Joanna and Johnny of Our Freaking Budget share how they’re planning to save for their daughters’ college education.
I used to have this recurring nightmare: I was back in middle school, rocking my puka shell necklace, JNCO jeans, and STUSSY t-shirt, when I’d enter homeroom and realize all my clothes had suddenly disappeared. Everyone would be laughing at me as I’d run naked down a never-ending corridor filled with jeering faces and locked doors. I’d wake up in a cold sweat every time and think, I used to wear jeans with a 22-inch leg opening?
And as traumatizing as those nightmares were, nothing could prepare me for what has replaced them since starting a family: my two baby girls leaving home and going off to college. This dream, in contrast, really will become reality one day. Obviously, the biggest fear is our girls leaving home and going into the world all by their lonesome. Still, the most worrisome element of the college scenario is how we’re going to afford it. Before our first daughter could even say mama, we knew we needed a game plan for stashing away money to pay for their college educations.
First things first: We had to decide what we wanted to contribute toward their education. This number is different for every family. After a few months of on-and-off discussions, we decided on a plan we felt was right for our kids. We committed to saving $30,000 (minus inflation and rising tuition costs) for each of our daughters to cover tuition for four years, including room and board for their freshman year. Those numbers assume they’ll attend our very inexpensive alma mater. They’re more than welcome to choose a different, more expensive school, but they’ll have to pay the difference.
Second, we needed to figure out just how we were going to put that money away. The miracle of compounding interest means we don’t need to save the whole $30,000 ourselves. If we went about it by putting in little chunks on a monthly basis, it would require $104 each month per child for 17 years (a principal total of a little over $21,000) before our money could make enough money babies to take us the rest of the way. Of course, that’s assuming a hypothetical average annual return rate of 8 percent from their 529 investment plans. I don’t know about you, but I think that’s an awful lot of Tuesday night taco specials to miss out on.
Instead, we put our calculators to work and realized footing more cash up front would mean more time for compounding interest to work its magic. If we once again assume an average annual return rate of 8 percent and are able to put away $7,500 a year for each child for two years ($15,000 total), we’d never have to touch it again until our girls cashed it out 16 years later, saving us more than $6,000 in contributions. (Hooray for more tacos!)
It seemed intimidating at first to come up with huge chunks of cash throughout the year, but we discovered there were lots of ways to set aside money once we were intentional about it. Our annual tax refund was one place to start, along with any extra freelancing income or side jobs. Year-end bonuses could be another potentially untapped resource. Sure, doing it in big chunks like this means sacrificing four-figure vacations and big purchases for a few years. But honestly, is taking your screaming, sleep-deprived, diaper-bottomed toddler to Hawaii really that much of a vacation? (Take it from us: No.)
A few things to note: Before we could even think about funding our children’s educations, we paid down our own student loan debt first. We wanted to make sure our education was paid off before contributing to anyone else’s. It was also important that we had a six-month emergency fund stashed away for all those “just in case” scenarios. Once we had those ducks in a row, we opted to put those hard-earned college savings into 529 investment plans, which provide some immediate tax benefits in many states—as well as tax-free withdrawals for education expenses when that fateful time comes.
Ultimately, we want to make sure our girls don’t have to worry about living on ramen noodles and ketchup soup after taking out huge student loans. And by saving large chunks of cash now, we’re ensuring our kids don’t pay the hefty price for higher education later. It’ll be worth it when we see their beautiful, beaming faces on graduation day. Now excuse me, I think my allergies must be acting up… *sob, sniffle, sob*
Joanna and Johnny are the writing duo behind Our Freaking Budget, a personal finance documenting the joys, pains, and realities of living on a budget. From the basics of saving and getting out of debt to venturing into the wild world of basic investing, they document their journey through young adulthood while exploring their love-hate relationship with their “freaking budget.”
Any third-party resources or websites referenced above are not under our control. We cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.
While we hope the information in these materials are useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need advice geared to your personal financial situation, you are encouraged to schedule time with a financial planner.