About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual Fiduciary Financial Planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
As a parent, you know that time with your kids can go by in the blink of an eye. So whether you are preparing to send your child to kindergarten or are dealing with teenagers, it’s never too early (or too late) to start planning for their higher education. Not sure where to start? We’ve gathered some of the most common financial mistakes parents make when it comes to college planning.
Mistake #1: Procrastinating
Raising children is no easy task. You have so much to think about as they’re growing up that college might not always be at the forefront of your mind. But the reality is, the earlier you get started on planning how to fund your child’s education, the better off you will be. With the impact of compounding interest, even just a couple of years can make a difference in your savings. Take the first step by calculating the potential future cost and consider how many years you have left to save. This way, you’ll have a specific number in mind when it comes to putting money aside each month.
Mistake #2: Not Researching Account Types
While it’s good to have options when it comes to saving for your child’s education, choosing the right savings account can be overwhelming. Take the time to research the types of accounts that can be used to cover educational expenses.
Options could include:
- 529 plans
- Coverdell ESAs
- Roth IRAs
This checklist covers 21 of the most important planning issues to identify and consider when trying to determine how to fund their child’s college education. It’s structured as follows:
- Financial Aid Issues
- Funding Issues
- Qualified Account Issues
- Tax Planning Issues
Consider how they differ and what aspects are most valuable to you. You’ll also want to consider factors such as your risk tolerance and how much time you have left to save.
Mistake #3: Buying Investments with High Annual Fees
You probably don’t want to have to think about additional fees when you’re trying to save for a huge expense such as college. However, excessive fees can make it much more difficult to reach your college planning goals. When choosing an investment vehicle or savings account for college planning, review any potential fees that could negate or diminish earnings.
Mistake #4: Relying on Your Retirement Funds to Pay for College
Depleting your retirement savings in order to send your child to school is a common mistake that parents make. It’s important to think ahead, because restarting your retirement savings in your 40s and 50s is going to make it difficult to actually retire when you want to. Instead of turning to your 401(k) or other retirement savings, look into student loans, scholarships, 529 plans, and other college savings accounts.
Mistake #5: Failing to Consider Student Loans
Taking out student loans does not mean that you don’t make enough money. College is getting increasingly expensive every year, and there’s no shame in taking out a loan for a little help. In fact, when it comes to federal student loans, there are about 42.9 million borrowers each year.1 Research different federal student loan programs and understand the difference between subsidized and unsubsidized loans to determine if taking out a loan would work for your situation.
Even if you don’t plan on borrowing money, fill out the FAFSA before sending your child off to school. It’s a quick and easy way to potentially receive aid, and you don’t have to take it even if it’s offered. Additionally, research loan types, as federal loans may offer lower interest rates than private lenders - but this may not always be the case.
Still stressed out by the thought of starting your college planning journey? Use these tips as a jumping off point as you work with your financial advisor to develop a college savings strategy for your future graduate.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. So if you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
In my July Newsletter, I discuss how to avoid a surprise tax bill. There's also a U.S. News and World Report article where I share a few tips to help you financially prepare for starting a family. If you're planning to build your dream home and/or need a construction loan, that's covered too.
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