Here’s how to avoid making them.
For many, providing an education for your children is a core value. As parents, we want to launch our children with the tools necessary to live independent and productive lives.
However, we also must acknowledge that, as parents, we are swimming in a confusing ocean of wants, needs, desires, and drivers that might lead us to unfavorable outcomes. Things don’t always go as planned, unexpected events or desires occur, and plans and values get deterred.
The 5 most common mistakes people make when saving for college are:
- Waiting too long to start savings
- Depending on Scholarships or Grants
- Guided by guilt
- Loading up on the UGMA/UTMA accounts
- Abdicating parental responsibility for college choice
Mistake #1: Waiting Too Long
Everyone’s busy. The outgrowth of that is delaying the decision and concomitant action to begin an accumulation plan. Once the baby arrives, it’s all sleep deprivation and diapers—who has a clear head to get the paperwork done and set a savings system in motion? Before you know it, your infant is in high school and college is an eye blink away.
In order to avoid this situation, begin with a savings goal for right after the baby comes home. There are many savings calculators available that will help you compute how much you need to put away monthly based on college costs today. Some examples are Savingforcollege.com and Bankrate.com. If, after going through the calculation, that amount is within your means, get the paperwork together before the baby arrives and complete the forms with the exception of the name, date of birth, and social security number. Ask a family member to take control of the process and complete it after the baby is born. Set up an automatic monthly investment from your checking account into the new account. The sooner you get started, the longer you have to let your savings grow.
Mistake #2: Depending on Scholarships or Grants
Of course your child is going to get a full boat ride into the college of their choice! Unfortunately, this wishful thinking can get you into trouble with your savings and your child’s future. While you might recall your moments of glory on the soccer field and see glory in your Little Kicker, planning on awards might be a little shortsighted.
If you hope, believe, or trust that your super achiever will bring home the bacon, make sure you still have a Plan B in effect. The worst-case scenario is that you’ll have a pile of money set aside that can be used for other purposes. Plan for the worst; it can never hurt.
Mistake #3: Guided by Guilt
Guilt is a powerful emotion and is liable to lead you into bad decisions with terrible consequences. If your budget simply cannot accommodate some universities’ tuitions, but your inability to afford those high costs brings dread and misery, consider working with a therapist to help you handle the emotional burden. Not having the wherewithal to handle a $50-$70,000 per year expense should bring no shame—this is not a manageable cost for most people. I have spoken with parents who, in order to avoid the guilt, go into debt or raid their retirement funds to send their kids to expensive schools. The tragedy is, these folks have no means of restoring their coffers or rationally paying off the debts, which leads to retirement years full of financial strife. Is that a future you want for yourself?
Mistake #4: Loading Up on UGMA/UTMA Accounts
Opening up Custodial accounts by parents for their children is common. After all, there are some tax savings to be had to accumulate funds under the children’s social security number. However, it isn’t unlimited and it doesn’t come without risk. Yes, your child’s tax bracket is lower than yours, but depending on the amount of money in these accounts and their earnings, you might wind up paying at your tax bracket and giving up control of the savings when the child hits majority. The purpose of a Custodial account is that you, as Custodian, have a fiduciary responsibility to be a caretaker for those assets. There have been lawsuits finding parents guilty of stealing their children’s money. Remember, if you put it in an UGMA/UTMA, that money is technically your children’s—not yours!
Mistake #5: Abdicating Parental Responsibility for College Choice
When parents are unable to create appropriate boundaries regarding school choice, the outcome is liable to be devastating for either or both parties. Either the child is going to be gravely disappointed when they find out their dream university is unattainable due to their parents’ financial situation, or the parents are going to put themselves into financial jeopardy by waiting until the 11th hour to deal with this issue. Parents: Start as early as possible by discussing money with your children and communicating what your current financial responsibilities entail. Set expectations for everyone. Ron Lieber’s book, “The Opposite of Spoiled” helps parents cross the bridge to healthy financial communications and management. Teaching financial responsibility is a process and it requires an openness of spirit and the courage to let your children know that the sky is indeed not the limit. It also sets the tone for the financial responsibilities that large milestones, like going to college, carry, and it opens the doors for easy, honest communication. The goal is to have no big or shocking surprises along the way.
You can avoid these mistakes by starting with a plan, knowing your financial capabilities, setting realistic goals, and working your plan steadily and actively. I know you can do it!