How do I save for college or other long-term goals?

It is simple, really.  You need to estimate what your long-term expense will be and divide by the time that you have until the expense will be made.  Applying an expected rate of return on the funds you are saving can help you arrive at the goal sooner.  The offset to that growth is the importance of reducing the volatility of the goal oriented portfolio prior to the funds being needed.  The need to be liquid on the date the money is needed will dictate the move to a money market fund alternative in advance of that date.

A nuance to this simple strategy, in some cases, can come into play if there are other potential sources of money to fund the objective.  For instance, I wanted to make sure that my children’s college education money would be there, no matter what, so I made a plan B and a plan C.  Plan A was setting aside money in a separate account in the children’s name so that it would be taxed at their low rate (the IRS changed the rules late in the game to have the money taxed at the parent’s rate after age 14, and again when they raised the age to 18 and then raised it to “as long as the child is a dependant and receives the majority of their support from their parents).

So, you can see that even when you put together a good plan, it may have to be revised.  I just kept on saving and investing mostly in stocks – because I had a plan B and plan C.  My plan B was to buy whole life insurance that would accumulate cash value tax free (or deferred) so that, if needed, I could use it as collateral for a loan to send the kids to college.  If not needed, plan B could be later used for retirement.  Plan B had the additional advantage of providing a death benefit that could pay for college, if something happened to me.  I might have even counted that as another plan, D.  It is important to note that I could make the investments more aggressive in plan A because I had a plan B and C.  If I had not, then plan A would have by necessity needed to be “bullet proof” and conservative.

My plan C was simple, but not as desirable.  I would simply pay for college out of my earnings.  That meant that I would have to build my income and salary so that I could afford to live and pay for college out of my salary.  I know a lot of people do this, usually with loans, so it seemed possible before we had children.  Today that seems like a stretch.  In any case, we also had our children spaced out enough that they were not in college at the same time (almost), so that plan C might be reasonable.

Another factor to think about in the case of college financing is the potential for scholarships, and need based assistance.  I didn’t want to count on this, so I planned to make enough money that I wouldn’t qualify for the assistance.  At the same time, I recognized that I might not reach the goal, so I should set up my accounts so that I might take advantage of the guidelines on benefits.  Today, one would be better off just keeping the money in their own account because money in the child’s name would be considered 100% available for college, while in the parents name it would only be partially available.  Also in today’s situation, accounts like 529 plans are available (see www.savingforcollege.com) that are potentially useful, especially for grandparents to assist in college savings by using this type of account as an estate planning tool (see Gifting section).

The message is that you need to look at your plans from many angles, make alternative plans, set the goals in writing and then you will stand the best chance of actually achieving them.  It is not really that much work, but it takes a little focus.  By the way, it worked out well for me, despite a big drop in 2001/2002 and another one currently in 2008.  The markets dropped just as my first child was going to college and I needed some of plan C.  Child two benefited from the account rising most of his college years, so plan A worked well.  By the time my third child went to college, I was able to use plan A because I had learned about getting conservative BEFORE she went to college and I therefore missed the market decline and have enough for at least 4 years.  Now, what will I do with all that cash value stored up in the Plan B insurance policies?  I can use that for my retirement plan B, instead.  Nice.  It would have even been better if my children had all received full scholarships, but while I know many parents count that as their Plan A, I wanted to make it about education and feared changing the motivation to some other aspect.  I also know many who have a plan that includes their children working to fund their college education.  I certainly endorse that and, in case my kids read this, I should admit that they did contribute significantly to defraying their living expenses.  My son started a company that owned some off campus housing and made a bit of money and learned a lot about business in that endeavor, too.  It may have contributed to him getting a job offer after college, and I certainly like that result.

Again, the lesson is that there are many ways to reach your goal, but you have to put it down on paper, or it is just a “wish”.  Your mind will begin to focus on the issue once you have put it down on paper, much like you begin to notice red cars everywhere after you decide you want to buy one.  You start to see the opportunities that would otherwise just pass you by.  Get started by writing your goal down, and you will be surprised at the focus it brings.