Personal Savings: My Kid's College or My Retirement?

Personal Savings: My Kid's College or My Retirement?

In their middle class home, Marcus and Krisha enjoy dinner with their kids at the kitchen table, laughing about all the events of the day.
Staring at them is a stack of unopened and unpaid bills they have to tackle after the couple’s finished washing the dishes and putting the kids to bed. When they’ve paid the last bill, they glance at each other with raised eyebrows because they’d hoped to have enough money left over to save toward their kids’ college education. More so is Marcus and Krisha’s desire to leave their jobs one day and live their dream of owning a restaurant together. They are eager to take control of their future but they always seem to be fighting a three-headed financial dragon.

“Is the 529 plan the best way to save for college savings, Marcus?” Krisha asks her husband.

“Babe, what good is it to save in a 529 college plan or 401(k) retirement plan when we barely have enough to put into either?” Marcus replies in frustration. “It’s either one or the other. We’ve got no choice. I hoped to use the equity in our home to fund those things, but look around. Our home isn’t worth that much anymore and who knows when this will turn around …”

Marcus and Krisha are one of millions of middle income families forced each year to choose between planning for the future of their children or their own. In the real estate boom of the mid-2000s, many middle class families witnessed their homes explode in value, banking on the fact that real estate will always be a safe investment and the true ticket to their financial dreams.

But the national median price of homes dropped 5.8 percent, from $219,300 to $206,200–the largest ever recorded by the National Association of Realtors’ (NAR) 28-year history. Without other discretionary income to save for anything else, people hoped their rising home values would bring them closer to their financial goals. With regard to the mortgage meltdown, combined with popular ARM (adjustable rate mortgage) loans adjusting mortgage payments higher, today’s middle class families caught in this trap are fighting to stay above water. If this area is not managed properly, they risk not only losing their homes to foreclosure, but also losing all the equity built for other plans of college education and future savings.

During these unique economic times, fear and uneasiness are compounded by the fact that our homes, considered by many families as their biggest investment, are losing value as the days go by. Daunting media headlines and co-workers being laid off adds fuel to these families potentially losing their greatest asset … hope for the future.

What are families like Marcus and Krisha to do?

In this fast-paced, technology-driven, hyper-evolving marketplace, it is said that college students today are preparing for jobs that currently don’t even exist. Tomorrow’s workforce is not only competing for the same jobs amongst other college graduates entering the workforce, but companies are opting to find the same qualifications and education from qualified job candidates globally. Parents can not only help guide their children toward a career path, but more importantly, they can help their children understand that true learning is a lifelong event and not limited to the confines of a classroom or campus. Once a child has confidence and direction, they can be more decisive and deliberate towards reaching a successful future.

There are usually two things that prevent parents from planning for retirement and funding college: misinformation and careless errors. Both are avoidable and costly.

Here are a few tips:

1) Be blind to “sticker shock”:
Never remove a college or university from the list because you think it is too expensive. Less than 35 percent of all students attending
college actually pay the advertised cost of attendance. Working the college system properly on your end (as much as the college system works you) will put you, relatively, at the same cost for college no matter where you desire to go.

2) Avoid the Hype and Media Madness:
Be wary of headlines and professionals that advise you that “everyone should do this” and “everyone should do that.” Just like our
fingerprints, everyone has a unique situation and your financial gameplan should be grounded, yet flexible. No one knows your financial
situation like you do, so find someone you can trust, be transparent with and remain accountable.

3) Stop Sitting On Your Assets:
For most, a mortgage is the greatest payment they make each month and their home equity is their biggest asset. It is just as important to manage your liabilities as well as managing your savings, especially in a depreciating market. You just may find some hidden dollars going unnecessarily to your mortgage company that you could otherwise redirect into retirement savings. In fact, the Federal Reserve Bank of Chicago reported that this “mis-allocation” of funds is costing Americans more than $1.5 billion a year.

Additionally, many private college financial aid formulas disqualify students if they discover their parents have large amounts of home equity in residential or real estate investments. Repositioning these assets into a liquid, safe, tax-advantaged environment would not only help better qualify a student financially but also parents planning for retirement.

Marcus and Krisha, like many of us parents, have good intentions. There are so many unseen circumstances along the way that may prevent us from saving for both our children’s college and financial freedom.

Fortunately, it is possible.

If you’d like to explore your possibilities and understand your options, please subscribe to this blog or to our free email updates to our Money Smart Workshops

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