How do you eat an elephant?
The answer to this question has been applied to many of life's challenges, but it may be most useful when it comes to saving for your kid's college education.
According to the National Center for Education Statistics, the average annual cost of attending a four-year public or private college or university is more than $32,000.
Sure, that includes tuition, fees, room and board. But it can be a bitter financial pill to swallow—especially if you're trying to digest it all at once.
That's why you need to approach saving for college the same way you would eating an elephant: one bite at a time.
Fortunately, there are many financial tools available to help you save money for your kid's college education. Unfortunately, figuring out which tools to use can be vexing, especially when college costs are skyrocketing and many students are unable to finish college within four years.
The upward trajectory of tuition costs combined with longer stays on campus can create absolute uncertainty. This means that even if you start saving the minute you find out you're going to have a baby, you might not have enough money by the time the little one graduates from high school.
That doesn't mean the little tiger shouldn't go to college. What it does mean is that you may have to take advantage of loans, grants and other forms of financial aid to make ends meet. But you want to avoid relying too heavily on these tools since they can create heavy debt loads for you and your child.
So instead, you should start saving as soon as possible. To help get you started in the right direction, take a look at these five questions every parent should be asking about college savings plans:
1) How can you ensure the money will be there when you need it?
You're probably thinking this question is a no-brainer, right? After all, you're saving the money so it has to be there when you need it.
Not so fast.
The truth is, many college "savings" plans are actually investment plans. Even the 529 plan, which allows you to save money while paying less in taxes, is an investment because it leverages the power of mutual funds to grow your money.
What this means for you is that when you put your money into college "savings" plans, you are actually investing your money in markets that can go up and down. And if they go down at the wrong time, you could wind up with less money in your "savings" account than what you actually contributed.
If you don't "save" (invest, actually) carefully, you could find yourself having to make the difficult decision to liquidate the depressed value of your funds. With this in mind, maybe the standard 529 plan isn't the best way to ensure your money will be there when you need it.
2) What if your child doesn't go to college?
Post-secondary education isn't right for everyone, and that's OK. But it's not OK when you've spent 18 years investing your hard-earned money in order to pay for your child's education.
If the little one decides not to go to college, you essentially have two options: use the money for another child or take out the remaining dollars (and pay exorbitant taxes and a 10 percent penalty).
If you only have one child, the standard 529 plan might not be the best option—especially if you're unsure whether or not your child will go to college.
3) What is the opportunity cost of saving for college?
Opportunity cost is defined as "the loss of potential gain from other alternatives when one alternative is chosen."
In the case of saving for college using the standard 529 plan, the opportunity cost could be thousands of dollars in your pocket.
For example, if you save $50,000 in a college "saving" account and give it to your child, the money is gone. On the other hand, if you save $50,000 and hold on to it, you could invest that money and turn it into $132,000 over the next 20 years (if you earn 5 percent interest).
And it doesn't mean you can't help your child pay for college. You can use some of the earnings on your initial $50,000 to pay for tuition and expenses. The big advantage is that you are in control of your money.
4) Are you comfortable not having access to your money?
If there is one certainty in life, it's that life is sure to be uncertain.
Job losses, illnesses, injuries and opportunities often appear when you least expect them. If your money isn't liquid (if it's all wrapped up in a 529 "savings" plan, for example), you won't have easy access to it when you're faced with a major emergency or opportunity.
If you do need the money in the 529 plan—to pay medical expenses or to invest in real estate, for example—you'll wind up paying heavy fees and taxes.
5) What impact does "saving" for college have on financial aid?
Believe it or not, you can actually be punished for investing in a 529 plan. When your child applies for financial aid—loans, grants, scholarships—the balance in your 529 plan is included into the financial aid calculations.
This means that the more you save, the less your child is likely to receive in financial aid.
Start eating the elephant
If all this sounds overwhelming and depressing, don't worry. There are other ways to "eat the elephant" and wisely save for your child's college education.
One easy way is to invest in a sensible life insurance policy—such as whole life—that truly allows you to save your money, access your money without penalties and grow your money year-to-year without being exposed to the ups and downs of the stock market.
If you start using a whole life insurance policy to save now, you'll be taking small bites out of the ever-increasing costs of college—and doing so on your own terms.
Sent from the Land of Possibilities!
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