Parents: Before you spend your tax refund READ this!
Madame Noire did an excellent post recently offering advice on what to do with your tax return money if you have children. Among the suggestions were 1. create a will; 2. invest in music lessons for the kids; 3. open a day care escrow savings and 4. start a savings account with the children. All great ideas. The most beneficial in my book was the suggestion to start a college fund.
For as much as people used to like to berate former Republican presidential candidate Mitt Romney for being too rich, there was at least one great lesson I learned from monitoring his campaign. I learned that his dad purchased some stock for Mitt and his brothers when each were just babies at $6 a share when Mitt. In Mitt’s case, by the time he grew up and when he and his wife Ann got married and were ready to go to college, that stock had risen in value to $96 per share. The couple cashed it in and used it to live modestly without having to get a part time job. Everyone knows that work co-op and putting yourself through college can make it more difficult to just focus on the studies.
So many of us live above our means. We prescribe to the youthful #YOLO (You only live once) mantra. We throw caution in the wind and live check to check because we have the perception that we can barely make enough to feed our families. We tell ourselves that we can barely afford health insurance and thus college savings is definitely out of the question.
However ,if we step back, we’d see many areas in our lives when we are in fact wasting hard earned money on frivolous perks….ergo our daily Starbucks latte, a weekly Lottery Ticket buy, weekly nail appointment or happy hour night. All of that spending could easily go towards a fund for savings for the kids.
It’s never too early to start.
If you have just $1,000 saved up now, by the time your 1 and 3 year old kids get to college, you can build a sizable savings for them. If you start by giving up your $6 latte a day habit, which equals to about $2,000 a year, you can wind up with $48,000 to contribute to their college education if the money is stored in an account bearing 6% interest.
A recent study showed that many parents are not putting aside money for their children and of those surveyed, over half said they were hoping their kids would get scholarships with the cost. Way to go to betting on a hope and hypothetical and not taking responsibility for our own actions.Another report found that parents were robbing their kids’ savings accounts when times got rough.
For these reasons, it’s great to pull the money from your weekly paycheck and deposited into an account at a credit bureau or other vehicle or location that put up a lot of physical, distance and paperwork burden and hassle to access the money. The tougher it is to extract money from the account, the less likely you’ll do it.
Should the children do in fact get a scholarship, the money saved for college can be used to fund their graduate school attendance, of to put down for a deposit or a new house or to start a business. So begins the process of growing generational wealth.
The wealth gap between the halves and have-nots can be bridged if more of the non-wealthy start following rules of the well-off.
Check out this College Savings Calculator to work out for yourself. Then when your tax money comes, do something smart and open up a 529 plan for the children!