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Pay Yourself First: Save for Retirement, Then College for the Kids

By U.S. News & World Report

Most parents want to provide as much as possible for their kids. But between summer camps, private schools and college, parents sometimes overextend themselves, putting their retirement savings on the back burner. Juggling multiple financial goals can be difficult.

For many families, there’s a gap between covering the required basic monthly expenses and the additional income needed to fulfill other financial goals — such as retirement contributions or a college fund. As a financial advisor, we often stress to clients the importance of paying yourself first.

Kids are expensive. It is easy to understand how parents are forced to make some difficult decisions. The U.S. Department of Agriculture estimates that a baby born in 2013 will cost middle-income parents roughly $300,000 until age 17, accounting for inflation. The study defines middle-income as households earning approximately $61,000 to $106,000 per year. Families that earn more can expect to spend more than $500,000 until age 17. Note that this projection excludes higher education.

According to the National Center for Education Statistics, it costs about $100,000 to send a child to a four-year public university, and nearly $200,000 for a private four-year school. Even for new parents with the benefits of a longer time horizon, the savings required to cover private college tuition is projected to be more than $800 per month. The inflation rate for education is higher than inflation as measured by the consumer price index, which eats into investment returns.

‘I have decades to save for retirement.’ While this is probably true, it is actually an even bigger reason to start saving for retirement today. By paying yourself first, your invested contributions will work harder for you over time through compounding. JP Morgan Chase & Co. provides an example of the effects of compounding:

— Investor A saves $5,000 annually between the ages of 25-35. Assuming a 7 percent annual return, by age 65, Investor A has an account balance of more than $1.1 million.

— Investor B gets a late start, and doesn’t begin saving $5,000 annually until age 35. Investor B contributes for 30 years, until age 65. Assuming the same 7 percent annual return, Investor B’s account balance is only $560,000.

Even though Investor A contributed $100,000 less than the late starter, they still achieved nearly twice the return due to the power of compounding. Younger investors with a longer time horizon until retirement can typically take a more aggressive approach to their asset allocation. Although your allocation will depend on your goals, age, risk tolerance and so on, starting out with a more aggressive approach can often add to the benefits of compounding in the long term.

Find a happy medium. Even when finances are tight, there are several strategies you can use to make the most out of your income:

— Pay yourself first — before even looking at your after-tax cash flow, make sure you are making sufficient contributions to your employer’s retirement plan or individual retirement account. Generally, people in their 20s and early 30s should be contributing at least 10 percent of their gross income annually to qualified retirement plans, or up to the maximum $5,500 IRA contribution (in 2015).

— Start a college savings plan such as a 529 plan — after-tax contributions are made and grow federal tax-free. When the funds are used for qualified education expenses, there is no tax on the deferred investment growth, either. Friends and family can also contribute to your 529 plan, which can be a great gift idea for special occasions.

— Consider the alternatives — whenever facing conflicting financial priorities, weigh the availability of alternatives before dedicating funds to any one bucket. For example, even you aren’t able to cover 100 percent of your children’s college expenses, plenty of alternatives exist to bridge the gap. Merit scholarships, independent scholarships, work-study programs and federal loans can all help families achieve their goals. There are no loans for retirement.

Although it can be hard, parents should always try to put themselves first when it comes to saving for retirement. Today, many offspring are returning to the nest post-college. With an increasing number of young adults still requiring some support until age 30, new parents can’t afford to delay saving for retirement, as it may take longer than anticipated for kids to be independent.

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Pay Yourself First: Save for Retirement, Then College for the Kids originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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