After your home, for many the next largest purchase many families will make is a college education. And like other large purchases, you may be inspired to save for this over a number of years. But how do you know how much to put aside? This is where the road diverges from the usual practice of researching the cost and calculating how much you need to save each year to meet that cost. How much you should save for college is a function of how much you can save. Over the years, saving for college will compete with other priorities…and particularly the biggest financial priority of all, retirement.
So let’s start there. Are you saving consistently and at a high enough rate to ensure your retirement success? When your child is very young (and perhaps so are you), that may be hard to visualize. In that case, when you consider how much to put aside towards future college expenses, calculate that amount after you have put in place an automatic contribution to your retirement account. (Think in terms of 12 to 18 percent of your annual salary.) As the years pass and both college and retirement loom closer, you will need to revisit your retirement savings plan to see if you are on track to meet your retirement goal. If not, that is the lever you need to adjust. Or to put it another way, how much you should put towards your child’s education needs to be based on how much you can afford, after accounting for your retirement. The price tag of the college bill is actually not the determining factor here. If there is a gap between what you have saved for college and what you believe it will cost, you and your child together will need to come up with a plan to close that gap…a lower cost school, grants/scholarships, part time employment, student (not PLUS) loans. But the gap cannot be filled by sacrificing your retirement security.