Among my friends and family, it seems that everyone is having kids. This includes:
- My brother
- My cousin
- My cousin-in-law
- Fellow professionals in the Financial Planning Association
- Friends from college
- My wife’s friends from high school
Everyone is having kids! And, as the fee-only financial planner in my community, I’ve been getting the following question a lot:
How do I set up a 529 college savings account?
It’s a good question. But, while opening a 529 college savings account for your (future) munchkin is a good idea, it’s very low on the list of financial planning priorities. When it comes to parenthood, there are three things that are way more important than a 529 college savings account. But before I get into that, a bit about why a 529 college savings account isn’t a big deal.
Why a 529 College Savings Account is not Important
Yes, saving for college is always a great idea. I’m not saying don’t do it. I’m just saying that human attention, energy and time are extremely limited – especially if you’re a new parent. So, if you only have so much time to do stuff, focus on the financial planning moves that will make the biggest impact. Setting up a 529 account isn’t one of those things that are going to make a big difference in your – or your child’s – life. Here’s why:
Your Kid Can Still Go to College
It’s not as if the lack of a 529 account means that your child won’t be able to attend college. It’s possible. It just means that some additional planning will be required, such as considering:
- Student Loans
Yes, having student debt after graduating is not ideal. However, it makes a college education possible in the absence a fully-funded 529 account.
- Work-Study Programs
Be it an official program with the university itself, or simply taking a part-time job on the side, it is possible to carefully set up your finances to be able to afford a college education without a fully-funded 529 account.
Your Kid Might Get a Scholarship
Can you tell that your kid is already a genius? Or maybe at 4 months he/she is already dunking hoops. Either way, it’s entirely possible that you won’t have to foot the bill for higher education thanks to a scholarship.
College Might Be Free in 18 Years
Right now, a college education is exorbitantly expensive. But, that might change in the future. Right now, primary school is provided to the public for free. As the need for higher education increases, governments (federal or state) may decide that it’s in their best interest to have an educated citizenry – and decide to fully fund higher education.
Your Kid Might Not Want to Go to College
It’s possible, right? College isn’t for everyone. Right now, less than half of Americans hold a college degree. So, your odds are worse than a coin toss that an individual will go to college.
So, now that we’ve covered why you absolutely don’t need a 529 college savings account, let’s talk about what you absolutely must have as a new parent.
Just Had a Kid? Here’s What You Need to Focus On!
While no one likes to think about their death, this is very, very important. And though I am not an attorney, I dare say that parents of minor children definitely need a will. In the will, you need to outline who the godparents are in the instance that you (or both you and your spouse) pass in an untimely manner.
Let’s look at a worst-case scenario: If you don’t have a 529 account, your kids might have to take out some student loans. If you don’t have a will, your kid may end up in a state-run orphanage. Of those two scenarios, which single issue is most dramatic – and which issue should you prioritize preventing as a parent?
Now that I’ve got your attention, let’s tackle two other extremely important issues – issues way more important than setting up a 529 college savings plan account.
As any new parent, or parent-to-be can attest to: kids cost money. A lot of money. The average cost of raising a kid in the United States is $250,000 – and that doesn’t even include the cost of college!
So, what happens when you die? Well, for the purposes of this conversation, your spouse (or your new kid’s godparents) are left to fund the cost of raising your kid without your income (because you’re gone). And I don’t think you need me to tell you that leaving your surviving spouse (or godparents) without a replacement for your income is not part of a good financial plan.
Do you think that the godparents you’ve chosen for your kid have an extra $250,000 sitting around? What about your spouse? Odds are they don’t. Do you think it’s more important that your kid has food on the table, clothes on their back, and shelter over their head for ages 0-18? Or is it more important that they have money for college? Focus on the most important financial planning issues first. Get a life insurance policy before considering college savings.
Ok. Enough with the morbidity of wills and life insurance. For this scenario, no one is going to die. You’re alive. Your spouse is alive. Your kid happily lives with you, and not in a foster home or orphanage.
But, that doesn’t mean bad stuff can’t happen. (Fortunately, you can plan for the bad stuff!)
In this scenario, you’re simply unable to hold a job for the rest of your life. (Not that bad, right?) Maybe you’re a computer programmer who loses your hands in a freak chainsaw-juggling accident. Or maybe you’re a salesman who gets throat cancer is never able to deliver a pitch again. The point is that you need insurance to protect your paycheck.
Disability Insurance replaces (a portion of) your income should you no longer be able to work. And since kids cost $245,000, do you think keeping money coming in the door is important?
So, while having a college savings account is a “nice-to-have,” it’s not a make-or-break financial planning move. A 529 college savings account is just not that important. What is very important for (would-be) parents are:
To be clear, none of these things preclude having a 529 account – they’re just much more important than a 529 college savings account. So, do the three above items FIRST, and then go open up a 529 college savings account.
. . .
Post Script: I Can’t even Sell these Services, or How I Stopped Worrying and Learned to Love Fee-Only Financial Planning Fiduciaries
The world of financial services is a complicated animal. There are lots of conflicts of interest abound – with salesmen pitching products (and not advice).
Why do people sell financial products (i.e. insurance) and not just give advice? Because those brokers/salespeople make money from selling stuff. They don’t make money from giving advice.
I’m not one of those broker guys – and I want to make that clear because misunderstanding that may impact the perception of the value of the advice I give.
I Don’t (and Can’t) Sell Insurance, or Anything Else
You might be thinking to yourself:
Of course, this guy wants me to buy life insurance and disability insurance – because that’s how he makes his money!
Well, guess what: you’re dead wrong. I make money by giving advice. It’s that simple.
My job is to simply give the best possible advice. I never sell a financial product. And I make no money when anyone ever buys a financial product – like insurance. I never get a kick-back, or a referral fee, or split commissions when any insurance product is sold. Ever.
In fact, I can’t sell a financial product. I don’t have the licenses to sell insurance. (I am licensed to give investment advice.) It’s completely impossible for me to ever make any gain (financial or otherwise) when an insurance policy is sold.
So, why am I such a strong advocate for life insurance and disability insurance? Because having life and disability insurance (if you’re a parent) makes financial sense. If you’re a (soon-to-be) parent, having both life and disability is simply one of the best financial moves you can make.
As a fee-only financial planner and a fiduciary, my only job (and legal obligation) is to give the best possible advice so that you can have the most awesome life.
I Don’t (and Can’t) Sell Estate Planning Services – i.e. I Can’t Write a Will for You
When it comes to my recommendation to get a will, it comes from the same place as my recommendation to buy insurance: it’s simply the best possible financial move. I’m not an attorney – and therefore I have no business writing wills for clients. I simply know (as someone who completed the education requirement for the CERTIFIED FINANCIAL PLANNERTM designation) that having a will is very, very important if you’re a parent of a minor.
In conclusion, I’m telling you to do these things not because I do better by you taking me up on these recommendations, but simply because it’s one of the most critical money moves you can make as a parent.
And at the risk of being repetitive: If you don’t already have these things, go out right now and get: