The bittersweet years of parenting a teenager can become laced with anxiety if $0 is the number attached to your child’s college savings fund. Not saving for your teen’s college dream can feel like a dirty little secret that keeps you up at night.
Instead of wallowing in sleepless angst, let’s make a plan. In the interest of gaining interest moving forward, we talked to financial experts about how to move that zero to a higher number, stat.
Letting go of your shame is a good place to start. “No shame, not blame: don’t beat yourself up," says Ron Lieber, “Your Money” columnist for The New York Times and author of The Opposite of Spoiled. “You made the best decisions in the moment. Good for you for trying to get on top of it now.”
Better late than never, with some caveats ...
By now we’ve all heard the phrase that you can’t borrow for retirement. “My first job is to make sure clients are taking care of themselves and that they are on track for retirement,” says Ted White, a financial planner at Blue Canoe Financial Planning in Seattle. “It’s great to save for college but robbing your future self of retirement funds is only a good idea if your kids are OK with you couch surfing with them after they are done with college.”
When you have older children and you haven’t saved for college, the tendency is to be overly confident in your future self. “Parents think they are going to earn their way out of a future problem,” White says. “If you are not going to start saving now, where in the world are you going to come up with the cash to pay for college costs, which could easily be $12,000 to $15,000 per year just for tuition?”
“When you are talking about future financial goals, the first question is always, ‘Are you going to fund it with assets or with cash flow?’” White says. “If you haven’t set that money aside, it becomes a cash flow issue. Are you paying college costs out of pocket as it comes up or you are taking out loans that come out of your future cash flow?”
A question like that may push you to start collecting stray coins for a college savings account now. This is exactly what you should do, White says. “You are intelligent adults who can say this is the amount you need to come up with every month to set aside. That leads to a lot of conversations in the car and at the dinner table about how you are going to come up with that money. Then sit down and come up with a written game plan. Automate that amount so it moves directly out of your bank account and into your college fund. Start now because Rome wasn’t built in a day.”
You want [to have] the money conversation about college at about the same time you start the general conversation about college. Make sure the child has a reasonable expectation of what you are willing to pay out of pocket, for financial or philosophical reasons.
The best news about starting a college savings fund for older children is that starting the process doesn’t need to involve researching types of investments. “Set aside what you can. Even $100 per month over six years should be enough to pay the first semester's worth of expenses at a typical school. Also, don't pay off your mortgage any faster than you have to — use that money to help save and pay for college instead,” says Kevin McKinley, a financial planner and author of Make Your Kid a Millionaire: 11 Easy Ways Anyone Can Secure a Child’s Financial Future.
Many of the financial planners we talked to advised keeping your investments uncomplicated. “It doesn’t make as much sense to save money in a 529 education savings plan for this age group if you haven’t saved any money yet,” White says. “Start with an online savings account and check bankrate.com to make sure your money gathers at least 1 percent interest. While there’s no tax advantage, this starts the habit of saving on the side.”
The next option is to open a broker’s account or a taxable investment account. White advises buying a low-cost target-date mutual fund with a target date closest to when your child will be attending college. “Buy through Schwab, Vanguard or Fidelity. If you do run into hard times later, you can always use that money for something besides paying for college,” White says.
Starting to save for college when your children are older means thinking conservatively when it comes to saving. If you know the saving will be used for college, some financial planners will point you in the direction of opening a traditional 529 plan, which is like a Roth IRA retirement savings plan. You can buy one without the help of a financial planner by gathering information at savingforcollege.com. Just be sure to find a plan that is easy to access and offers low-cost investing options, and know that this money must be used for education expenses.
“On average, parents with a 529 plan save 68 percent more than those simply using a savings account,” says Karalyn Carlton, president and financial advisor at Carlton & Company Financial in Seattle.
Involve your tween/teen now
There’s no time like the present to tell your child about the balance on their college savings account, especially if that number is low (or zero). “I think you want the money conversation about college at about the same time you start the general conversation about college,” says Lieber. “If certain options are going to be closed off financially, let them know that. Make sure the child has a reasonable expectation of what you are willing to pay out of pocket, for financial or philosophical reasons.”
Lieber reminds parents to let kids know that even with no or little savings, no one needs to see themselves short. “Private schools will make some kind of economic offer to make it more affordable to attend their schools. Explore both merit-based scholarships and financial-based scholarships together,” he says.
When your teen is ready to start looking at colleges, every school has a net price calculator that will tell you what you will be able to get in the form of scholarships from the school. “At CollegeAbacus, you can plug in three colleges into a calculator that will give you the estimated net prices of each school, side by side. Recently I popped in Chico State University, Syracuse and Lewis and Clark. It turns out the estimated net price of Lewis and Clark (a private college) was only $7,000 more than Chico State (a California public university), even though the list prices at these two schools are $30,000 apart,” Lieber says.
Mention the wonder of that when discussing future college costs. And as you begin saving for college, let your teen in on the saving fun, too. “You might match any money your kids voluntarily put into their college funds,” says Tracy Cutchlow, a parenting speaker and a former personal-finance editor at MSN, who recommends widening the conversation beyond just saving money. “Just started thinking about college savings?” says Cutchlow. “Think Running Start, scholarships, technical college, community college for the first two years, and in-state tuition. Or look abroad: College is free in Germany!”