How Our Family Is Saving For College

how-our-family-is-saving-for-collegeSaving for college is no easy task. If parents decide to pay for their kids’ undergrad education, it’s potentially a 22-year commitment from birth until graduation. Yet, saving for college is often a minor component of an overall financial plan.

Not in our family.

For our three kids to each attend four years of in-state undergrad university, I estimate the total cost will be about $716,000. That’s an average of $60,000 per student per year.

I really hope that isn’t accurate. But that’s my current estimate.

I’ve already laid out the reasons why I believe our commitment to pay for our kids’ college education is the greatest risk to not achieving my goal to retire at age 55. So we make saving for college a high priority.

Saving for College is a Family Affair

I stressed family in the title of this post because even though I’m the only member currently working, all five of us are saving for college. How’s that?

The money we put into tax-advantaged Virginia 529 accounts each month is cash we’re not using to buy things or have fun with. This cash could fund some cool stuff…

…like a lease on this 2014 Maserati. Boss.

Saving for college Maz

…or every six months we could take a Disney cruise. That’s 29 family Disney cruises between today and when my son is “supposed” to start college.

Saving for college Disney

The thought of 29 Disney cruises gives me nightmares with It’s a Small World After All playing on repeat. I’m sure the kids would like it, though.

As a family, we’re making some serious sacrifices.

Every month we prioritize saving for college first. This has led to some procrastination in other areas of our lives. For example, Mrs. RBD and I don’t have a headboard for our bed or any grown-up bedroom furniture for that matter. I’m still using my bachelor pad Ikea dresser and bedside tables, and she is using her 1950’s hand me down dresser.

We want, and I would argue we need, decent adult bedroom furniture. We could just stop saving for college for a couple months and use that money to buy furniture, but we don’t.

It’s frustrating because we’ve been married for five years and plan to be married at least another 50 years or so. You would think we would buy ourselves some decent bedroom furniture that we’ll use every night of our lives for the next 50 years.

Remodeling projects in our house have also been put on the back-burner. I’ve been talking about redoing our ugly laundry/mud room to be more usable and space-efficient. But the offensive light purple walls and grotesque laminate floor remains.

Estimating Tuition for the Class of 2037

Estimating college tuition is a necessary evil for planning purposes. The easy way is to find an online calculator. Google “college savings calculator” and this site comes up. It’s super easy and gives you something to work from.

I just did a quickie using my son’s age and it says I should be saving $322 per month… just about on target there.

But if you’re like me, a simple online calculator won’t cut it. Instead, I built a semi-elaborate spreadsheet to try to give myself more control over the variables.

Basically, I average the total cost of education (tuition + books/housing etc)  today at five of the largest in-state schools. Then I add in inflation rates of 3% (lowest expected) and 7% (highest expected) to calculate the future costs.

By building these numbers out to 2037, I can estimate a range of what four years of undergrad college for each of my kids will cost. The average between the high and low estimates was a heart-stopping $716,000.

When I ran the simulation through the basic online calculator, the number was a more manageable $582,000.

I’d rather over-estimate.

Either way, at our current pace of savings, I estimate a savings shortfall. But I’m not worried, I’ll tell you why later.

Our Monthly Savings Strategy vs. Front-Loading

On the day each of our kids got their Social Security Number in the mail, we opened a new 529 savings account. From the Maserati picture above you can see we save $900 per month. That’s $300 per kid per month and $3,600 each per year for a total annual savings of $10,800.

We use the Virginia 529 plan because we live in Virginia and get a decent tax benefit (5.75% of contributions). When my first perfect little daughter was born, I explained our thought process of choosing this plan in this long-titled post.

Our strategy is still to dollar cost average consistently into each child’s accounts for up to 18 years. We also typically receive some monetary gifts for the kids that we add in (usually bringing us to the state maximum of $4,000* per child).

Starting early is a way to front-load the accounts to maximize the compounding effect on savings. The $4,000 saved in the first year will compound for all total 18 years. The $4,000 in year two is added to the first year contributions and returns and grows for the next 17 years, and so on.

When a child is born, time is on your side. Get started immediately. 

Don’t let time work against you.

Front-loading is a term in retirement savings that refers to maxing out retirement accounts early in the year. Take a Roth IRA, for example. An investor can dollar cost average $458 into the account every month to reach the max for each year. Other investors may wait until April 15th the following year (i.e. 2016), tax day, to add eligible funds to a Roth IRA for the previous year (2015). Both strategies are fine, as long as investing the max is the goal.

With true front-loading, however, you’d invest the full $5,500 in the month of January every year. That allows for 11 months more for funds to compound as compared to contributing in December. Over an 18-year period, that extra compounding will add up.

I would front-load our 529 college savings if we could afford it. But we don’t have $12,000 sitting around January 1st every year.

Dollar cost averaging, on the other hand, isn’t a bad strategy. We automatically buy more when market prices are low and less when they are high.

Early in our kids’ lives, contributing the maximum amount is paramount to taking full advantage of the compounding effect of time.

A Rule of Thumb I Don’t Use

There’s a simple rule of thumb for saving for college that a friend once told me. Plan to pay for a third of college expenses via 529 savings. Pay another third through salary cash flow (i.e. working while they’re in school). Lastly, pay the final third either via cash-on-hand (non-529 savings) or by borrowing.

Logically it makes sense because this strategy builds in flexibility. For example, what if your kid earns a full-ride? Then all the 529 savings could be left useless.

In reality, few people save too much for college and only a small percentage of kids earn a full-ride.

The way I see it, if one of our kids earns a scholarship or doesn’t need as much money for education, one of the others will. I also think it’s likely that at least one of our three kids will attend graduate level school. 529 plans allow for transferring funds between family members and funds are eligible to pay for graduate level courses.

The money will be spent one way or another.

Unfortunately, following my friend’s rule of thumb doesn’t fit into my retirement strategy because I plan to retire at age 55. That’s the same year our oldest, our son, will start college. Paying through salary cash flow won’t work. Borrowing isn’t ideal either because I’ll want to keep our recurring expenses at a minimum.

So do I expect to pay for college completely out of 529 savings? Probably not. A majority? Yes, hopefully.

I do expect to cash flow some tuition, not from a salary but from investment income. Or I may sell some taxable assets during their college years as long as the tax consequences aren’t too bad.

Borrowing is always an option if needed. The intent is to have our mortgage completely paid off by age 55. That would open up some home equity for tuition. If borrowing is only meant to supplement 529 savings and investment income cash flow, it wouldn’t be the end of the world.

Since this is all a family ordeal, a big part of our plan is to stress return on investment (ROI) to our kids. We’ll encourage high paying degrees at in-state schools for a good return on our education capital.

If our kids are interested in a career they are passionate about, but one that doesn’t pay well, we won’t discourage that path. But we’ll still stress ROI. For example, if one of our kids wants to be an artist, we’ll encourage them to attend art school, not Pepperdine.

Ideally, instead of this rule of thumb where funds are equally drawn from three sources, my goal is to pay for college this way:

  • 80% from 529 savings
  • 20% from cash flow or asset sales
  • 0%  from borrowing

This builds in some flexibility too, and we always have the option to borrow if needed. On our current path, we are saving enough every month which should not put my retirement goal of age 55 at risk.

Specific Investments

529 plans don’t always have a full selection of investment options. One of the nice features of the Virginia 529 inVest plan is their commitment to low-fee investment choices. That’s not to say it’s a perfect plan. All funds and actively managed portfolios have expense ratios well below 1%. Passively managed index funds have expense ratios in the 0.30% and below range.

For our strategy, we’ve decided to stay mostly with simple low-cost equity index funds from Vanguard. The funds we use are as follows:

  • Vanguard Total Stock Market Index (VITSX)
  • Vanguard Total International Stock Index Fund – (VTSNX)
  • Vanguard REIT Index Fund – (VGSNX)
  • Parnassus Core Equity Institutional “The Socially Responsible” fund – (PRILX)
  • James River Age-Based Portfolio

We invest $100 in both the VITSX and VTSNX each month for each of our kids. Our goal is equity market returns over the next 10-15 years. Then for the third fund, I’ve mixed it up a little, adding to the VGSNX REIT fund for two of kids, and one managed mutual fund, PRILX, for our one daughter.

As for the actively managed fund, I originally invested in this for my daughter when I opened her account. It was outperforming all the other funds even after the fees were taken into account (currently 0.82%). I don’t like that fee, but it continues to outperform. So, for now, I’m sticking with it.

When I first opened my son’s account, I used an age-based revolving portfolio called the James River. At the tender age of three, they’ve already moved this fund to only 80% equities and 20% fixed income. For that reason, I’ve ended those contributions in favor of the REIT fund.

I expect to keep all the portfolios heavily weight toward equities until each child reaches the age of 12-14. At that point, I’ll likely cut back on equities for each of them as their start dates approach, lowering risk.

By the pre-teen years, college cost estimates should be in a more narrow range and savings rates and expected returns can be adjusted.

The Virginia 529 plan website looks good from the home page. But the administration side of things is not the most user-friendly. To track my 529 savings I rely more on Personal Capital than the Virginia 529 site. I’m already tracking my net worth there, and the numbers are loaded right in. It also keeps a close eye on fees, so I can confirm I’m not losing out to active managers. Best of all it’s a free tool.

saving for college

Commencement

Here are the main takeaways I hope you find useful from this post:

  • Saving for college takes sacrifices. Don’t lease a Maserati.
  • If you intend to pay or help pay for college, start saving today. For future kids, start the day they receive their Social Security Number. Why wait?
  • Use a simple calculator to get a ballpark estimate for future college costs. Construct an elaborate spreadsheet if you’re into that kind of thing.
  • Don’t worry about over-saving for college. Save aggressively early, you can always cut back.
  • Invest aggressively in equities while your kids are young. Start to back off the equity risk in the pre-teen years.
  • Don’t pay high fees.

* Note: The Virginia state minimum for 529 college law is somewhat confusing and misleading. Read the Virginia 529 Simplified page to learn more on this topic.

Photo Credit: Karen Blaha via Flickr

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23 Responses to How Our Family Is Saving For College

  1. Chris @ Flipping a Dollar October 20, 2015 at 7:22 am #

    Glad to see others like us. We have a 3 year old and a month old. We are only putting $75 per kid a month away due to our current situation. Going to open up a Maryland 529 too which sucks because they are very limiting. Pennsylvania is was a lot more flexible and would allow for tax deductions on any 529, not just in state ones.

    I also ended up borrowing for my last year, but paid it off quickly. I think that was. Fair trade for my parents. All of my internship money went to them throughout school, so I’d expect something similar with my daughters!

    • Retire Before Dad October 20, 2015 at 8:36 am #

      My parents paid for my entire undergrad education. I was responsible for spending money and worked hard over the summers for that. In return, I will pay for my kids college. That’s the way I’ve always seen it and intend to follow through.

      Sucks about Maryland’s plan. Doesn’t surprise me, frankly!
      -RBD

  2. brian503 October 20, 2015 at 7:43 am #

    Great post. Saving early and often is the key. I think it’s important depending on age of children to loop them in on this discussion so they understand what’s being saved and how they can help along the way.

    • Retire Before Dad October 20, 2015 at 8:37 am #

      DD,
      You’ve got a few kids approaching go time, right?

      Perhaps my view on saving for college will change over the year. I don’t think my consistency will, however.
      -RBD

      • brian503 October 20, 2015 at 2:49 pm #

        We have 3, ages 16,16 and 13. Our goal is them graduating without debt so all options are being looked at grants, scholarships, them working during college.

  3. Bryan Cockfield October 20, 2015 at 8:29 am #

    I don’t know if I’d be averse to student loans. It could be healthy for one’s children to share some of the financial burden of college, hopefully so they could be more incentivized to choose a school and major that suits their future ability to repay a loan. An art degree from Pepperdine IS expensive, after all!

    • Retire Before Dad October 20, 2015 at 8:41 am #

      Bryan,
      I agree with you that there is a benefit to kids having some skin in the game. However, since my schooling was paid for, I want to pay it forward. They will be expected to pay for spending money. I’ll need to work on incentives to perform well.

      I think if rather have them work to pay for some school rather than being saddled with debt. Perhaps having them pay $1000 a year or semester or something. That might encourage them to work, and to perform well.
      -RBD

  4. Amy K October 20, 2015 at 11:53 am #

    My parents started saving before I was born – Dad’s work allowed employees to buy savings bonds through payroll deduction and back in those days (the 1970’s and 1980’s, before 529 plans) Series E bonds were a good, safe way to save for college. My parents wanted to me to have a little skin in the game too, and our agreement was that the subsidized student loan ($2625/year at the time) was my contribution amount I could take out the loan or work through the summer and pay the school. I graduated with $3500 in debt in 1999, which was very easily paid off and since they were subsidized with a 6 month grace period after graduation I don’t think I ever paid interest.

    I think my parents ended up cash-flowing most of my tuition and my brother’s and they still have those bonds kicking around for their retirement.

    I’m not sure having “skin in the game” really did anything one way or the other for me. College was just something I did because it was expected. I got middling grades, matured a lot, but even at graduation didn’t know what I wanted to DO with my life. My husband, on the other hand, was fully funded by his parents, got middling grades, but had a clearer vision and launched immediately into a more lucrative field.

    We go back and forth on how much to save in a 529 – we have only 1 child – and how much to put into our traditional/early retirement accounts. Save too much and we have no one to waterfall it to. Save too little and take a hit to our retirement, or take out loans. Does she need to have skin in the game? What about scholarships, or trade school? Our plan now, suggested by our financial advisor, is as the cost of daycare goes down put that $$ into the 529. We’re at $260/month right now thanks to Preschool being cheaper than Infant care.

    • Retire Before Dad October 20, 2015 at 12:04 pm #

      Amy,
      Thanks for your thoughtful comments.

      Interesting to see how it was in the 70’s. Obviously, times have change and tuition costs are much larger now. Skin in the game does make sense. I probably didn’t work as hard as I could have. Maybe that would have been different if I had some loans.

      One child does add a different element. Good luck with your planning.
      -RBD

  5. Income Surfer October 20, 2015 at 12:16 pm #

    Great post buddy. Helping three kids with college won’t be an easy feat, but I’m sure you two will get it done. Those are some great looking Vanguard ETFs you invested in. Your completely “hands off” mini portfolio will serve you guys well in the future. (Sigh) kiddos 🙂

    -Bryan

  6. Tawcan October 20, 2015 at 1:06 pm #

    We plan to help out our kid(s) with college as much as we can. We plan to put $2,500 into Baby T’s RRSP every year and deploy couch potato index ETF approach. It would be nice if we were to fully fund Baby T’s university tuition but I think he will need to take charge of his educational cost as well. Gotta work hard for your money is a mantra we plan to teach Baby T.

  7. Fervent Finance October 20, 2015 at 1:08 pm #

    Honestly I think in the next 5 or 10 or 15 years there will be an education cost “bubble burst”. Basically states or students/families are going to say enough is enough and stop going or seek other alternatives. If not, it’ll get to the point where college is not financially worth it. I sometimes think how much further ahead I’d be if I became an electrician or HVAC tech. If my kid has any entrepreneurial bug I’ll definitely advocate that route. Nothing better than creating something for yourself, and not having to work for the man. Every kid is different though and not everyone is meant for college either. I think people need to move away from the stance that everyone should go to college or you’ll be a failure, as that’s very far from the truth.

    • Retire Before Dad October 20, 2015 at 1:16 pm #

      FF,
      You make some excellent points here. I also think costs have gotten out of control. I estimate a year of school will average me $60k, but some people actually pay that much for education TODAY!

      HVAC and plumbers do very well in our area. But a good education will pay off many times, if it’s the right degree at the right cost. Hopefully the education cost inflation slows. If it does, or bursts, then I can simply slow my contributions.

      We’ll also instill the ideal of self employment and hustle. Can’t beat hustle.
      -RBD

  8. our next life October 20, 2015 at 5:12 pm #

    I think all posts should begin and end with “Don’t lease a Maserati.” Solid advice. 🙂 Also, love the new site look and logo! Nice.

    The amount you’re forecasting makes me want to throw up a little bit. Wow — that must feel so daunting to have to save essentially another retirement nest egg just for your kids’ college. Do you plan to cover 100% of their expenses? I got a full ride, but still ended up with about $10K in loans from freshman year housing and books (my parents wouldn’t let me get a job until sophomore year because they wanted me to focus on studying… though I mostly focused on partying that first year). But I’ve never regretted having that debt, especially since it was small and manageable. I learned a lot from paying it off, and it helped solidify some of my views about money. I know you feel strongly about paying for college, but wonder if paying for 80 or 90 percent would give them a bit more of a personal stake in their own education by forcing them to do work study or pay back loans, without strapping them with the kind of crushing debt that so many kids graduate with now. Either way, it seems like you have your savings and investing plan well in hand. It’s great you’ve started early, and that Virginia offers low-cost funds!

    • Retire Before Dad October 21, 2015 at 10:14 am #

      ONL,
      Yes, that number is jaw dropping. I’ve over estimated (I hope) on purpose. If rather aim high to give us options.

      By planning the way I am today, I give us a lot of options. We could always have the kids take part in funding school. This would definitely come into play if one insisted on going to a private school or another that is unreasonably priced. My son is already showing signs of this kind of stubbornness!

      We have 15 years to plan. Things will likely change. I’d rather have a good base of savings to work with than not.

      And thanks for noticing the new design. Actually have a lot more subtle changes to make. But happy to finally have a logo I like.
      -RBD

  9. Gen Y Finance Guy October 20, 2015 at 5:40 pm #

    The education model is antiquated and due for disruption. I am confident (although kidless) that the education system is going to be disrupted and demonitized.

    I would not be surprized if the cost of an education is closer to ZERO in 20 years. There are some really wicked smart people working on some really cool things out there.

    Not saying I wouldn’t save just in case.

    The class of 2037 will be hacking their education and customizing it to them. I think there will be endless permutaitions. The stucture will be a hybrid of physical and virtual presence. Less memorization and more relevent skills.

    • Retire Before Dad October 21, 2015 at 10:09 am #

      GYFG,
      Certainly a worthy point. Years ago my cousin was just born. His Dad stated that by the time he’s in college, grad school will be required for everyone. He was wrong. His son didn’t graduate college and is more entrepreneurial. In the future there should be some kind of shakeup. But good education experiences won’t go away. And the benefit will be there, but yes, possibly to varying degrees.
      Thanks for your input.
      -RBD

  10. JCulley October 20, 2015 at 10:03 pm #

    Have you considered going the DGI route for their college savings? I live in Alaska so there is almost no reason to use a 529 plan and since I don’t like the investment limitations, I elected to go with a standard taxable brokerage account. I have two sons, 7 and 2, for whom I deposit their AK PFD checks each year plus a fixed amount each month that I raise by 10% each January.
    I’ve created DGI portfolios for each of them because it gives me even more flexibility with how to pay for their college. Subject to future financial aid conditions, I plan to have each of them take out student loans to pay for any education expenses that are not covered by grants and scholarships. I’m on track to have ~$250k in each portfolio when each turns 18 and by having them get financial aid it will allow another 4+ years for the dividend income to grow. Then, after graduation, I can use the income stream to make the student loan payments for them or sell the holdings to make a lump sum pay off. If I use the dividend stream it will leave the portfolio intact to either augment my retirement funds or to be passed on to the kids once they demonstrate they are capable of responsibly managing real money as an adult.
    It has the added benefit of allowing a fairly easy “skin in the game” component if I choose. Depending on grades or time it takes to graduate, my kids may find themselves paying a percentage of their student loan payments. I just payed off my student loans this year and don’t want them to have that same burden but I also want them to know that poor decisions can have long term ramifications.
    You’ve got a pretty stellar DGI portfolio yourself, have you considered this route for funding the kids education?

    • Retire Before Dad October 21, 2015 at 10:06 am #

      JC,
      Interesting approach. I do expect to use dividend income to cash flow some college expenses. We get a good tax break here on 529’s so I make 5.75% risk free return when I invest each year. Then it grows tax free. Both are good positives. Not all states are like that so everyone has to do what’s best for them.
      That’s great you can put the oil money into the kids pockets. Interesting how you plan to use DGI to cover loan payments. I never thought of it that way.
      My whole plan is subject to change. But starting early is something I can’t change 5 years from now. So if I start early and over save, that gives me options.
      -RBD

  11. Chad Carson October 21, 2015 at 11:43 pm #

    Hey RBD,
    Thought provoking article for me as a dad of a 4 and 2 year old. Thanks for sharing your details. Also, I love the new site look and logo!

    As you know I’m more of a real estate guy, although I love vanguard index funds too. My current plan is to pay for college with 2 rental houses, one for each daughter.

    My wife and I owned a $150,000 house as a residence until our first daughter was 1. We moved and rented it out. We have about $50,000 equity, and $100,000 debt now. The house is rented for almost $1,000, but I need to up rent because market rent has exploded to about $1,200 since she moved in. It has positive cash flow, mostly sheltered from tax by paper depreciation expenses, and our loan will be paid off in almost 20 years (with minimum payments). We’ll likely pay it off early with extra cash flow from rents.

    In 14 years at 2% appreciation, the house would be worth almost $200,000. I plan to either refinance it or sell at that time. Refi is attractive because I’ll avoid taxes and just let the tenant pay it down for another 20 years while rents and prices go up. Either way I’ll pull out about $160-180,000. I used your calculator link, and my current cost of $25,000/year in-state would cost about $38,000/year at 3% inflation in 14 years or $152,000+ for 4 years.

    Did I miss something on the future numbers? Maybe my instate schools (South Carolina) are a lot cheaper than Virginia. If they go out of state or if I’m short, I’m not too concerned. I got a full-ride to school playing football, but even if they can’t – I don’t mind them working, getting grants, or maybe me doing my own student loan to them separately (that they can pay back to me and I’ll put in a fund that I’ll set aside for their first business/real estate deal or something like that).

    I plan to do the same with our current residence for our 2-year old daughter. It’s worth about $200,000, we bought it at a steal (close to $105,000) and we’re below $90,000 on the mortgage. It will rent for $1400-1500/month when we take our overseas trip to Spain in 2016:)

    Fun stuff. Thanks for making me think through this exercise.

    • Retire Before Dad October 22, 2015 at 9:18 am #

      Coach,
      Thanks. Glad to finally make some visual changes here.

      I like your strategy since you know real estate best. I have a friend doing something similar in the southwest. He rents 3-4 houses and plans to just let them ride until his three kids start school. That’s awesome you’re raising rents down there. I recently informed my tenants that I’d be raising it. Planning to write a post on it. My rental could possibly be used to pay for college. I’m back to leaning toward keeping it instead of selling. Need to run some numbers on the taxes.

      I’m assuming a higher inflation rate in my model. About 5%. I also calculated each year of school individually. So my son starts in 2030 and my youngest daughter graduates in 2037. That 7 years of 5% inflation really adds up. As I said, I really want to over estimate these numbers. I can always cut back on savings.

      You’re really house hacking there. Been meaning to sit down and read your last few posts. Good stuff (that I don’t want to read on my phone). Also checked out both of your podcast appearances. Nice!
      -RBD

      • Chad Carson October 22, 2015 at 12:55 pm #

        Yeah, inflation rate I used of 3% on college expenses probably won’t cut it. And when I calculated all 4 years separately for my oldest, the total rose from $152,000 to $213,300. I guess I’m still not too worried, because that gap of $50 – 60,000 would be manageable for her and/or us. But you definitely gave me something to think about.

        Yeah, house-hacking is my little hobby-for-profit. I highly recommend it. My first two house hacks are now rentals as well … a house and a quadplex. When I lived in the quadplex it allowed me to cover all expenses and then some with the rent from the other 3 units. I loved that!

        Thanks for planning to read the last few posts. Would love your comments or ideas. Yeah, BP podcasts were fun.

  12. Cassettes Club (@cassettesclub) October 24, 2015 at 12:52 pm #

    The things you own end up owning you.

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