Paying for College
College can be expensive, but you know that already and that's why you're here.
From my perspective, funding college is a four-step process:
- Step 1 - It's hard to get started without figuring out where you want to eventually be, so the first thing to do is figure out how much college is going to cost when the kids head off to college. College costs since the 70's have gone up at a rate substantially faster than general inflation, so remember to factor that in to your calculations.
- Step 2 - Once you have that number in hand, then determine how much of it you want to pay. I meet many, many affluent families that have their children pay some portion of their college, so unlike what you sometimes might feel, it is social acceptable to have your children pay for some of their college expenses. Heck, I paid for all of mine.
- Step 3 - Here's a curve ball. Once you've determined how much you'd like to pay for college, figure out how much it's going to impact your other financial goals. Let me give you an example of what I mean with a case study:
Imagine that you have a new baby boy...let's call him Michael. You want Michael to go to Harvard one day and you're willing to move heaven and earth to make that happen. Now, the all-in cost to attend Harvard - in 2015 dollars - is just shy of $59,000/year....or about $240,000 over 4 years. If we assume that the cost to attend Harvard increases at an inflation rate of 4% over the next 18 years, the total cost is $486,000 and change. That, my friends, is a BIG NUMBER.
But it's not the real number. The number I'm concerned about for you is the amount you would have had at your retirement had you had NOT spent down $486,000.
What if you had saved $486,000 by the time that Michael was 18 and kept that money invested - what would that account's value be when you retire? If we assume a 7% return on your money and that you'd retire 20 years after Michael goes to college, the $486,000 would be worth $1,880,000.
So what does this mean? Well, spending $486,000 on Michael's college cost your retirement plan $1,394,000 in lost interest ($1,880,000 - $486,000)! Bet you didn't see that coming, did you?
Welcome to Wealth Management 101 - KEEP YOUR CAPITAL INTACT. This is a core philosophy of the Family Bank.
- Step 4 - After you've picked yourself off the floor and thought a little more about how much college you're willing to pay for, now it's time to think about putting your savings dollars to work. Download the FREE REPORT for the Best Ways to Save for College.