2495: How Much Should You Really Save For College by Jeff Rose of Good Financial Cents

[00:00:00] Now before we start, you might want to check out our other podcasts covering topics like personal development and minimalism, money, health, relationships, and more. So to optimize your life in other areas, just search for Optimal Living Daily in your podcast app. Now on to the show. This is Optimal Relationships Daily, How Much Should You Really Save For College by Jeff Rose of GoodFinancialSense.com

[00:00:28] A major goal for most parents is to see their children graduate from college and receive a good job so that they can live a long and fruitful life. The recent financial fiascos of the United States have put a strain on the ability of government to contribute to the ever-increasing costs of college.

[00:00:45] Historically, college costs have inflated at around 5-8% annually, with some long periods of inflation over 8%. This could pose a major problem when your average investment return will be in the range of 7% annually based off the historical returns of the S&P 500. This sounds overwhelming at first. But starting to save early is crucial to your success. From the day your child is born, you will have approximately 18% of the year.

[00:01:14] You will have a lot of 15 years to be ready for the day your son or daughter is ready for college. But the question is, how much should you save? This whole question became even more apparent in my life, as we just welcomed our third son into the world. Can you say, college tuition times 3 equals big bucks? Yikes. I know many other parents are in that same situation, so I thought it would be best to help them figure out how much to really save for college.

[00:01:41] Do you really have to pay the whole bill? That's a discussion that you'll have to have with your spouse. Both my wife and I have different college funding experiences. My tuition was self-funded with the GI bill that I received for joining the National Guard, and the difference was paid for by me working 30 hours a week. Hers was also funded, except it was done by her parents. We both turned out good students with good careers. But I'm sure you can imagine that we have conflicting views on how much we should pay for our kids' college.

[00:02:11] There isn't a right answer. You'll have to figure that out on your own. What the numbers in this article will help you to figure out is a ballpark figure on how much damage you'll be looking at. If you're not sitting down yet, maybe you should. College costs how much? Gulp. To estimate the cost of college, there is a great website that you can use to figure out how much you will need to save based off of the type of university as well as the years planning to attend.

[00:02:39] The website is collegeboard.com and their tool, the Financial Cost for College Calculator. This website gives you the ability to pick the inflation rate of college costs, the years anticipated of attending, the percent of the total cost you would like to cover, as well as the years until your child has to enter the university.

[00:02:59] For our example, I will be using four-year public in-state tuition to figure out how much you need to be saving per month to pay for your child's complete college bill.

[00:03:09] According to the college cost calculator, the average cost of four-year in-state tuition is $19,388 per year. With the 5% inflation figure, planned attendance of four years, and 18 years until college, the total cost of your child's complete education will be $201,108. Start saving when your child is born.

[00:03:37] This figure seems scary, but you have to consider the fact your wages will also likely increase at a constant rate to differ some of the excess costs. If you were to start saving the day your child was born and were planning on paying the $201,108 with an 8% average return on your investments, you would need to save $418.90 a month to be able to pay your child's total college expense.

[00:04:04] If you were to only receive a 6% return on your investments, you would need to save $519.19 a month for the next 18 years to pay for your child's total college expense. Start saving when your child is 5 years old. Keeping all the same variables in place, except for changing the time to college to 13 years, now assuming you start saving when your child is 5 years old, how much would you need per month?

[00:04:32] Due to the shortened time frame until college, the estimated total cost of college is now $157,574. This is a counterintuitive figure because it is less than the numbers I just mentioned. This is not actually the case. It is just the case because the total cost had less time to inflate. But you also have less time to save.

[00:04:56] Earning an 8% return on your investment for the next 13 years would leave you to save $577.36 a month. If you were only able to earn 6% on your investment, you would need to save $669.25 per month. For those of us working on a tight budget as it is, the extra $100 a month more of savings by waiting the extra 5 years may not be attainable. Late to the game. Your kid is 10.

[00:05:27] The final figure we will investigate is if you did not start saving until your child was 10, therefore leaving only 8 years until they will need to enter into college. According to the college cost calculator, you would need to have saved up $123,463 to pay for the entire bill. If you were to earn 8% on your investments, you would need to save approximately $922.27 a month.

[00:05:54] This is a huge increase in savings per month compared to the amount needed if you were to start saving for your child's education earlier in their life. If you were to earn 6% on your investments, you would need to save $1,005.17 per month to pay for all of your child's tuition. As you can see, just because you're late doesn't mean it's over. It's just a long road ahead. Paying your kid's tuition bill.

[00:06:21] When you look at these examples, the only thing that you can control is the year which you start saving. You will most likely not be able to determine a higher return for your portfolio and should not be relying on this to pay for your child's education. Of course, the simulations also have the expectation that you will be paying for 100% of your child's tuition, when in reality, the majority of students graduate with some type of college loans. If you were to only pay for, say, 78% of your child's college costs,

[00:06:49] you would need to save significantly less than the figures mentioned. The key takeaway from this information is that the earlier you start saving for your child's education, the better off they will be in their adult lives, and the more debt-free they will be. You just listened to the post titled, How Much Should You Really Save for College? by Jeff Rose of GoodFinancialSense.com Great post from Jeff here today. Thanks a lot to him for that.

[00:07:20] While I'm a big believer in budgeting, and I do track my own personal finances really carefully, I'm of course a little reluctant to start offering advice or feedback when it comes to savings, since it's not an area of my expertise. I would recommend checking out a couple of episodes, episodes 1012 and 1013, which talked about a 529 plan, which seems to be one of the best ways of preparing for children's education expenses. So, there are a few resources for you if you do want to put Jeff's words into practice. That's going to do it for me though, everyone.

[00:07:50] Really glad to have had you here today for another parenting episode, and I will see you back here tomorrow for another insightful episode, where your optimal life awaits.