College savings seems like something only the wealthy can afford, and I swear when I read articles about investors trying to advise a family what to do with their money, most of the time, they are advising people who make $200,000 a year combined, and I really don’t know any people like that. I don’t think people like that really need to be schooled on how to make money anyway.
I know this is a boring topic, but parents face this decision. The world tells us to. Nobody is really saying that you shouldn’t be allowed to breed if you don’t save for your child’s education, not like they do if you don’t breastfeed; however, this is a topic that sits on the back of the to-do list because nobody wants to really deal with all the boredom involved.
While investors tell you, “Save one fund for your retirement and a separate fund for your kids’ education,” I’m going to tell you something else. I think investors want you to purchase different packages of investments because that’s how they make money.
For people like most of us reading this blog, the best approach to savings is (according to the money experts)…
1. Emergency Savings
You want at least 3 to 6 months of what you currently make (since that’s what you are used to spending), for in case you lose your job. Read more about building an emergency savings.
2. Invariable Savings
You want a grand to 2 grand that you replenish frequently to use for expenses that are not monthly or expected expenses, like property taxes, oil changes, car breaks down… The idea is you take your income, budget out for expenses you know are about to occur like rent, utilities, and so forth, and then you have this savings for things you didn’t expect like under-budgeting a utility bill or an emergency trip out of town for a funeral so that you aren’t impeding on your regular bills to cover the random nature of life. This is basically a pool of money you can turn to instead of asking a parent. In theory anyway.
3. Roth IRA
The purpose of an IRA is to save for retirement; however, with the ROTH, you are not taxed extra to take the money out early for you or your immediate family’s education. It’s also tax deductible up to a certain amount annually.
The reason this is my preferred way to save for both retirement and my children’s education expenses is what if my kids decide they don’t want to go to college? What if they get a full scholarship somewhere? What if they join the military first? This is a situation where the money they DO NOT use can still be used for your retirement.
Spreading money out between accounts doesn’t make money grow more. You have X amount of dollars you are making, and where you put that doesn’t change what you have to work with. Putting most of your money into one account will probably yield more interest than putting a little here and a little there just because more money makes more money. Some banks offer a sweep checking account (investment account) for this very reason alone: you can have like 5 different checking accounts, but the moment you deposit in one, the money actually goes to the sweep account which is a pool of all the accounts for purposes of maximizing on interest. Now if you are getting into the game of making some high risk investments, now that’s one you don’t want to put all your money into.
The ROTH seems to be the best solution to the dwindling middle class and lower class. You don’t have to put in 3 grand at a time. You can start a Roth with 20 dollars a pay check.
Because there’s a tax penalty for early withdraw for things like, “I ran out of money so I took out an extra hundred to help with the rent,” you are less apt to touch it. You are actually saving it for what you intended it to be. Even more important, if you have a spouse who is anything like mine, you are making your savings unavailable to them to spend on impulsive narcissism.
Read more about using a Roth to save for education…
The important thing is that you save. It’s tough in this day and age with this economy. The habit of saving is more important than where you put that money.
NOW that I said the INFORMATIONAL Worthy Crap, now time to make it about me…
I don’t have any awesome investment account portfolio to show you because of things like Christmas, Lay-Offs, eating… The Roth, so far, is the most successful way I’ve saved thus far. I almost think it better to have that and take the tax penalties when you use it for emergencies than not to have anything at all.
I don’t intend to rebuild my savings until after Christmas. But I’m saving for Christmas, so if I get used to taking so much money out of each pay check for Christmas, I can continue doing that after Christmas, half going to a ROTH and half going to a savings account.
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