Sign up with your email address to be the first to know about new products, VIP offers, blog features & more.

You are viewing Saving for College

The Three Flaws With The Most Popular Saving Strategy

The most common saving strategy is where the investor saves a specific and set amount of money on a regular basis. For example, $200 is automatically set aside (and possible invested) by a young family every single month to fund future college education expenses until their child turns 18.

Here’s the problem: Using a fixed dollar amount as described above is hardest in the early years which is when cash flow is already tight. There are three reasons why.

  1. Behavioral standpoint. The saver is just getting started and not conditioned to save such a large amount so quickly. While they have every intention of saving $200 a month, they crash and burn after only a few months.
  2. Cash flow limitation. A saver may decide they can’t afford to save $200/mo now and decide to begin saving at a later date after they have received a raise or two, abandoned the goal altogether or reduce the scope of their goal. All of which may be premature decisions.
  3. Economic standpoint. The purchasing power of $200 declines, slowly but surely, every year due to inflation. Think about what $200 could have bought 18 years ago? Now imagine that trend continuing 18 years into the future. When the saver factors in the effect of inflation, and future salary raises, the pain of saving $200 will decline substantially by the end of the 18 years. The saver would still be saving the same amount, but it will feel like a lot less 18 years from now.

Think of it this way: if you begin to exercise today and have a goal of running in a marathon twelve months from now, you won’t just start running 26.2 miles per day. You’ll burn out or get injured. The same can be said for how we save. Trying to develop a habit in which you save too much, too quickly, can easily fail.

Using The Money Management Tool: Setting a Budget

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with prospective client who needed some help staying on budget.

Situation: A young couple with two children asked us for guidance on getting a handle on their debts. They had multiple credit card balances with obscene interest rates, a result of unexpected bills. They were spending more and more of their income to make debt payments instead of saving for retirement. They were slowly realizing that they would not be digging themselves out of debt anytime soon and needed a plan to get back on track to save for retirement.

Problem: During the initial meeting, we discovered a significant amount of their take-home pay was going toward non-essential expenses, such as the most premium cable package available and eating out for lunch every single day.

Solution: Directing savings originally intended for retirement to pay down credit card debt is an acceptable strategy in some cases. But when there is a lot of non-essential spending occurring, a tightening of the belt should be the first strategy. In this case, the client could connect their credit card account to The Money Management Tool and analyze their spending habits to see just how much is spent on restaurants and entertainment. They could then develop a budget to help them stay on track.


If you or someone you know needs help getting their financial house in order, this tool can help.

Contact us today to get started.

Is Retirement Savings Being Crowded Out by Student Debt?

A recent study conducted by HelloWallet suggests that a dollar of student loan debt is associated with a 35-cent decrease in retirement account balances! That means, investors with lots of student loans are unable to save as much for retirement.

This is a big problem on a large scale:

  1. 60% of college graduates take on some form of student loan.
  2. The average loan size has tripled over two decades form $9,400 to $27,300
  3. There is more student loan debt than credit card debt.

You can read the study here

I take issue with this study in several areas:

  1. The study assumes that people have a given number of dollars available and must split it between debt repayment and saving for retirement. In reality, I am seeing many people make significant sacrifices in their lifestyle in order to stay on top of their debts and retirement planning. People are living at home longer, avoiding more debt by not buying a house, or living a more modest lifestyle.
  2. People I see coming out of college with significant levels of debt are going through a crash course in personal finance much faster than those with no student loans. They are experiencing a wake-up call in their 20s and 30s as opposed to their 40’s or 50’s. Smart financial habits that they develop now could lead them to a more prosperous future.
  3. I’m working with many families on a more complicated dilemma. Not only do they need to weigh existing student loan debts and saving for retirement, but they also struggle to save for their own children’s education.

The final issue I take with this study is a line repeated multiple times: “There are few widely available tools to help individuals decide whether to prioritize student loan repayments or retirement savings.” In reality, there are lots of tools available to help people analyze that question, such as a Certified Financial Planner™ professional.