Today I’d like to offer an alternative point of view on how people prioritize their savings goals. You see, when I read about most people’s plans, they look something like this:
- Pay off Consumer Debt
- Build an Emergency Fund
- Pay off Student Loans
- Save for Kid’s Education
- Save for Retirement
- Pay off House
I mean even Dave Ramsey says you should save for your kid’s education before you pay off your house, so what gives? Although it is logical to organize your savings goals in chronological order, I hope to convince a few people to move #4 down to the bottom of the list.
My first bit of advice if you have children of any age, is to learn about FAFSA. This is the federal financial aid form. Its purpose is to calculate out a person’s eligibility to receive need based financial aid.
The FINAID site goes into all the nitty gritty details on income limits, scholarships, ownership rules, etc. The two things that everyone should be aware of before saving a dime for college is whose name to put the asset in and what the federal government considers an eligible asset or liability. I won’t touch on all of them in this post but there are 4 big ones that I think everyone should be aware of:
- 401K and IRA plans – are not considered eligible assets in your need based calculation. (The exceptions are the contributions that occur during the year of the FAFSA application). The good news is the federal government doesn’t expect your 70 year old arthritic self to eat cat food in order to pay for junior’s education today.
- Your Primary Residence – is not considered an eligible asset...even if it’s 100% paid for. Again, Uncle Sam doesn’t want you to go homeless to pay for Jr’s education.
- Your consumer Debts – are not considered eligible liabilities. So if you make $100K/year, but have thousands a month in credit card payments and car loans, the federal government doesn’t count those as eligible liabilities. Your income on the other hand does count. Uncle Sam isn’t going to reward you for being a dumb a$$.
- Certain Durable Goods – like cars, computers, etc are not considered eligible assets.
So what’s my current plan for my kid’s education (ages 1 and 5)? Well, they do both have 529 plans, but they usually only get contributed to during birthday or Xmas time when family members throw them a few bucks. I do plan on eventually contributing, but not until after I max out our retirement plans and pay off our mortgage.
Oh, I guess I do one other thing. Our emergency fund is in savings bonds in our name (better than if in Jr’s name). If we’re lucky enough not to have to tap that til college time, we can cash those in tax free come tuition time.
What’s your plan? Has your mind been changed at all?