John thinks saving for college is stupid. That's going to be our topic today on Friends Talk Financial Planning. Join Bridget Sullivan Mermel and John Scherer as they dive deep into the controversial topic of college savings. Is it really necessary to save for your child's college education, or are there better ways to manage these costs? Watch this episode to find out!
📌 Links Mentioned:
- USDA Study on Cost of Raising a Child: https://www.usda.gov/media/blog/archive/tag/cost-of-raising-a-child
- Alliance of Comprehensive Planners (ACP): https://www.acplanners.org
🔎 Follow Us:
- John Scheer’s Practice: https://www.trinfin.com
📢 Connect with Us:
- Bridget Sullivan Mermel on LinkedIn: https://www.linkedin.com/in/bridget-sullivan-mermel-a72620/
- John Scherer on LinkedIn: https://www.linkedin.com/in/johnmscherercfp/
#FinancialPlanning #CollegeSavings #MoneyManagement #FinancialAdvice #ParentingTips #Investing #FinancialEducation #PersonalFinance #RetirementPlanning #Budgeting #educationfunding
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TRANSCRIPT:
Bridget: John thinks saving for college is stupid. That's going to be our topic today on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we start talking about saving for college, I want to remind everybody to hit that subscribe button. We're almost at our goal of 1,000 subscribers, so hit that subscribe button and then let's talk about saving for college. And I gotta say, I don't disagree. I'm not a big fan of saving for college, but I'm not sure I said that it's stupid or not. So that might be a little clickbait on behalf of my partner here.
Bridget: Haha! Okay, so let's just talk this through. So why don't you build the case. I think maybe you need a little bit more time in high school😊
John: Haha! That’s right. Consider the source. But actually, good friends of mine just had a baby and they're talking about saving and what things you need to do. They were saying, “Hey, we gotta start saving for college. It's so expensive.” And it certainly is. I'm not saying that college doesn't cost a lot of money, but I don't think that it's as big of a delta or big of a change as what it comes out to be. And you see these numbers, it cost $25,000 to $50,000 a year.
So, geez, four years, five years, you're in for a quarter million dollars. How do you pay for this? So it's scary on the one hand, but like a lot of things, I like to step back and take a look at some of the facts. What's actually going on here? So one of the factors that I look at is that it's not like your kids cost nothing from zero to eighteen, then when they go to college, suddenly you've got this great big expense that comes in. They already cost something, and some of those costs get transferred over.
And actually the USDA puts together a really neat study every few years about what the cost of raising a child is. We can put a link in the show notes for that. But it says that it takes something like $10,000 or $15,000 a year to raise a kid. This includes food, shelter, activities, and those things. Well, some of that stuff transfers over. So is there an increased cost? Yes. But then I'm not buying food at home for my kid when I'm buying their food at college.
Bridget: Right.
John: It's not a double dipping sort of thing. So one of the things is, yep, there's a change, but it's not zero to $25,000 or zero to $50,000. It's something in the middle of that. And you just take a look at that. If you cut the scary college number, by a quarter or a third or something, suddenly it becomes more manageable from that standpoint. So that's one thing that people don't think about very often.
Bridget: Yeah, that's interesting. The other thing is that I think people think, “I don't know where my kid's gonna want to go, if they're gonna want to go.” Sometimes it's hard for people to even think 20 years out.
John: Oh, yeah. Two years out for some. It's hard.
Bridget: Right. And so, there's just a lot of uncertainty about all these different factors. And so, I think that can make it hard for people to save for college.
John: Right. Just to think about one of the other things. And I use this all the time. So my kids are very close in age. They're both in preschool and daycare at the same time. A new client signed on, and their kids are sort of in that middle ground like my kids are, and they said, “Geez, we haven't really saved for college. I think we really want to focus on this.” That’s a super smart way to think about things. But I had said to them, “When you had the kids, were they in daycare?” They replied, “Oh, yeah, we remember that expense. Holy mackerel.” And for my two boys in daycare, it was like the cost of going to UW Madison, one college tuition.
And I said, “Well, how much did you save for preschool or daycare?” And they said, “Well, we didn't save for daycare.” And I responded, “But you put your kids in daycare, right?” “Oh, yeah, it was a huge expense” they said. “Well, how'd you make it work?” And they said, “Hug. I don’t know. We just kind of made it work.” Not that, hey, just making it work as a plan, but the reality is when you have young kids with daycare costs, which are astronomical, you make it work out of cash flow.
Bridget: Okay.
John: And when you look, is it exactly the same comparison? No, not exactly the same, but that idea of having more costs with some things and less expenses when the kids aren't doing their club soccer and all those things that they're can be helpful from a peace of mind standpoint. You go, “You know what? When we had the kids, we went from zero to whatever the cost was, and we just made it work. We can do this thing again.”
And the idea of should you save for college? It’s not that you shouldn't save for college, but the idea of saying, “If we haven't saved up for this, we're going to be in trouble,” is a false one. Well, if you weren't in trouble when you had the kids and you have this five-figure cost annually for daycare, you're probably not going to be in trouble when you get to college, and you've got a five-figure cost that comes in. That sort of thing, it can really help put people's mind at ease.
Bridget: Yeah. So you're saying that the stress or the feeling like you're inadequate because you're spending money on your kids now instead of saving money for the kids later is an unnecessary worry.
John: Just to consider that idea, because exactly what you said. Sometimes parents say to themselves, “Oh, geez, I should have done this. I haven't. I'm supposed to do this sort of thing, right?” And then when you think, “Well, wait a minute, we've been through this rodeo before.” For many of us, we’ve had the daycare issue. You go, “Oh yeah, that's right. Daycare was really expensive.” “Yep. And you didn't save for it.” “Oh, no, I didn't save for it.” And when you can look at that and you go, “Oh, yeah, college is going to be really expensive.” “Yep.”
And even if you didn't save for it, you go, “Well, hey, we've figured this out before.” There’s another thing for many people, too. You think back 10, 15, 20 years ago when you first had the kids, where was your income? What was your income level? What's your income level now? And let's say if your kids are ten years old, you got another 7, 8, 10 years before they go to school. What's your income likely going to be in ten years? You got no guarantees, but if you get this promotion, your income is probably going to be higher. Well, guess what? There's some of that contribution as well.
Bridget: I had one client at one point that they had a consulting business, and they ramped it up while the kids were in college. They weren't really making that much on it before, and they said, “My kids in college, I got to be motivated. I got it to go find these jobs.” So that was an interesting take on it because it was like direct. I need 50 grand a year for this kid’s college. I got to make that.
John: That's one of your tenets of financial success overall. You can save more, or you can make more money.
Bridget: Right.
John: You talk about that all the time, which is great. There’re possibilities. I was going to say that one of the things that ties right in with another option is that oftentimes if you don't have the preschool or the daycare thing, one parent perhaps stayed home for a period of time. And so, we've had other folks, friends of mine, where one parent was a stay-at-home parent, now the kids are ten or twelve or whatever, and geez, mom or dad's going to go back to work.
And you think about, well, if I've been a stay-at-home parent, or we've had a stay-at-home parent for a period of time, when that parent goes back to work, what is that? What's the income that comes in from there? Oh, geez, there's college costs. I mean, that can be as simple as, hey, I'm going to stay at home for the first ten or 15 years, and then when I go back to work, my salary is going to pay for college for those four or six years.
Bridget: So you have a very fly by the seat of my pants approach to college.
John: I prefer to think of it as pragmatic.
Bridget: I think a lot of other people are more comfortable with a different approach, which is, okay, I'm saving for my retirement, and let me say I'm gonna save at least 10% of my income, maybe 12% or 15%, just for retirement.
John: Right.
Bridget: And that's a no brainer. It's automatically taken out. So what if I save another 5% or certain amount for college, because I like to have the money first, and then when I get to the thing, go, “Oh, look, I have the money. It's set aside for this.”
John: Yup.
Bridget: In our profession, I call it being buckety. Yeah, because they call it those mental buckets. Okay. So some people, they like to create a mental bucket, and it's like, okay, it's full. It's mental. This bucket is full.
John: Yeah.
Bridget: Now, one of the things we talk to people about is, well, it's kind of nice when you get to that point if only half of that bucket is in a 529 plan, which is a specific college savings plan, and another is in a lot more flexible plan that you could save for college or you could do something else with if you want. So that's my two cents.
John: No, that's great. And I am a little bit more fly by the seat of your pants, but I think part of that is that I think saving for college is less important than we're being told it is. There's a sort of marketing pressure in being told this. But it is helpful for me to think about this. I don't know, but I don't have people that save up for daycare. That's a giant expense.
Bridget: It just hits people; it’s like a tsunami.
John: And to be able to have that recognition of…
Bridget: So they don't want the tsunami when their kid goes to college.
John: Right. But again, knowing that I've been through this before, if that's the case, it'll be okay.
Bridget: We’ll figure it out.
John: And it’s the fear, we're gonna be screwed if we don't do this. No. Should you save? Should you plan for it? Great. I use envelopes instead of buckets because I'm a little bit more flexible, as you noted, but the same thing. Hey, I get this bucket filled up. I get this envelope with some college savings in it. No problem. But if I don't have that much, I'll figure it out. That sort of mentality and that peace of mind is sort of the messaging that’s more important to me.
Bridget: Right.
John: And then I'll tell you the other thing that I look at it. Both Bridget and I know Bert Whitehead, who started the Alliance of Comprehensive Planners, 25 years ago. But one of his theories that I do espouse is to have the parents be committed for a third of the college costs, to think about taking out loans for a third, and have the kids be responsible for a third or some combination.
And it differs based on your background and your approach and all these sorts of things. But the idea of having the kids cover some of the expenses, whether I'm going to pay for school and room and board, and you pay for everything outside of that, or you pay for your housing or some input. Again, you take a third off and say, “Hey, you got to have a summer job to pay for a third of your schooling costs…”
Bridget: And your fun money. If you want to go on a trip, great, get a job.
John: The other thing about college costs is that when you take a look at what goes into that travel and fund money is part of the cost of college. You go, “Wait a minute!” So that's one of those things where, hey, look at what the real numbers are. What's the real difference between what you're paying now for your 12, 14, 16-year-old versus what you're going to pay for your college kid?
And then know that, hey, I've been through this rodeo before. If you've done the daycare thing, you go, “Oh, yeah.” It might not be ideal; I might want to plan for it more, but it's not going to be an emergency. My kids not going to not go to school. We'll figure it out. And then think about having them contribute some of that money, right?
Bridget: Yeah.
John: A little bit goes a long way from that standpoint. That's the place where, as you said before, hey, I'm going to save for retirement. If I've got extra, I want to save for college. Cool. So often we hear people want to save not for retirement, but instead for college. And I go, “No, let's do it that direction with things.”
Bridget: The other thing I would pitch is that once your child does go to college, no matter if you're contributing zero or you're paying for the whole thing, coaching them and working with them and having a good relationship with them around how they're spending and how they're controlling that, I think, is a key element of being a parent to somebody who's going to college. So that's my two cents.
John: Yeah. No, that's great. Well, I think that's a great place to wrap it up here, Bridget. Again, I'm John Scherer on a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John mentioned Bert Whitehead, who started an organization that's called ACP, or the Alliance of Comprehensive Planners. We're both proud members of it, and we're also both taking clients, but if you're interested in an advisor in your area, you can check out acplanners.org.
John: And don't forget to hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.