Budgeting Between Retirement and College Funds

Choosing between your own retirement funds and being able to sponsor your child for college is often an agonizing decision for many parents. A survey from TIME magazine notes that one in three Americans has $0 saved for retirement and that 56% of Americans have less than $10,000 saved.

Clearly, Americans struggle with a number of daily expenditures such as rent, insurance, food, transportation, and so forth. But our savings for retirement and the college funds for our children are among two of the biggest areas where we concentrate our money. How can we find a balance that prioritizes the end of our lives without sacrificing the quality of our children’s education or burdening them with excessive debt?

Getting Things Straight: Retirement Over College

Before anything else, you need to put your own retirement over your child’s college fund. As inconsiderate as giving priority to your own financial situation over your child’s future may sound, you need to recognize as an individual and as a family that your own financial stability is a requirement for your child’s financial stability. Burning through your own finances to fund your child’s college dreams will just leave you at the edge of a cliff and unable to backtrack.

Let’s stop and do the math to illustrate just how not saving for retirement is a terrible idea. Let’s say that you’re making around $80,000 at the end of your career accounting for the current appreciation of the assets in capital accounts that you have and for your income. This value isn’t actually too far off from the actual median and mean values of workers aged 55-64. We also know that the average American lives about 79 years today.

Assuming that you stop work at 65 years of age, that means that you’ll have to sponsor a lifestyle that you’ve previously led with $80,000 over about 14 years - that’s about $1.1 million. If you have less than $10,000 saved up due to inadequate planning, it will be very uncomfortable to live in the red for the last few decades of your life.

Regardless of the outcome, your children will likely feel a degree of responsibility for the debt their college tuition has imposed, meaning that the obligation of debt has not really shifted all that much. So, it’s a mistake to sacrifice your retirement savings and plans for your child’s education and career opportunities.

Balanced Budgeting

The approach to proper budgeting between college and retirement should be similar to how dealing with oxygen shortages on planes - make sure your own mask is fastened on before assisting others. With debt, you want to make sure that your own debt is paid before assisting others.

Famous motivational speaker and financial guru Dave Ramsey notes that you should only start to consider contributing to your child’s education when you can easily set aside about 15% of your income towards a retirement fund. While we call it a retirement fund, the investments that you make do not necessarily all have to come from one account. You can use a combination of mutual funds, 401(k) contributions, and similar investments as part of a diversification strategy with regards to your retirement savings.

In fact, many Americans have grown wise to this approach - mutual fund ownership shot up from 5.7% of the population in 1980 to 43.3% of the population in 2014. This trend shows just how important that making proper investments on the side to supplement the appreciation of your assets (such as your house) and your work-related income has become.

You’ll also want to watch your credit score and make attempts to keep it high or repair it if it’s currently poor. Checking out the data suggested by credit repair reviews can help you orient yourself to your current position and the steps you can take have better credit. Having good credit is especially important because it lowers a number of your interest rates and improves your maximum borrowing ceiling from financial institutions.

What Are Your Responsibilities to Your Child’s Education?

College tuition and rooming costs are sky high. Most parents can’t afford to finance student debt loans let alone the students themselves. In a report published by the Wall Street Journal, it was noted that the federal government was rearing up to forgive more than $108 billion in student debt in the following years.

If the Government Accountability Office (GAO) is willing to criticize the government’s own flawed accounting methods for creating such a disastrous debt situation in the first place, then you should feel no guilt as a parent for not attempting to overcome such a Herculean financial task.

After depositing about 15% of your income towards retirement accounts, it is reasonable for you to consider opening up a number of funds for your child’s education with the remaining money. The IRS offers options like the Coverdell Savings Account and state or educational institutions offer a 529 plan. Both of these plans make the process of setting aside money and saving for your child’s education much more manageable.

The opinions expressed in this article do not represent the views of EconoTimes.