A 36 y.o. neighbor with two kids under six, asked my advice.

She is considering saving $1,000.00 per year for each of the two kids.

But she is paying interest on school and home loans.

I suggested that she pay off the loans early , skip the savings for the kids.

Quit paying interest earlier.
Was I wrong ?

Not necessarily; depends on loan rates.

quote:

Originally posted by bcereuss:
Not necessarily; depends on loan rates.

This and does she already have an emergency fund set aside? Common advice is 3-6 mos. but with 2 kids that young, I would shoot for a year. If already in place, great! If not, fund this first. School and home loans are long term debt. Kill any short-term debt first. (credit cards, etc.)

Impossible to say without more information.

If the rate on the mortgage is low paying it off early offers no benefit to her.

If the student loans are the kind that will be forgiven after 20 years of making payments on them and she has no hope of paying them off, then paying those down offers no benefit to her as well.

How is she set for retirement? That plan needs to be in good shape before she should considers saving for the kids.

Why is she thinking of saving for the kids? If it’s for college and she has no hope off paying for their college education on her own, then there’s no benefit in saving for college. It’ll count against her in the financial aid calculations. In terms of those calculations, she’d be better off putting the money towards her retirement.

We followed Dave Ramseys advice and used the debt snowball-where you make the minimum on all debts except the smallest loan regardless of interest rate, then pour all you can into that to get rid of it. Then advance thru the debt in the same manner.

He suggests suspending savings, besides $1000 for emergencies, until the debt is paid off. He also says to get rid of any credit cards. -we didn’t do that because you need one to order online-but we pay it off every month.

Sounds like similar advise Bendable. It’s got a proven record and it works.

No, you're right. The typical financial advice steps would be to pay off most/all debt before savings for your kids' college or whatever.


But getting a bit deeper, she needs to save up an emergency fund first before tackling her debt, if she doesn't have that already.

And the thinking about debt varies a little from advisor to advisor. Some will say to pay off stuff like credit cards and cars, but then prioritize other things like retirement/kids' college savings before paying off the house. Especially if you have one of those 2020-era super low interest rate mortgages (like me ).

You might also not prioritize putting extra towards paying off your student loans if you're on track to have them forgiven, through an existing program like Public Service Loan Forgiveness for teachers/nurses/cops/firefighters/etc., or military enlistment benefits. (But I certainly wouldn't ignore paying off student loans just in the hope that someday some Democrat proposal to negate them will materialize.)

And she also needs to ensure that she's saving for her own retirement too, if she isn't already. 36 is a bit late to be just starting to think about retirement savings, but still better than 46 or 56. This typically should be prioritized over saving for your kids. Doubly so if she's offered the free money of something like a 401k employer match.

You don't necessarily have a parental duty to pay for your kids' college... You do have a duty to ensure that you can support yourself once you're retired and not become a burden on them.

Another reason you're right is, at least under present rules, college savings plans will hurt financial aid. Or, if she is planning on putting the money in a regular (non 529) account in the children's names, it will likewise hurt their financial aid.

Basically, colleges look at how many dollars the family has to spend, and subtracts that from the cost of attending. The difference will be the aid in loans or scholarships. Iirc, my kids even had to report accounts their grandparents had for them.

Colleges do not consider retirement savings, so she is better off putting the money into her own retirement savings rather than into education savings.

I agree with all the previous responses, though, that she needs a good overall plan first which prioritizes along the lines of Dave Ramsey. Emergency fund, then eliminate debt. Take full advantage of employer 401k match immediately (I am not sure Ramsey agrees before the debt is eliminated).

I advocate ignoring interest rates in doing that. While mathematically better, human nature undermines success if one pays off higher rate debt first rather than paying off smallest debt first. Ramsey's debt snowball harnesses human nature instead.

quote:

Originally posted by RogueJSK:

You don't necessarily have a parental duty to pay for your kids' college... You do have a duty to ensure that you can support yourself once you're retired and not become a burden on them.

I think you even understated that. By demonstrating financial self-responsibility to one's children, it teaches them that it can be done. It teaches them that even with modest income, a person can be independent. It teaches them pride in success, again even if only of modest numbers of dollars. It teaches them that having a goal and a plan leads to winning. They will look at the masses who live in constant debt, and they will appreciate their parents' teachings.

quote:

Another reason you're right is, at least under present rules, college savings plans will hurt financial aid. Or, if she is planning on putting the money in a regular (non 529) account in the children's names, it will likewise hurt their financial aid.

It doesn’t matter who the beneficiaries of a 529 plan are; it’s the account owner that counts. If she’s the owner, the 529 plan goes on the FAFSA. If a grandparent is the owner, then it doesn’t go on the FAFSA.

A $1,000 is a $1,000; it doesn’t matter where it gets reported on the FAFSA. Having $1,000 less debt or having $1,000 in a savings account in her name, or having $1,000 in a savings account in her kid’s name, is all the same. However, qualified retirement plans aren’t included on the FAFSA.

Again, with the information given, it’s impossible to determine if bendable’s advice was solid or not. We don’t have a clue what she thinks saving for the kids is for and yet here we are with college. There’s a really good chance for the not side, because the factors in making that determination are much more complicated than should she do A or B.

I guess another important factor here is what exactly she has in mind for that money.

We're mostly assuming it's for college. If the intent is to pay for their college, saving up $15-20k in a 529 over the next 10-15 years won't be enough to fully cover a 4 year degree at really any school, though it may be enough for a community college associates degree or a trade school certification. So as others have pointed out it could hurt the financial aid calculations in the long run, and she may be better off (for FAFSA purchases) to put it elsewhere like her own retirement.

But, for example, if her goal is just to save up ~$10k-$15k in a HYSA by the time they turn 16 to be able to buy them a decent car, that could be more reasonable.

Though either way, it's still not something that should be prioritized over having an emergency fund, paying off debt (at least the higher interest stuff like credit cards and cars), and starting her own retirement investing.

Agree with Rogue.

Pay off/down debt first

Establish Emergency Savings

Fund Retirement

Then College

You're dealng with money. You can direct money in different directions.

The problem is too simplified as given: Considering $1000 per year per kid for a total of two kids and she is paying interest in school and home loans.

My questions would be: What will the savings for and where is the rest of her money going besides school and home loans? I'm assuming she's already paying the school and home loans with other monies.

I would ask what would the savings for the children go for?

Does she have an emergency fund, how many months is it worth, and how is it invested?

What other future expenses need to be funded? vacation, car, retirement, etc.?

Where will she put the $1000 per child into?

As for the loans, you have to look at the total cash flow picture. Student loan interests are often lower rates and tax deductible. When she dies, the student loans go away and are forgiven. Home loan interests are also tax deductible.

It doesn't sound like she is under a load of credit card debt if she is considering saving $2,000 a year.

She said savings acct. For the kids $.

That's all the specifics I got.

quote:

Originally posted by MikeinNC:
We followed Dave Ramseys advice and used the debt snowball-where you make the minimum on all debts except the smallest loan regardless of interest rate, then pour all you can into that to get rid of it. Then advance thru the debt in the same manner.

He suggests suspending savings, besides $1000 for emergencies, until the debt is paid off. He also says to get rid of any credit cards. -we didn’t do that because you need one to order online-but we pay it off every month.

Sounds like similar advise Bendable. It’s got a proven record and it works.

I never knew that was Dave Ramsey's advice. My wife and I did the exact same about 25 years ago when we were in too deep and have been debt free ever since.

There are so many financial nuances to getting everything in order. One would have to know all the details.

If she’s borrowing to fund school, likely not a whole lot of extra $$ laying around.

Say one had a job that offered a 401k with good choices. On top of that they had a ‘company match’ up to a certain point. Then this individual also had various IRA options available. With all that decided they didn’t want to ‘lock up’ $$ so they just opened a taxable account invested in an index fund for savings. This is an example of all types of bass ackwards thinking and positioning.

Not saying it’s the case here, but one’s mind can dream up various ways to hamper oneself.

If your friend can afford it, pay off debt save for retirement and invest in the kids while young. Obviously depends on the budget available. My oldest turns 17 tomorrow . Since he was born I’ve put $100 a month plus any gift money hes ever got into a very bland mutual fund portfolio. As of this month I’m 20k of my own cash in, his portfolio is worth 32k+. We took some out to buy his 1st car last summer. The brokerage account is in my name and I’m paying the taxes. At some point after he turns 18 or 21 I’ll take him to schwab add his name to the account and hand it over. He also has a 529 but not sure if he’s the college type. He may go to a trade school. Same for my younger daughter.

My point is when he turns 21 or so it would be a challenge to cough up 32k or even 20k to get him started in life. I’m also blessed enough to be debt free except mortgage to be able to do this for my kids. Getting those years back of time in the market is impossible.