Parental Investing: Balancing Kids' College Savings and Your Future Needs

Parents (or any young adult for that matter) looking to establish the best financial footing for the future should consider four key savings areas: cash savings, life insurance, 401(k) & IRA, and 529 college savings accounts.

Retirement seems a long way off for people in their 20s or 30s. Likewise, young parents have a hard time imagining not being around to take care of their children. Instead, the prospect of college tuition likely looms large in parents mind as what they should be saving for to help their children. And they are right, college tuition is costly and parents who plan and start saving early will be in a much better financial position when their children are ready to attend college. However, a range of options are available to help finance education. These options are not available to finance retirement or caring for loved ones and so personal planning for the future is particularly important. Establishing a relationship with a financial planner who can provide guidance and advice about savings decisions is a prudent choice when possible.

Saving money for the future is difficult when getting by paycheck to paycheck, so individuals should consider incremental steps toward four key savings areas: cash savings, life insurance, 401(k) & IRA, and 529 & other college savings accounts.

Cash Savings

Financial experts recommend having savings of 3-6 months of living expenses in case of medical emergency, job loss, or other unforeseen financial event. Cash savings can be in a savings account, money market funds, stocks, etc.; the idea is for the money to be liquid and accessible. Before or simultaneous to building cash savings, individuals should pay down credit card and other high-interest debt as much as possible.

Life Insurance

As the insurance saying goes, life insurance is not for the deceased, but for the living. Anyone with dependents should carry life insurance to ensure that their beneficiaries will be cared for in case something happens to them. Permanent (or whole) life insurance has fixed premiums that are determined according to age when purchased and has accumulation of cash value, which in itself is another type of savings. Term life insurance is for a specific period of time (i.e. 20 years), has variable premiums, but no cash accumulation. Many employers offer life insurance as part of employee benefits packages to select from different levels (for a cost). Additionally, carrying life insurance from a source not tied to employment is wise because of potential job insecurity.

401 (k) & IRA

Retirement savings through an employment-based 401(k)s and IRAs (or Roth IRAs) is ideal for long-term retirement planning. Many companies will match employee contributions up to a certain percent, which is essentially free money for the future. IRA contributions are tax deductible, depending on income eligibility. The current limit for IRA contributions is $4,000 per year for individuals under age 59. Funds in these accounts grow in a tax-deferred basis. The compounding nature of long-term savings makes contributions into 401(k)s and IRAs one of the most important saving mechanisms for retirement that young parents make.

529 Savings Account

A 529 Plan is a college savings account that lets individuals save money in a tax-deferred account to be used for educational costs in the future. 529 plans are state controlled savings plan and vary from state to state, however, anyone can enroll in any state plan and the funds are not limited to the colleges in the designated state. Other benefits of 529 accounts are that it can be rolled over to another individual for educational purposes if the child does not go to college, if the child gets a scholarship, any unused money can be withdrawn without paying a penalty, and anyone can contribute to the account.

The savings mechanisms detailed above emphasize personal savings over saving for college tuition for the primary reason that children can get loans and grants to pay for college. These types of financial assistance are not available for retirement. However, parents do not have to sacrifice investment in their future at the expense of their children's education. Even a regular deposit of $10 per month will compound and pay off in the long term. Through a direct deposit from paychecks into each of the four savings areas - cash, life insurance, retirement, and college - parents can ensure both they and their children have money in the future.

Sources:

State Farm, Permanent Life Insurance

State Farm, Term Life Insurance

Investopedia, Retirement Savings

HowStuffWorks, 529 Plan