Saving for the future- what a dad should know

Posted by Dad on Mar 13, 2007 in Dad Issues, Parenting, The Blog | 0 comments

One of the difficult parts of being a dad is balancing between staying focused on the present while planning for the future. It’s tremendously important to be able to enjoy the “now” with your kids. However, in so doing, it would be irresponsible to neglect planning for the future. Particularly, being fiscally responsible today in order to make things easier later.

I’ve been thinking a lot about this lately as I was fortunate enough to get a small raise at work. The wife and I decided that we are old enough now to think a little bit before spending the money on something we really don’t need. So, we began to research how parents of two should handle their money so that they plan for retirement and help their kids out with college expenses.

First, we consistently found that financial planners recommend that you have six (6) month’s living expenses stashed away in a money market or other liquid account. Yes, I did write six months. I was shocked too. That’s a lot of money. However, it makes a lot of sense in today’s insecure job world. You never know when your employer will go bankrupt, decide to move or downsize, or whatever. Rather than losing your house or having your kids go without food, focusing on establishing a nest egg today is what a responsible parent should do. Even putting aside $10 per week is something. The point is to start putting a plan in place to get there. Some financial planners even advise paying the minimum on all your bills until you’ve reached this goal.

Once you’ve got this amount in the bank in a high-interest rate account, then you should focus on your retirement. Planners say we should all be saving at least 15% of our annual, gross salaries in retirement accounts such as 401Ks, IRAs, SEPs, etc. This 15% should take into account any employer matching or pension contributions being made so the actual amount you contribute may be less than 15%. Again, yes, 15% is the magic number in order to have a “OK” retirement. If you want a comfortable retirement, then put away 20% annually.

One planner says that if you can’t put away 15% annually, you are living beyond your means. It’s that simple. But, I don’t think this guy’s been living in today’s world. I know I can’t contribute 15% of my salary today with the expenses we have. Most, if not all, of my paycheck is used just to break even monthly. It seems that every month something new pops up like something at school or a few birthday parties or we simply spend too much eating out. Nevertheless, the reality is that you need to make it a priority to start saving 15% annually.

The wife and I have decided to cut some minor expenses and begin putting away 3% of my salary in my company’s 401K plan. If we find we can live with that, then we’ll slowly increment the contribution until we reach 15%. I don’t see that happening anytime soon, however.

Once you’ve got your 6 months in the bank AND are contributing 15% of your salary annually to your retirement plans, then, and only then, should you begin to save for your kids college. The thinking here is that they can always get financial aid while you won’t be able to when you retire.

I’ve found various sites that were very helpful for information on saving for your kids college. One in particular, Savingforcollege.com, is great for understanding Section 529 plans. These plans, along with Prepaid plans, are the most common ways for saving for college.

We’re fortunate in that the kids’ grandparents have established college prepaid plans for them that would cover the tuition if they decided to go to one of our state’s colleges. Most, if not all, states have these programs and I highly recommend you looking into them. They’re relatively cheap and you can lock in today’s college tuition rates that are likely to go up very fast during the coming years.

The other alternative is the section 529 plan. This plan is named after the Internal Revenue Code section that established the plan several years ago. These are special accounts sponsored by each state and managed by several mutual fund companies. Contributions to these plans are considered gifts for Federal income tax purposes and may be deducted from some states’ income taxes. The income accumulation and appreciation in these accounts is tax-free if it is used exclusively for educational expenses for the beneficiary of the account.

Moreover, these accounts can be used for any college in any state. So, it’s up to you to determine what state’s 529 plan you will invest in. We decided to invest in the Ohio plan that has a very good fund selection and low expense percentages. However, Utah is said to be very good too. You can see how the different plans rate and details about their funds and expenses at the above site.

So, if you’ve read this far, I congratulate you. It’s sobering to read that you probably are not saving what you should be saving. I know it was for us. However, knowledge is power and you can use it to get yourself on track today. Even if you need to begin small, do it! Do it for your family. At the very least, this will give you another reason why that expensive car you wanted to lease is probably not the wisest thing to do at our age. Good luck!

All the best,