When Do You Start Saving for Your Child’s College Fund?

college graduation fund

by Elle Martinez · 27 comments

Preparing for the Baby’s College Fund

From time to time, I get feedback from Couple Money readers. It’s something that I enjoy and try to respond to. After my recent post on preparing the baby’s nursery, Becky emailed me a wonderful question on another baby expense parents think about:

I was wondering if you were going to do a post on how you are preparing for the baby’s future financially (college, etc…) We are expecting in August and are starting to plan for these types of things.

Our biggest worry/concern is starting to act now to plan for college for our child. We really don’t want them to start their adult life with that debt hanging over their head. Any suggestions on that would be awesome.

I’ll be tackling the how to process in the later post, but I want to start off with an important question – what financial milestones should you have reached as a couple before you start funding your child’s college fund?

I’d love to get your thoughts on it – I’ll share a few that I believe are essential right here.

Be on Solid Financial Ground

I truly believe that before you can help you children financially with an expense like college, you have to have your finances in order. After all you’re trying to help them avoid having a huge debt, so you have to lead by example.

I think that if you have the following 3 factors down, you can help your child without damaging your own financial future.

Emergency Fund Ready

Quite simply if you don’t have an emergency fund and your child in college, you’ve put yourself between a rock and a hard place.

Most financial gurus recommend you have 3-6 months of expenses in savings, but that may not be the right amount for you. If you’re looking for something more specifically tailored to your family’s needs, then there are several factors to consider when determining your emergency fund.

  • Family Size - If you’re a dual income couple with one child and no other family obligations, then you’ll probably won’t need as a big of an emergency fund as a family of 5.
  • Family Expenses – Your family’s lifestyle has a big effect on the size of your emergency fund. If you have high monthly expenses, then logically, you’ll need more money to save.
  • Income Streams – If you have 2 or more income streams coming in, that can decrease the size of your emergency fund. You should still have one though, as unexpected events can happen.

If you’re still unsure than shoot for what makes the more financially conservative of you two comfortable.

Have Your Debt Under Control

My personal preference is having all your non-mortgage debt paid off, but some parents feel uncomfortable with that situation. They may have started late with getting their finances in order and don’t have time to save for college and pay off debt.

If you are in heavy and/or high interest debt, I think that your child’s college fund should be put on the back burner. Instead, look at all your financial aid options, such as grants, scholarships, and work/study opportunities.

For those still determined to help their children, then I’d sit down together and come up with a reasonable amount to cover. You may not be able to handle 100% of tuition, but perhaps you can cover 50%. Your child has options on paying for college that you don’t have when paying down debt.

Here are a few ways they can get a solid education at a cheaper price:

  • Attend a community college
  • Use CLEP and AP courses to reduce credits needed
  • Find scholarships

If you have any other ideas on handling both debt reduction and college savings, please share it in the comments.

Continue your Retirement Investments

Don’t think you’ll be able to fend for yourself later. Many grown children are struggling with supporting their parents during retirement while raising their own families. Wall Street Journal ran a piece about it a couple years ago:

About 30 percent of adult children in the United States contribute financially to their parents’ care, according to the Pew Research Center. On average these children pay $2,400 a year on everything from uncovered medical expenses to making sure the refrigerator is stocked each week.

One reason is that with parents living longer their savings may not be adequate. So when you’re looking at how much to retire, skimping on your contributions may backfire for you and your children down the road.

But so often adult children end up ignoring their own savings and retirement accounts or, worse, go into debt, because they’re taking care of their parents, says Tim Casserly, a lawyer in Albany who specializes in issues of elderly care.

Many parents want to do their best to avoid this emotionally and financially draining situation.

Having your retirement contributions automated can certainly help out.

Sacrifice Now or Sacrifice Later

Unless you have a huge amount of money (in which case you already have the money for college saved), you’re going to have to make sacrifices. Your choice as a parent is whether you want it now or later. Can you cut back on your family’s monthly expenses by 10% now to insure your child(ren)’s college fund grows?

Thoughts on Saving for College

How many of you are starting to save for your child’s college fund? How much do you think should help with college? Next post on this topic will discuss how to determine how much to save for college and what options are available. I’d love to get your thoughts on that as well.

Photo Credit: Schlüsselbein2007

About Elle Martinez
Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  • http://www.boomerandecho.com Echo

    You’re right Elle, most people think that they MUST set up an education fund for their child right away but don’t have their finances in order themselves. Look after yourself first!

    In Canada, if we deposit $2500/year into an education fund we can get $500 matching from the gov’t. We haven’t fully taken advantage of that yet because we have other savings goals to think about right now (like a down payment on a house!). We contribute $100/month and will increase that when we feel comfortable.

    • Elle

      Thanks Echo for sharing how Canada has it set up. I worry about parents who are trying to do so much with family budget that is already strained. I think if you can heave the discipline to get your finances under control, it can be a big help for when you start your child’s college fund.

  • http://blog.themillionairenurse.com Dr Dean

    I think it is a mistake for parents to be paying for kids college if they are not out of consumer debt and are fully funding retirement.
    You don’t OWE your kids a college education. You owe it to them not to be a burden on them or society when you retire.

    There is nothing wrong with kids working and paying their own way through school. Much less likely they party away their first year if they are paying part of the freight anyway!

    • Elle

      Thanks Dr. Dean! That’s something I’ll probably tackle later – asking other bloggers how they financed their college education and what it taught them. Some students just squander a great opportunity and others thrive on a challenge. iI would be fascinating to see how they worked it out.

  • http://www.krantcents.com krantcents

    Since there are many solutions to saving for college, getting started early is important. I think you need a plan to getting out of debt, saving for retirement and saving for your child’s education. Your child’s education is one of the most important skills you can give him/her. Also, how you do it can be a great education too. If you do nothing, they will be saddled with debt and they can learn about that too.

    • Elle

      I think you bring up a good point – how you save is an education. Prioritizing spending is an important facet of personal finances. If parents can cut unnecessary expenses it can help make savings much easier.

  • Thomas

    Personally, I think kids are being “helped” way too much when it comes to college expenses. Are they actually being helped? Having graduated a little over two years ago from college, I can say from recent experience that a kid who has to pay for his own college education tends (generally) to take ownership of his education and apply himself more than a kid who receives a full ride from mom and dad. I worked full-time + and went to school full-time all the way through college. Sure, it was hard, but I learned a few lessons along the way:

    1. You have to work for what you want/need
    2. You have to manage your finances responsibly if you want to survive on a college budget
    3. You don’t have to go to an ivy league school to get a great college education. Junior colleges and state universities are much more economical and quite effective.
    4. Time management is essential…not just in college, but in life.
    5. And the list goes on…

    All these things are a result of my own personal experiences and observations. Helping your child out with his college expenses is not inherently bad. I would just take caution in doing so, especially if you are, like Elle said, in debt, don’t have an emergency fund setup, and you are neglecting your retirement fund. I would also be mindful of the possible learning opportunities that exist in having your child pay all or part of his college expenses.

    Cheers,
    Thomas

    • Robert Goodman

      I totally agree Thomas but the fact is college is so expensive now that even with help, the kid has to earn a ton of cash and own the education. I helped each of mine they both got graduate degrees. Each kid spent (almost 200k of the hard earned money from birthday gifts , odd jobs and scholarships) I helped them in little ways like sending a bit extra for groceries and laundry soap and all total over 8 years for two kids even the little bits added up to 60 k each kid.
      This included $5k when they graduated undergrad (they each used it to move to grad school and get settled) and $5K for graduating grad school (this got used to bridge the gap until the job showed up)
      I sent care boxes every three months while they were in school things like laundry soap an extra blanket, a new shirt laundry quarters(this was the only cash I ever sent) some stamps for postage , food, hygiene items , some music , a new laptop when needed, backpacks , when needed, a bike for each to get around on the list goes on and on.
      So my advice save at least $120 for each child and break it down that is x amount you need to save each year. Do not forget college cost start before they even graduate from high school.
      Registration expenses, visiting campuses, college board, test fees, application fees (how many schools are they going to apply too?) The last 6mo of high school will be college expenses. Plus just putting a few things aside like towels and kitchen items will run some cash too.

  • http://barbarafriedbergpersonalfinance.com Barb Friedberg

    Do not save the in the childs name. The more money they have in their name, the less they will be eligible for financial aid. 529 plans are great. We started, with help from grandparents as soon as our baby was born!

    • Elle

      Thanks for the advice for financial aid! We haven’t discussed the college fund with our parents so we mention that next time we visit- just in case they’re interested.

    • Robert Goodman

      Barb,

      I did not save the money in the kids names rather I put it in my husbands name (he ran off with the cash and a 20 year old) so now my advice put it in the kids name. At least then you know it is there for them.

  • http://change-is-possible.net Heather

    I’m not starting a college fund for The Kid until my own student loans are paid off.

    Of course, if I’d had *any* teaching or guidance about *anything* financial, I would have fewer student loans now. So it goes. The cycle shall not repeat.

    • Elle

      I can completely understand how you feel Heather. I hope you pay off your student loans off- we’ll be excited when ours is gone soon.

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  • http://www.financialsamurai.com Financial Samurai

    Perhaps the best time to save is as soon as a couple gets married? And even if the couple doesn’t have a baby, they can use it for something else yeah?

    • Elle

      I think if a couple has the other 3 financial milestones ready, then preparing ahead can be feasible. I wonder if you can transfer accounts between one spouse and the future child. Something to look into….

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  • http://smartmoneyfocus.com Joe Edward

    Elle,

    I was about to get off your site when I saw this post and read it. I know it is kind of old but I wanted to pass along what we have done. We are luck enough to have our kids education funded about 80%. We start as soon as they were born. We have three boys 8,6 and 1. I don’t know how you feel about credit cards, but we use a Upromise card and have everything linked to a 529K. We have been using it for about 7 years and we have received about $9K in their 529s through this. No, it is not our main saving vehicle for them but maybe it will cover books for a semester :)

    Thought I share,
    Joe

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  • readerdrw

    One suggestion I would make is for couples to consider ALL of their families’ goals before purchasing a home. Usually the thought of college savings occurs after this purchase has taken place. At that point, unfortunately, there is often little wiggle room for much extra savings.

    I know that buying a home is an emotional event, but the best thing we can do when going through the process is to try to remember that real estate is a business. The mortgage companies’ goal is to get us to borrow as much as we can on a residence without going broke. And our natural urge (at least for me, my husband not so much) is to want the idealized home image as seen on t.v.

    The median house price in the U.S. over the past several years has been about $200,000 and the average size is about 2400 square feet. I realize that this in not the case in some areas of the country. My husband and I live in an area, however, that is pretty close to the national average. When deciding how much to spend on a home, we compared our income to our lifelong goals. We realized that paying for all of the following would be pretty much impossible: average-sized family house, two cars, average yearly family vacations, college tuition for our children, and a decent retirement fund for the two of us. We determined which items were most important to us, which items were important but could be simplified, and prioritized the family budget accordingly. When we bought our home, we decided to borrow half of what the mortgage lender told us that we could afford to pay off. It’s smaller than the average family home, but it is efficient and serves our family well. It really does feel like home. :)
    With less mortgage interest to pay off than if we had gotten a larger home (and smaller utility bills to boot), we were able to tackle paying off our mortgage fairly quickly and are now able to give more to the retirement and college savings accounts (There won’t be enough to send them to Harvard but enough for a decent university education.). Our kids don’t live the high life, but we want to give them a secure life.

    • http://couplemoney.com Elle Martinez

      Thanks for sharing some good points. I wrote about looking at the big picture and running all the numbers before buying a house. It helps to keep money available in the budget for other goals.

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