Contrary to popular belief, good college planning begins with retirement planning.
Retirement is a distant and theoretical concept for most people. College, on the other hand, is more like a freight train picking up momentum and heading right at us. When suddenly confronted with the overwhelming reality of college costs, parents take action.
Typically, they look to accessible assets first and spend those to meet the initial costs. Then, discovering that those won’t get the job done, they evaluate where they can cut back and redirect money toward college. After all, we want what’s best for our children, we suffer from peer pressure and we figure we can always make up the time and money later.
But often times, the well runs dry. As stress and panic take root, parents look to financial aid only to discover they don’t qualify for as much as they’d hoped. This is where desperation and debt kick in. Parents resemble hikers who took the wrong trail: dazed and confused after expending energy in the wrong places, dehydrated, depleted and in need of rescue.
Today’s college education is a cash flow challenge, not a savings challenge.
This is the phase of life when getting serious about efficiency with our money comes sharply into focus. Detailed cash flow planning can help us find money we are losing, unknowingly and unnecessarily, and bring it back for both college and retirement. A big picture plan is essentially optimizing what we have without allowing money to evaporate from our savings and investment accounts.
This part of the equation is actually pretty simple, which is not to be confused with being easy.
If we’re serious about our financial future, we must answer these four questions (created by Don Blanton of MoneyTrax):
1. What rate of return do we have to earn on our savings and investment dollars to be able to retire at our current standard of living and have our money last as long as we do?
2. How much do we need to save on a monthly or annual basis to be able to retire and enjoy the same lifestyle we live now through our life expectancy?
3. Doing what we’re doing now, how long will we have to work to become financially independent and enjoy all our nonworking years?
4. If we don’t do anything differently than we’re doing today, what level of downsizing will we need to embrace to have our money last as long as we do?
Sending our kids to college introduces a fifth question that must be asked and answered:
5. How does funding our children’s education impact the answers to the previous four questions?
Once we’ve answered the four critical questions regarding our future lifestyle, we can focus on our real-world or “working family contribution”, which is the amount of money we can actually afford to put toward our children’s college education – all kids, all years. It’s an exercise in thorough and detailed cash flow planning that needs to start no later than our oldest student’s sophomore year.
By evaluating what the real out-of-pocket costs are for parents, we can begin to understand what we can actually afford before the student applies for college.
To learn more about cashflow for college and other related topics, you can check out my book Never Pay Retail for College.