How to Balance Saving for Your Future vs. Your Kids' College

As you save for your retirement, there are many other goals you may find competing with your plans. Specifically with the rising costs of higher education, many families choose to prioritize saving for their children’s college tuition over their own retirement. 

Both your and your children’s futures are important to you, so how do you go about balancing your savings efforts?

Understand What You’re Saving Toward

One of the most essential elements of a successful savings plan is understanding your goal. Even if you’ve been saving for retirement or education for years, it’s a good idea to revisit your plan and the reasoning behind it. Consider:

• When do you want to retire?
• How much will you need to live the lifestyle you desire in retirement?
• How old are your children?
• Do they plan on going to college?
• How do investment rates compare to interest rates?

Continue to ask yourself these questions every so often as your answers may change. However, by understanding what you’re saving for, you’ve made it that much more tangible for yourself.

Saving for Your Future

It’s important to understand that while your kids can take out loans for school, choose an in-state university, or select an inexpensive trade school, you can’t choose to not pay your rent or buy groceries in retirement. Most everyone wants the best for their kids, but it’s important to prioritize your savings efforts accordingly.

If you’re on track to meet your retirement goals and have extra money left over to put away, it’s absolutely a good idea to stash that for your kids’ college education. If you don’t yet have your retirement savings on track, focus on aligning your savings goals with your retirement needs first. Remember, you can always help your kids pay off their loans in the future once you’re meeting your retirement needs.

Supporting Your Kids

As nice as having a free ride to school is, one of the best gifts you can bestow upon your children is financial literacy. Consider setting up a custodial account for your children as soon as they’re born and deposit a small gift on birthdays and holidays. When your kids are young, you can also deposit any cash gifts they receive from family.

As they get older, you can begin implementing age-friendly financial literacy activities into your daily lives. For elementary school kids, you may start by helping them understand what money is and what it’s used for. In today’s paperless world, many children don’t see their parents using cash and instead only see a credit card being used. Take the time to show your kids what money is, what it looks like, and what it’s worth.

At the older end of elementary school, consider having your kids help with a small portion of your budget that directly impacts them: snacks. You can designate a specific sum of money for snacks and let your child decide how it will be spent (within reason). They may be disappointed to find out they can’t purchase everything they want and will learn how to be frugal and make sacrifices. This, of course, is great math help, too!

When your kids get into middle school, consider implementing small chores or odd jobs they can complete for pocket money. While it’s great to learn how to balance spending, one of the best ways to learn the value of a dollar is having to earn it. This is also when you can begin explaining saving and investing to your kids. Help them understand the value of saving up their money over many weeks or months to make a large purchase — it’s essential to learn the value of delayed gratification while young.

The ideal timing of this conversation will vary by child, but when you feel your children are ready, you can begin explaining how investing works. Compounding interest truly is a wonder and when your kids are young, time is on their side. However, it’s also important to explain volatility. Over time, your investments will grow. However, there may be peaks and valleys along the way.

Once your child has their first job, you can help them set up a custodial Roth IRA. In a custodial Roth IRA, your child’s investments grow tax-free, just like in your own Roth IRA. While not ideal, if your child ends up needing this money sooner for the purchase of their first house, they can withdraw the money with a small penalty. Remember, the best way to instill strong financial values is by modeling them yourself.

You won’t be around forever, so by helping your kids learn the value of saving and investing early on, you’ll set them up for a strong financial future. As much as we want to help our kids, empowering them to do well on their own is truly the best gift you can give.

Striking a Balance

Ultimately, the best path for you will depend on your family’s situation and goals. It’s always best to speak with a financial advisor to make the best decision for you. Although you typically cannot take out loans to support your retirement, certain high-income earners have access to loans that can help boost their savings rates to meet their goals.

Schedule time with our team of experts to discuss your retirement savings plan and evaluate how you can designate funds to support your children’s futures.

The information contained in this material is intended to provide general information about Anew Advisors and its services. It is not intended to offer investment or tax advice. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement. Please consult a tax professional for tax advice. Information regarding investment products and services is provided solely to read about our investment philosophy and our strategies. You should not rely on any information provided on our website in making investment decisions.