When you’re first child is born there is an overwhelming feeling of taking care of that child in every way possible. At some point you start thinking, “I better get it together. I better start saving for my child’s college education. I know, I’ll check into one of those 529 Plans available through out the country.”
First, you shouldn’t even think about how you’re going to pay for your child’s college education if you haven’t done the three actions that I describe at this site for yourself and your spouse.
Forget about any college savings plan like the 529 Plan. Instead, open up your own account at a brokerage firm that you name, “Jane’s Post High School Savings Plan” or something similar to that.
This plan would have the same time horizon that you’d need for your child’s college education. So if you’ve taken care of your own savings and retirement plans, and you now have a new baby named Jane, then open up an account and set a time horizon of 18 years when you’ll need the money for your child’s education or possibly something else.
Which leads me to – you don’t owe your child a college education. There are many ways to pay for college but only one way to pay for your retirement. What you owe your children is equality of opportunity.
This means if one child wants to go to college then you’ll have money saved for them to help them make it through college. If you have another child that wants to open their own business, then you are set to help them with the money you’ve saved for their post high school endeavors.
You might have a child who doesn’t know what they want to do so they immediately go into the work force. You are then in a position to hold on to the money under your name and your spouse’s name (because that’s how you opened the account in the beginning) to be used by you or continue to hold for the child. They might want to go to college a few years later.
On another note, I would be extremely skeptical of giving a big chunk of money to any 18 year old to manage. You never know what path your child will take. Read this.
As I’ve mentioned in other posts, your money is your money, don’t let someone else or some other program try to manage it better than you can. We can always manage our money better than someone else or some program. The only “someone else” we’d work with is a financial advisor who is interested in how best to manage our money and not sell us some kind of investment gimmick. This would be someone we’d pay for their advice and not what would make them the most money – annuities, a bridge in Florida, etc.
To help calculate what you’ll need to invest in for your child’s post high school endeavors, check out this calculator that helps you answer the question, “What should I invest in for this account?”
The calculator is CNNMoney.com Asset Allocator. Play with the different settings and you’ll wind up with the asset classes you’ll want to invest in. As time moves forward and your child nears those college years, recalculate how to reallocate the money you’ve invested into less volatile asset classes like bonds and cash.
Here are some screen shots of starting with a new account. The choices listed are what I would do. But keep in mind that I put myself in a more aggressive investing category.
Here are the results:
Again, I would recalculate now what different asset allocations look like as the child nears 18 years of age. That would give you a plan today that you could stick to for that time horizon. Assuming the CNNMoney.com Asset Allocator is still around in 10 years and maybe the financial world looks different, you can always go to their website and recalculate what you’ll need to do.
Let’s jump ahead and see what the pie chart looks like when the child is 15 years of age.
Here are the results:
In Part 2 of this series I’ll present the portfolios you can invest in.