Throughout life, there will be many important monumental events that will ultimately cost a great deal, whether that is buying your first home, or maybe even your child’s wedding. However, the two biggest life events that require extensive planning will be your retirement, and your children’s education if you so choose to contribute. Now, I’m not saying here that you need to fund your child’s entire education. There are options that are more viable, as it is unrealistic for many parents to fund the children’s education fully on their own. Sure, financial aid is available for some, but for families that are truly affluent, needs-based aid begins to decline as they don’t qualify for state and federal aid. At that point, if parents are unwilling to pay in full, it becomes partly the child’s responsibility.
College planning isn’t for parents only. It is an investment that should involve the whole family and offer students their first taste of financial planning. With your kids going back to school this month, it’s time to start thinking about your game plan for your children’s future. The initial discussion with your child about funding their education may be unusual to them, especially if they haven’t had to be responsible for their finances in the past. There are many lessons to be had in this discussion (for parents and children alike), including goal setting, tax-deferred compounding, budgeting, and debt management that will carry over in other aspects of their life as well. Allow me to explain below.
Setting goals early will set you and your children up for success. We all know this, but it is easier said than done. Let’s say for example purposes that the Smith family has failed to save for their son’s college. He is now a high school freshman. Just because there have been no savings thus far does not excuse them from doing it now. They will need to adjust the goal-setting process for the lost time and be realistic in what they can contribute and how the child will now be involved. There are many important questions here that need to be answered. What is the child’s career plans? Income targets? How much debt does he feel comfortable with? Scholarships? Will a private school pay for itself in postgraduate earnings? Or would he prefer a less expensive school as he is going into a lower paying career, such as teaching? These are all important questions to answer. Though this may put stress on children at an earlier age than expected, it is a powerful process. This is real life planning, and by having some skin in the game, your child is likely to take this process a bit more seriously.
Now say, the Smith’s child is now a senior in high school. He has made a plan for funding his college. Though the Smith’s could not take advantage of tax-deferred compounding to the maximum effect, they are still able to do this for their retirement. After all, regrets often provide the greatest life lessons. For example, a young person can accumulate over $1 million in 50 years by saving just $150 per month at 8%. The child is able to understand this, and I could bet that he will never miss an opportunity to save and compound after hearing that.
Now, debt management is maybe the biggest topic here. Any child who has ever borrowed money from his parents has had some experience with debt. But, of course it didn’t involve interest or fees, and it certainly didn’t introduce the child to the nation’s most unforgiving lender, Uncle Sam. The principles of debt management seem obvious to adults, but children swept up in the financial aid game need to learn them: don’t borrow more than you can afford to repay, shop for the best rates, and most importantly, understand the full cost of the loan over the payment period. As unfortunate as this is, student aid officers are in the business of selling loans, and they probably do not have your child’s best interest at heart.
Next to retirement, college planning is one of the most serious aspects of financial planning, because it influences a young adult’s total lifetime earnings, and will ultimately shape this young adult’s direction, opportunities and life. The lessons in planning go further than just college planning and will carry over to other financial and life planning issues that will come up in the years ahead. Making this event into a family effort is something that many households seem to find beneficial for the parents as much as the child.