Saturday, November 11, 2006

Is college savings worth it?

Dave Ramsey's step 5 is to save for college. He doesn't give any numbers or suggestions other than save what you can. Now is this reasonable? I don't think it gives enough guidance.

Now using a simulator saving $2k/year for 18 years @ a rate of 8% return will give you $77,123 for your child's education assuming you start when they are born. That sounds great, but will college really be only $77k? I don't know, but probably not.

But the real question is should you be saving more? I say maybe. You should only be saving more if you have already maxed out your 401k, Roth IRA options, then yes definitely save more. If you haven't saved $38k/year, then save the $2k/year and go back and put the rest to retirement. Trust me, you kids would rather have school loans than have to try to support you the rest of their lives during retirement.

Besides if you take out loans for your kid, you can always pay them off after college if they finish with good grades in four years. But if they drop out then you haven't wasted any more on something they don't appreciate.

Our personal goal is to save $10k by our kid's 1st birthday. I have no idea if this is a strech goal or not, but if we can put that away I think we may not need to save much more. Currently we have saved about $500.

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