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Forsaken for college

Forsaken for college

| September 18, 2015
Education Planning

"Love is the best school, but the tuition is high and the homework can be painful." - Diane Ackerman

In practice as a financial planner, college planning is a very popular topic. It is very noble to make sure higher education is achieved for our next generation. The call is greater now than ever for our children to be competitive in tomorrow's workplace. Without proper planning, however, it can be a reckless endeavor for our own financial health.

Let’s take a moment and explore why college education is so incredibly important. I see two personal reasons. For parents who didn’t go to college, it’s a level of achievement for their children that they may have never attained. These parents want for their children to be more financially secure than they were. For parents who are continuing the tradition, they want their children to go to college so they can have the opportunities they had – or greater. These days a college education seems to be the bare minimum in the professional world. Without one, it’s very difficult to be taken seriously no matter quality of the gray matter between your ears.

According to the Bureau of Labor Statistics as if July 31st 2015 (by way of JP Morgan’s 3rd Quarter Guide to the Markets), a college graduate stands to earn an average of 27k more per year than someone who only finishes high school. Finishing a few more years of college for an advanced degree and they stand to earn another 23k on average. That’s 81% more picking up a college degree. Let’s put this another way, considering the average 27k more per year, over a 40 year(25-65) work life, they earn $1,080,000 than someone who only finished high school. 

Many might argue that our kids aren’t getting jobs when they get out of college and that the debt burden is too high. Statistically that argument is also bogus. In the current economy, it may take a couple years to find their career, but those with college or greater are standing at a national unemployment rate of just 2.5% for those 25 and older. It’s becoming increasingly difficult to find quality job seekers.

I’m sure I’m preaching to the choir here. We know why our kids should be going to college.  It’s the how than most seem to miss the mark. Education planning is a very important point in financial planning.  And it’s just that – planning over a long enough time period to make an impact in funding the cost of education. I can’t make myself clear enough – if you fail to plan for your kid’s financial education, you’re planning to fail. Perhaps not in getting them to college, too many of us forsake our own financial health to ensure their kid’s proper education.

For deeper understanding, let's start with a basic understanding of investing – an exercise that implements the power of compounding over time with the hope of achieving certain financial goals. By taking dollars, investing them, and earning a return on that investment over time, our dollars will hopefully grow significantly more than if we held them in cash. Pretty simple. In retirement planning, we pick a date, find out what we need to earn and plug away. Starting earlier is better and the last years of compounding are the most important. Having 30+ years to invest can be incredibly powerful.  For college planning, we take a few years off, 18 years of investing can still be impactful for the college tuition payments.

So why would lack of planning lead to financial failure? Too many parents want to send their kids to college without the planning component. Once the college years arrive and the expenses start piling up, they stop funding their own financial goals while putting kids through school. Too many parents put their own financial well-being on the back burner, sacrificing their own savings, income and retirement in the process. This compromises our own financial health in the name of ensuring our kids are put through school and demonstrates that we aren't taking full advantage of investment compounding for as long as we should. 

Here's the impact. Let's pretend we're spending $25k per year putting our kid through college right now – housing, books, tuition etc. We're 45 years old when this begins. By the time we're 49, we've spent $100k on our one child suggesting they finish in 4 – and they are off to the races. What does this mean financially? If we had invested those funds intended for retirement, earned 8% net annually, and then retired at 65, that $100k could have grown to roughly $340,000.  But wait, we have 3 kids and two of them took 5 years... In this scenario, tuition could cost us over a $1,100,000 shortfall in our own retirement plan.  That’s more than the per kid difference we tried to save them from. Is this concerning? Shouldn’t social entitlement programs take care of that $40-$50k per year of income we sacrificed for our kids to join the real world debt-free?  

I'm a big advocate of college education. I wouldn’t be where I am or who I am without a quality education. That being said, we shouldn't forsake our own financial health to the ideal of helping our kids out - even if our own parents gave us a hand up. College is much more expensive now than it ever. Yes, getting through school without debt would be an amazing privilege to give our children - if we can afford to do so, which most of us can't. Financial planning should help us achieve overall financial health and sometimes it's better to give a child the gift of the struggles we ourselves went through to make it in this world.  It's tough love, but remember, if we (or those around us) made it work, it has to be likely that our children can replicate similar results.

Here we need to be pragmatic, it's not selfish or greedy to take care of ourselves. In fact it's prudent and wise to do so and may allow us to have much more impact with our resources down the road, including helping our grand kids in a way we couldn’t afford to do so with our own children. A comprehensive financial plan can help us have more, do more, and give more in the future. The key is to plan.

There are many great resources, especially if you want to make an impact in your children’s lives without forsaking your own fiscal health. I like www.savingforcollege.com, you can search the internet for your state’s sponsored 529 program or you can just give us a call and discuss at (913) 681-9155.