College Savings

[Anonymous]

So, my wife and I are going to be starting to have children soon and I've been trying to do research on the best ideas in terms of saving for college funds for future children. Now, I constantly run across conflicting ideas.

One of which is saving for retirement rather than savings for children's college. My wife has a 401(K) through her work and I have one through my civilian employer as well as I have a TSP (much like a 401(K)) through the military. So I feel we have that end covered, so my question is with that being said. Is it still better to invest into an IRA rather than a savings account/certicates even though we have those retirement savings already or at that point is it okay to look at college savings options?

Also, what ends up being a better option for college savings? Certificates or Savings accounts like MMA/ESAs?

[Revelate]

Couple of thoughts:

It's really hard to say where college tuition is going to be in 20 years, it's already charging what the market will bear and I don't know if that will last.  Secondly, more and more parents are explicitly not paying for college (too damned expensive and sacrificing your own financial future for your kids is no longer an obvious move given more extended lifetimes) or only paying for a subset which is a trend I expect to continue, so really I think if I were to have kids at this point I would be honest with myself and make it a pretty flexible plan.

First, in general, if you have a 20 year time horizon being in a MMA or similar is financially not great.  A not great mutual fund over 25 years for me (kid to adult) went from call it 2k to 8k, and a similar 2k investment in a different fund which somehow wound up in a MMA for the past 15 years or more only went to 4.3k.  Lame, and even SPY (SPDR S&P 500 ETF) would've been a better solution than either.  You want more risk your portfolio for better returns when looking at a long time horizon.

Second, if you are really looking to dedicate money for your children's college, a 529 plan is the way to go... and explicitly you want one that offers some investment options like a broad-based index fund.  MMA's and certificates just don't offer enough returns and may not ever again in our lifetime TBH.

That said, money stuffed in there isn't easy to do something else with.  Personally I would still be funding the retirement accounts, and then shuffle some additional money into a 529 plan but nothing I couldn't afford to lose.  That's me personally, you may do another calculus but trying to figure out where things are going to be in 20 years is tough.

[Anonymous]

Revelate gave you a lot of good advice. Especially...

1. What you're going to need for tuition in 20 years is really uncertain. In addition to Revelate's insights, certain polititians would like to make college free. If that happens, you won't need tuition, but you very well might need a lot more retirement money as the effect of such a massive entitlement program on the economy could be devistating. (Or maybe it won't be devestating -- I don't mean to be political, just to point out that the landscape could look a lot different in by that time).

2. For long-term investing, being in some kind of index-based fund is absolutely the way to go -- a mutual fund (as Revelate suggests), or an exchange traded fund (ETF), which is similar, but often has lower fees attached and is easier to trade. If you aren't familiar with them, you buy a share of a fund (kind of like buying a share of stock), and then the fund manager takes all of the funds and buys a range of stocks (or commodites, or real estate, etc, depending on the nature of the fund). A stock fund (whether a mutual fund or ETF) will generally follow the DOW and the S&P500. There will be ups and downs, but over 20 years you're likely to see a better return than you can get reliably pretty much anywhere else.

And one thing Relelate didn't mention...

3. I believe the best thing you can do now to be in a position to help your children with college (or with whatever they need help with as young adults) is to begin now to put yourself in the best financial position you can. Pay down any debt and don't accumulate any more. Pay your house off. Put yourself in a position to pay cash for cars. Imagine how much you could stash away every month if you didn't have any payments.

The problem with trying to invest when you're carrying debt (any debt) is that overall you're not really making much headway when the 10% interest that you're making on your investment accounts (if you do well) is cancelled out by the 16% that you're paying on your credit card debt, or even the 5% that you're paying on a much higher mortgage principle. Once you wipe those out, you can really start to build wealth, and you'll be much more able to help your children whatever their needs turn out to be.