COLLEGE SAVINGS 101

Savingforcollege.com

Top four savings essentials for young families
http://www.savingforcollege.com/articles/top-four-savings-essentials-for-young-families

Posted: 2014-05-20

by Kathryn Flynn

Everyone starts out with good intentions. You graduate from college, score your first real job, utilize your 401(k) and buy a home, all while keeping a healthy balance in your savings account.

Then it happens Ė Kids. All of a sudden, youíre faced with an abundance of new expenses ($60 a month for diapers? $250 a week for daycare? But ALL the kids are wearing Crocs!) And as a result, savings often get put on hold.

Whether your first baby just arrived or your oldest is headed to middle school, itís never too late to get your familyís savings plan back on track. Here are some tips on how to get started:

1. Pay yourself first - Save for retirement.

I know; itís years away. And who has anything left over after paying the mortgage, student loans, car payment and credit cards? But the reality is that at some point in your life you will want to retire comfortably, and with the way things are going social security checks will barely keep you out of poverty. There are no loans to rely on during retirement, so building your nest egg should be a top priority. A good rule of thumb is to aim to save 10-15% of your before-tax income.

What works for most families is to set up automatic deposits directly from your checking account. If your company offers a retirement plan, you can usually set this up through payroll. Investing in an employer-sponsored plan like a 401(k) can reduce your taxable income and any earnings will grow tax-free. Some employers even offer matching contributions, which is basically like getting free money.

If you are self-employed you can keep up with your savings with an individual retirement account (IRA). IRAs also offer tax benefits and some have no annual fees or minimum balance requirements. Check out Mint.com to compare different options.

Retirement vs. college savings

2. Build a rainy day fund.

Although itís called a ďrainy dayĒ fund, unexpected car repairs, sickness and job loss can happen in any kind of weather. Experts recommend socking away enough to cover at least three to six months of your regular household expenses in a liquid investment such as a high yield savings account. That means if your combined household income is $90,000, you should aim to keep at least around $23,000 on hand in case of an emergency.

It takes some serious discipline to put away money each month. Fortunately most banks offer savings accounts that can be linked to your checking account for automatic deposits. NerdWallet features a list of the top online high yield savings accounts, with rates updated weekly.

3. Pay off credit card debt.

Itís arguable whether or not paying off high interest credit cards should be done before or after your emergency fund is established. One suggestion is to save $1,000 toward an emergency fund and then tackle the credit cards. Once the credit card debt is paid off, shift your focus back to completing goal #2.

If youíve been keeping up with your pre-kids lifestyle on a family budget, itís time to get things under control. Bankrate.com lists 6 different strategies for paying down credit card debt, and includes a summary table of the pros and cons of each method.

4. Start saving for college now.

It may be hard to imagine, but yes, someday your chubby-cheeked little toddler will be ready for college. You might wish you could freeze time and keep your little ones little, but the truth is they will all eventually grow up to be teenagers. One of the best things you can do to make the transition easier is to get financially prepared.

Tuition costs have been rising faster than inflation, making saving for college appear to be an unrealistic goal for many of us. Donít be discouraged, regular monthly deposits as small as $25 can add up significantly over time in an interest bearing account.

A good place to start is to open a 529 plan, which offers benefits like tax-free growth and tax-free distributions when used toward qualified educational expenses. Your contributions to a 529 account will end up costing much less than what your child would have to repay in student loans.

Keep in mind that you will incur a 10 percent penalty tax for any non-qualified purchase made with 529 funds. However, in the event your child receives a scholarship to pay their tuition you can still withdraw funds tax-free for things like room and board, supplies and equipment needed for college courses.

If youíre thinking about opening a 529 account, this is a great time to start. Many states are in the midst of celebrating National College Savings Day, which falls on May 29th (5/29). On top of offering state tax incentives for residents, there are a number of sweepstakes and promotions going on for those who open a new account this month. While there are often advantages to investing with your own stateís plan, plans from other states are not off limits. Be sure to explore all of your options in order to maximize your savings.

If you have questions about saving for college, including how 529 plans work, financial aid and where college savings fits into your personal finance goals, join savingforcollege.com for a live Q&A webcast Thursday, May 29th at 1:00pm ET featuring some of the industryís top experts. You can submit your questions during registration or via Twitter at @529Day. Be sure to use #529Day in your tweets!

Has your family fallen off a savings track? If so, what steps are you taking to get back in financial order? Any advice youíd like to share with other young families? How about your biggest obstacles?

Everyone starts out with good intentions. You graduate from college, score your first real job, utilize your 401(k) and buy a home, all while keeping a healthy balance in your savings account.

Then it happens Ė Kids. All of a sudden, youíre faced with an abundance of new expenses ($60 a month for diapers? $250 a week for daycare? But ALL the kids are wearing Crocs!) And as a result, savings often get put on hold.

Whether your first baby just arrived or your oldest is headed to middle school, itís never too late to get your familyís savings plan back on track. Here are some tips on how to get started:

1. Pay yourself first - Save for retirement.

I know; itís years away. And who has anything left over after paying the mortgage, student loans, car payment and credit cards? But the reality is that at some point in your life you will want to retire comfortably, and with the way things are going social security checks will barely keep you out of poverty. There are no loans to rely on during retirement, so building your nest egg should be a top priority. A good rule of thumb is to aim to save 10-15% of your before-tax income.

What works for most families is to set up automatic deposits directly from your checking account. If your company offers a retirement plan, you can usually set this up through payroll. Investing in an employer-sponsored plan like a 401(k) can reduce your taxable income and any earnings will grow tax-free. Some employers even offer matching contributions, which is basically like getting free money.

If you are self-employed you can keep up with your savings with an individual retirement account (IRA). IRAs also offer tax benefits and some have no annual fees or minimum balance requirements. Check out Mint.com to compare different options.

Retirement vs. college savings

2. Build a rainy day fund.

Although itís called a ďrainy dayĒ fund, unexpected car repairs, sickness and job loss can happen in any kind of weather. Experts recommend socking away enough to cover at least three to six months of your regular household expenses in a liquid investment such as a high yield savings account. That means if your combined household income is $90,000, you should aim to keep at least around $23,000 on hand in case of an emergency.

It takes some serious discipline to put away money each month. Fortunately most banks offer savings accounts that can be linked to your checking account for automatic deposits. NerdWallet features a list of the top online high yield savings accounts, with rates updated weekly.

3. Pay off credit card debt.

Itís arguable whether or not paying off high interest credit cards should be done before or after your emergency fund is established. One suggestion is to save $1,000 toward an emergency fund and then tackle the credit cards. Once the credit card debt is paid off, shift your focus back to completing goal #2.

If youíve been keeping up with your pre-kids lifestyle on a family budget, itís time to get things under control. Bankrate.com lists 6 different strategies for paying down credit card debt, and includes a summary table of the pros and cons of each method.

4. Start saving for college now.

It may be hard to imagine, but yes, someday your chubby-cheeked little toddler will be ready for college. You might wish you could freeze time and keep your little ones little, but the truth is they will all eventually grow up to be teenagers. One of the best things you can do to make the transition easier is to get financially prepared.

Tuition costs have been rising faster than inflation, making saving for college appear to be an unrealistic goal for many of us. Donít be discouraged, regular monthly deposits as small as $25 can add up significantly over time in an interest bearing account.

A good place to start is to open a 529 plan, which offers benefits like tax-free growth and tax-free distributions when used toward qualified educational expenses. Your contributions to a 529 account will end up costing much less than what your child would have to repay in student loans.

Keep in mind that you will incur a 10 percent penalty tax for any non-qualified purchase made with 529 funds. However, in the event your child receives a scholarship to pay their tuition you can still withdraw funds tax-free for things like room and board, supplies and equipment needed for college courses.

If youíre thinking about opening a 529 account, this is a great time to start. Many states are in the midst of celebrating National College Savings Day, which falls on May 29th (5/29). On top of offering state tax incentives for residents, there are a number of sweepstakes and promotions going on for those who open a new account this month. While there are often advantages to investing with your own stateís plan, plans from other states are not off limits. Be sure to explore all of your options in order to maximize your savings.

If you have questions about saving for college, including how 529 plans work, financial aid and where college savings fits into your personal finance goals, join savingforcollege.com for a live Q&A webcast Thursday, May 29th at 1:00pm ET featuring some of the industryís top experts. You can submit your questions during registration or via Twitter at @529Day. Be sure to use #529Day in your tweets!

Has your family fallen off a savings track? If so, what steps are you taking to get back in financial order? Any advice youíd like to share with other young families? How about your biggest obstacles?

 

Reset email successfully sent.
Please check your inbox.

Close
page loadtime mark

Advertisement


close