In our previous discussions about college planning, we’ve discussed where and how much to save while acknowledging that these questions require several assumptions. Is it sensible to make saving for college a major financial goal when there’s no guarantee the child will attend? That’s a tough question for families and for this reason, we favor educating over dictating. When it comes to college funding, we want you to know what it might take and how you might do it; we don’t want to judge your values & decisions. The reality is most families don’t have college fully funded before the student matriculates. If you or an heir fall into this majority, here are some creative strategies that can be used at any time to boost college savings.
Parent Contribution Matching
We’ve met many parents and grandparents who are more than able to fund an education but want to see commitment before pledging their own dollars. In this case, an incentive like contribution matching can be a helpful tool. What if you as grandparents matched the parents’ contributions 2-to-1? The benefits would be greater than the savings and their growth before college. Such an incentive would create savings behavior that benefits the parents’ own finances. Once they are accustomed to budgeting for college savings, they’ve created cash flow that can later be used to help with tuition payments while the student is in school or bolster their own retirement goals.
Family “Merit-Based Scholarship”
The student can follow incentives just as well as their parents. If you as a parent or grandparent have the means to help fund college savings, why not try attacking the problem from both ends? This could be accomplished by putting a carrot on activities that correlate to lower total tuition costs later. Younger children could be rewarded for their Accelerated Reader participation. Older students could earn contributions by completing AP/dual credit courses or completing an exam prep course.
Child Roth IRA
The first job for a teenager has a host of benefits. They learn new skills, become responsible for their own money, and improve their resume for future college and job applications. This can be a great time to introduce higher-level financial concepts (hello, taxes!). One opportunity is to introduce the child to Roth savings; they can contribute the lesser of their earned income or the $6,000 limit in 2022. This can be paired with the incentive strategy if the parents or grandparents have the means, meaning the child can enjoy the fruits of their labor and also enjoy the long-term benefits of Roth savings.
Rewards Credit Card
Take this idea with a grain of salt, and don’t report me to Dave Ramsey. We would never suggest creating a new debt to save for another. But we know our clients are sharp enough to appreciate nuance. Using a credit card that sends its cash-back rewards to a college savings account is a great example of putting behavioral finance to work for you. In my household personally, 100% of the credit card cash-back rewards get spent on dubious Amazon.com purchases, so redirecting those to a wealth creator rather than a wealth destroyer would be a win.
Contribute In Lieu of Gifts
We don’t ever want to be guilty of bringing about a social faux pas. However, I want to highlight a phenomenon that is becoming more socially acceptable due to ballooning college costs. Grandparents and other relatives are contributing to college funds instead of giving traditional gifts like toys. This fits the trend of giving experiences such as vacations & event tickets rather than more “stuff” like toys and games. Indeed, there is growing research by leading behavioral psychologists that having more “stuff” doesn’t make us happier. Especially for young children who may not remember gifts and who can benefit most from appreciation on savings, giving to a college savings account at birthdays and holidays can work well.
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.
