As we approach the beginning of another school year, the mind races:
The rush for the right school supplies is on! Which teacher did we get? Is there lunch money left over? New tennis shoes again?
What I recently realized is – Those are the easy things. Having your oldest child enter her senior year of high school presents a whole new list of questions:
When is that next ACT exam? Which college will we choose? Can we afford it? Is she ready? Am I ready?
Planning for college tends to become a primary goal once we find out a baby is on the way. Most people start by opening up some type of financial account and making regular contributions to it. You can run an online financial calculator to decide how much to put away every month. Then just sit back, relax, and 18 years later you are ready, right? I hope that is not your plan. If it is, then perhaps this post can open your eyes!
You simply need to use some of the basics of financial planning:
1) Determine Goals and Expectations
· Project future college costs using inflation and various other options (in-state, out-of-state)
· Decide on your level of financial contribution – do you want your child to have skin in the game? How far are you willing to go with your dollars?
2) Analyze Your Situation
· Are you currently saving for other important goals, such as your retirement (keep in mind that the government won’t loan you money to travel in your 60s), rainy day/emergency funds?
· Are you able to start regular contributions for college savings? Do you know where all of your money is going? www.mint.com is a great, free, online financial data aggregation tool to help you categorize your cash flow and determine discretionary income.
3) Create Your Strategy
· Using the data from the first two steps, you can structure your own, unique plan. Your plan should include strategic characteristics including time value of money, tax efficiency and implications, account fees, and account ownership and control.
4) Take Action
· No plan is any good until you actually do something! Make it happen – open an appropriate college savings plan and start putting your money to work. www.savingforcollege.com has thorough information about 529 plans, Coverdell ESAs, scholarships, financial aid, etc. You can also follow them on twitter! @saving4college
5) Monitor and Adjust as Necessary
· “The only thing that is constant is change” ~ Heraclitus. Jobs change. Kids grow up. Markets fluctuate. Life keeps happening while you are planning it. Structure flexibility into your plan so that you can take advantage of opportunities as well as deal with uncertainty.
· Watch how your money is working for you and stay informed.
Picking the right financial tool(s) early is a strategic decision which has the potential of offering you and your child the freedom of choice down the road. Contributory accounts such as 529 plans and Coverdell ESAs provide savings specifically for education. Retirement accounts such as IRAs and Roth IRAs can provide the ability to withdraw for education and be exempt from penalties, and possibly income tax. Uniform Gift or Transfer to Minors Act (UGMA/UTMA) accounts provide a way to move investments into a child’s name for potential ongoing tax savings, although this money is not required to be used for education. As your student enters college, other choices become available such as scholarships, student loans and work-study programs. Income tax incentives such as deductions and credits can be available for out-of-pocket costs for tuition and fees, and possibly other education related expenses.
In addition to the financial plan, a key component in preparing for college is establishing year-by-year goals in high school and creating a timeline. The website www.actstudent.org is the site you use to register for the national ACT exams. However, it is also a thorough college prep website. Use it to engage your incoming high school student in the process of creating the plan. It offers information on financial aid and career planning and provides a checklist for each year of high school to guide the student to certain milestones and deadlines.
Sending your child off to college can seem stressful and scary, but it can also be very enjoyable and rewarding. Knowing that you planned well, and that your college student was involved in the creation of the plan and understands the importance of planning can relieve the stress and make room for the rewards.
Samantha J. Kopek is VP and Market Manager for Financial Planning at BOK Financial. She received her BA in Psychology and Human Development from the University of Kansas. She is a CFP® certificant, as well as holds the Enrolled Agent (EA) designation awarded by the IRS. Samantha is a member and Past-President of the FPA of Greater Kansas City.
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