Among my friends and family, it seems that 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 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. Before I get into that, a bit about why a 529 college savings account isn’t a big deal. (For related reading, see: The 529 Plan Tutorial.)
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 four months he or 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. Primary school is provided to the public for free. As the need for higher education increases, governments (federal or state) may decide it's in their best interest to have an educated citizenry and decide to fully fund higher education as well. (For related reading, see: Should Public College Tuition Be Free?)
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. 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 First
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 is most dramatic and which should you prioritize preventing as a parent? (For related reading, see: Last Will and Testament: Not Just for the Elderly.)
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.
2. Life Insurance
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 about $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 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 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.
3. Disability Insurance
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, 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 and need disability insurance. (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 and 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 $250,000 each, keeping money coming in the door is important. (For related reading, see: Top 6 Features of a Great Disability Policy.)
The Bottom Line
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 includes:
- Life Insurance
- Disability Insurance
To be clear, none of these things preclude having a 529 account—they’re just much more important. So, do the three above items first, and then go open up a 529 college savings account. (For related reading, see: Budgeting For A New Baby.)