It’s almost the end of July and despite our best intentions, Johnny and I still haven’t started contributing to a 529 college savings plan for our future scholar, Sally. When we wrote about 529s in a post last November, we calculated that we wanted to save $30,000 for her college tuition. If we saved for the next 17 years, we would need to save $104 per month. Johnny informed me that that’s a lot of Wendy’s Junior Bacon Cheeseburgers that we’re sacrificing every month. I informed him that that’s disgusting.
But here we are, over six months later, and we haven’t contributed a single cent. Yet. But that doesn’t mean we haven’t been talking about it. And as we’ve been talking about it more, Johnny and I came to the decision that we’re no longer going to save $104/month for the next 17 years. Sorry, Sal. After you threw my potted plant and my iPhone this weekend and broke its screen for the second time, we’ve decided you’re on your own. Kidding. But, seriously, don’t do either of those things again. Ever. So instead, we’ve decided to contribute two big chunks of money this month and early next year. And here are the two reason why:
Our Sitting Savings
We just renewed our lease at the condo we’re renting. And that means we won’t be buying a home for at least another year. That said, we’ve already saved up enough for a down payment for a modest house, and so we have a decent chunk of savings just sitting, bored out of its gourd and fighting to keep up with inflation. And with our “best in the market” savings interest rate nearly at a whopping 1%, inflation is beating the pants off our dough.
So here’s what we’re thinking: we’re going to take $7,500 of our savings and put it into a 529 for Sally the next two years. We’ll keep saving and putting money into our savings account as usual so that we’ll replenish our fund with the $7,500 (and hopefully more) we’re taking out. And assuming everything works out (famous last words, I know) we’ll do the same thing early next year. The end result? We’re still on track with our housing fund AND we’re (hopefully) done saving for Sally’s college fund. FOR-E-VER. So how does that work? Glad you asked…
By putting in a large chunk of money now, rather than small chunks of money over the next 16 years, our 529 savings will have the chance to have a lot more money babies over a longer period of time.
Here’s a hypothetical. Let’s say you wanted to save $100k for your child’s education. You have 18 years to save with an average interest rate of 8% (minus inflation). Here are two different options.
OPTION 1: Fun Size Contributions
- Contribution: $280/month x 18 years
- Total contributions: $61,200
- Total 529 savings: $100,000
OPTION 2: King Size Contributions
- Contribution: $22,000/year x 2 years
- Total contributions: $44,000
- Total 529 savings: $100,000
With option two, you contribute far more up front, but end up contributing $17,000 less. The question is, how many of us just have $22,000 laying around, ready to throw at whatever we please? Not many. In fact, the maximum an individual can even contribute to a 529 each year is $14k (while a couple can contribute $28k). The point of that hypothetical is to once again show the power of compounding interest — it pays to keep more money for a longer period of time.
A few other things of note:
- The total we plan to save for our children’s college is lower than some because the school we have in mind for them to attend (our alma mater) is very economical. If our kiddos decide to attend a different, more expensive school, that’s totally fine. That just means they’ll have more expenses to cover on their own.
- Based on the feedback the last time we mentioned 529s, we’ve decided to put the 529s in OUR names, rather than Sally’s. That way if Sally decides not to go to college and instead become a trapeze artist (since that happens all the time), or if she doesn’t use/need all the money we’ve saved up for her, we can gift that money to one of her younger siblings. If she treats other little kids the way she does my potted plants, we may never be comfortable giving her a younger sibling. Kidding again. Sorta.
- In our research, we’ve also realized that sometimes it doesn’t matter which state you choose to use to open up your 529. The tax credit received is almost negligible in our state (Utah), and the more important issue seems to be choosing a plan with good investment options with low fees. We’re big fans of Vanguard, which is where we’re doing all of our retirement investing for our Roth IRAs, so we’re in the process of deciding between a few different options that they offer.
- Saving for your child’s education should fall pretty far behind other financial priorities: emergency fund, debt, and retirement. In the case of retirement, you can likely save for both concurrently, but don’t sacrifice funding your retirement.
Would you consider funding your 529s in large chunks? Obviously, it wouldn’t be an option for us if we’d already pulled the trigger on buying a home. But since we’re still not homeowners (sad face), we’re going to put our savings to work in the meantime.