With the holidays in full swing Vic has a gift idea for all parents (and/or aunts, uncles, godparents) of little ones. No, it’s nothing as cool as a Playstation 4, iPad Pro, or a Kylo Ren lightsaber. It’s something even better.
It’s the gift of a college education!
Whether your child is 19 months, 4 years old, or 14, it’s never too early or too late to start saving for their college education. As a big personal finance nerd, many of the stories I hear about people with a crazy amount of debt usually involve student loans. Since I know my daughter is destined to be a world class doctor (she was named after a famous surgeon after all), we’re going to do everything we can to ensure that she doesn’t graduate with a loan the size of a mortgage.
Addie’s College Fund
The fund we opened for Addie is a 529 Plan, which I think is the best way to save for college. Much like a Roth IRA, the money you put in a 529 Plan gets invested and grows tax free and can be spent towards qualified college expenses. The website Saving for College lists the top 7 benefits of a 529 Plan (which you can find in more detail here):
1. 529 plans offer unsurpassed income tax breaks
2. Your own state may offer tax breaks (sadly, California’s 529 plan does not)
3. The donor stays in control of the account
4. Low maintenance
5. Simplified tax reporting
6. Flexibility (easily change plan providers, change beneficiaries)
7. Everyone is eligible to take advantage of a 529 plan
Since California does not offer any tax breaks for their plan, we enrolled Addie in Utah’s 529 Plan because it uses Vanguard funds so the costs are low.
If there’s one reason I can recommend that every parent should open a college fund, it’s because of the gift giving aspect of 529 Plans. Addie’s plan makes it pretty convenient for friends and family to contribute to her fund. When it comes to birthdays and Christmas, donating towards a child’s education is a great option for friends and family. Kids don’t need that many toys. Even though Addie will get a lot of toys for Christmas, I’m pretty sure she’ll forget about most of them in favor of her Minnie and Mickey Mouse dolls.
For Addie’s first birthday in April, I included a link to her gift giving site on the bottom of her invitation. As a result, she received about $700 towards her college fund. Quite a few of our friends and family were more than happy to contribute when given this option rather than purchase an outfit or toy that she’ll eventually outgrow.
Yes. She still received plenty of toys.
Until Addie is old enough to handle her own money, every single penny that she receives will go straight into her 529 Plan. Shout out to my friend Haydee for already donating to Addie’s fund for Christmas, who told me she felt great knowing that she’s contributing towards something that will benefit my daughter in the long run.
What if My Child Doesn’t Need the Money
When Addie eventually goes to college, there might be a chance she won’t need the money we saved for her. She might receive scholarships, grants, or end up making millions from being a child actor. Having too much money saved up for college is like having too much food at your wedding reception. It’s something NO ONE complains about. It’s a great problem to have. Wouldn’t you rather have too much than not enough? If Addie ends up not needing the money we’ll most likely transfer the funds to another family member that could use it. We could also pull out the funds and incur the 10% penalty on the earnings (in addition to taxes). Done and done.
Some College Savings is Better than No College Savings
Of course, there are other things you should do first before regularly contributing to a college fund. Paying down debt, having an emergency fund, and funding your retirement are some of the things that should be a higher priority than contributing to your child’s education. While there are many ways Addie can fund her college, there’s not much you can do about retirement unless you save for it.
That being said, if you can find room in your budget – start saving. Even if you only put $25 a month in your child’s college fund starting at birth, your child will have almost $11k by the time they turn 18 due to the magic that is compounding interest. Before I got laid off we put around $250 a month towards Addie’s education. Since my wife and I are good about keeping our expenses low, we’re still able to contribute between $50 and $75 a month.
With the cost of college increasing each year, I don’t know if we’ll have enough to fully fund Addie’s education. Hopefully she’ll have scholarships, grants, and work money to help offset the cost. At the very least my wife and I will be happy to know that we did our best to help contribute.
Thinking about my daughter growing up makes this dad a little teary eyed. Kids really do grow up too fast. It seems like it was only yesterday that she was making a scene hiding underneath her high chair at a restaurant.
Wait. That was yesterday.