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College vs. Retirement

Which one should parents save for?

Smiling Afro-American family reading a book in the living-room

As a parent, you are always striving to balance your child's needs with your own. One question that may come up is whether you should prioritize saving for your own retirement, or setting aside money for your child's college expenses. As with most financial questions, there is no simple answer, and the best approach depends on your own situation. Here is some general guidance to consider as you work towards your own best solution.

Start Saving for Retirement First

While it may initially seem selfish to do so, most parents should initially prioritize saving for retirement over contributing to their child's college fund. There are a few reasons for this.

First, due to compounding interest, the money you save towards retirement when you're young will be worth more than the money you save when you're older. If you spend the next 10 years only saving for college, you'll be way behind in your retirement savings with little hope of catching up.

Second, you must remember that failing to save for retirement may one day place a burden on your child. If you are unable to financially support yourself in old age, that responsibility will fall on them. This is a bigger burden than having to pay some or all of their own college expenses. If you can pay for your child's college expenses, that is certainly wonderful—but if you are unable to contribute, there are other options your child can take advantage of, like scholarships and student loans. If you fail to save for retirement, on the other hand, there's really no good alternative, other than continuing to work into old age.

Start Saving for College When You're Able

Once you are contributing adequately to your retirement investments, then you can start thinking about saving for college. Most financial experts recommend contributing 10 to 15% of your income towards retirement. If you're not quite there yet, work on revising your budget and increasing your income before you start saving for college.

After you do meet that 15% retirement savings threshold, you can start contributing to a college savings plan for your child. Don't worry if you can't start contributing right away. The first few years of a child's life are expensive, as parents take time off from work and pay for daycare. Once your child reaches school age, expenses tend to decrease, and you may find you're better able to save for college.

Save What You Can for College

Parents often wonder how much they should save for their child's education. The answer is "what you're able to save." After contributing 15% of your income to retirement, if you have an extra $100 a month to save for college, do so. If you have an extra $200 a month, that's even better. Many parents can come up with this amount by making a few simple budget cuts.

College savings add up faster than you might think. If you invest just $100 a month at 6% when your child is between the ages of 5 and 18, you'll have $29,200 to put towards their college expenses. If you save $200 a month, you'll have $60,495. Do make sure you are investing the savings in a tax-advantaged 529 plan for maximum earnings.

It is usually wise for parents to prioritize saving for retirement over saving for college, and then to start saving for college when they're able. Even if you are only able to set aside an extra $100 a month for your child's college expenses, you'll have a significant amount to help fund their education. 

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