Hullman, J.
Davidson Institute for Talent Development
2008
This Tips for Parents article is from a seminar hosted by Jamie Hullman, in which she describes the three basic steps toward budgeting for your child's future.
As the cost of a college education continues to increase at roughly twice the rate of normal inflation, it’s becoming more important for parents to plan for their child’s education farther in advance. Planning should involve three basic steps: 1. Estimate the total cost of your child’s education, 2. Create a personal budget to determine how much you will be able to save each month for education expenses, and 3. Plan for financial aid and/or other options to help fund the difference between your savings and the cost of the education.
Estimating the total cost of your child’s education can be done by using the Sallie Mae Educational Investment Planner at www.salliemae.com. This planner will allow you to select specific schools that you are considering. It will calculate the year by year cost of tuition, fees, books and room and board for the present or future. It will consider the cost of inflation in the calculation so you will have a good estimate of the cost at the time when your child will be attending college. It will not consider cost of various personal expenses such as transportation, entertainment, clubs, personal supplies, etc… so you will want to use the costs from the educational investment planner and create your own college expense budget specifically tailored to your child’s needs.
Creating a personal budget to detail your anticipated income and expenses will help you to determine how much you can save for your child’s education. You can do this by using one of the personal budget worksheets that I have added to the course materials for this seminar or by writing all of your income and expense categories on a sheet of paper then fill in a dollar amount next to each category. I find it easiest to consider all costs as a monthly expense. For example, since I pay my car insurance only once a year, for budgeting purposes I divide the payment into 12 and consider it a monthly expense. Since my natural gas expense varies significantly throughout the year, for budgeting purposes I total the expense of natural gas for the previous year and divide it into 12 equal payments. If you save your previous years’ bank statements and credit card statements, you can look through them to judge how you spend your money on a monthly basis. Once you have detailed your budgeted monthly income and expenses, you will know how much you can save towards educational expenses or you can consider adjusting your monthly spending habits to allow you to save towards educational expenses.
After you have completed your monthly personal budget to determined how much you will save, plug the monthly savings amount into a savings calculator that will calculate the future value of your savings using an interest rate that best fits your risk/reward tolerance or the type of investment vehicle you will use to save for educational expenses.
There are a number of funding and investment sources available to help you bridge the gap between what you will save and the total cost of your Child’s education:
- 529 Educational Savings Plans
- 529 Prepaid Tuition Plans
- Coverdell Educational Savings Plans
- UGMA’s and UTMA’s
- Scholarships and Grants
- Student Loans
- IRA’s
- Borrow from your 401k
- Home Equity Loan
There are Pro’s and Con’s to funding your child’s education using any of the sources listed above. It is advisable to discuss these options with a Financial Planner to determine which investment source will be best for you.
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