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Monday, November 4, 2013

Money Question Monday: Saving for College

Every Monday, I'm going to answer your money questions. Email your questions to charlottewoodwind at gmail dot com, and I'll change your name to something unusual so no one knows who you are. David will help out when there is a disagreement/discussion between spouses about how to manage or spend money. Email me your questions, or I will be forced to make some up!

Charlotte, for your blog: I don't really have a specific question, but I'd like to hear your thoughts/suggestions/recommendations on saving for college. Thanks! ~Americus

Americus: I'm not an expert on investing. You should talk to a fee-only financial adviser to talk specifics. 

What I can tell you is to start as soon as possible. Look at the beauty of compound interest: If you start contributing $150 a month when your baby is born, if you can get 12% interest, you will contribute $32,400, but you will get $82,000 in interest for a total of $114,000. Of course, you're not guaranteed to get 12% interest. You might get 20% one year, and 1% another year.

If you wait until your child is 13 and contribute $150 at 12% interest, you will only get $3,300 in interest for a total of $12,300. Use this calculator to put in your own numbers.

Start as soon as possible, but make sure you have things taken care of in the right order. These are Dave Ramsey's baby steps
1. Save $1,000 for an emergency fund.
2. Pay off all debts except for you house.
3. Save 3-6 months of expenses for your emergency fund.
4. Start saving for retirement.
5. Then start saving for your kid's college funds.

It's more important to save for your retirement because you can't get a loan to pay for your golden years, but your kids can get a loan for college if they have to.
The reason to pay off your debts first is because of compound interest working against you in the reverse. In the same way you get $82,000 in interest when you save, you can be paying that much in interest when you borrow.
Should you save enough to pay for your kid's entire education? I don't think so. They should be getting a job when they're old enough so they can help pay for it. If they aren't paying for it, they won't feel ownership in it, and they won't work as hard in their classes.

Another thing to think about: Is college the best way to get an education? I'm not so sure that it is. I don't know about you, but I wasn't necessarily that interested in learning when I was in school. I passed my classes, but I did not have a thirst for knowledge, and I only did what I had to in order to maintain a B average. (Of course, I didn't go to the most academic of colleges). Since I've graduated, I realized that I want to know as much as possible, and I think I've learned a lot more through reading books than I ever did through taking classes. With college costs always on the rise, I think we are going to be seeing more alternatives to college. I think we'll be seeing things like apprenticeships on the rise. I think that a mix of on-the-job training and online classes will be the way of the future.

I just had the best time in college. I hate for anyone to miss out on that.

Do you feel like you learned a lot in college?

Do you have any ideas for an alternative education?


  1. these are really great tips! My husband and I just started our "emerg" fund! No kids yet, so no savings for college, but we will prepare for that when/if it happens :)

  2. There is nothing wrong with looking for more alternatives to higher learning, but I think the best way will always be going to college. Learning may be different for everyone, and there are some who might find more benefits in alternative education, but let’s acknowledge the fact that holding a college diploma may open up larger opportunities. That being the case, then it’s only right to start our baby steps in saving for our child’s education as soon as we can. Thanks for sharing some tips!

    Valerie Casey @ Studemont Group CFS