The following is a long-awaited guest post from Mr. BFS. He was thinking about his own college education expenses and how his parents handled it. That got him thinking about windfalls in general. And wonders never cease, he actually wrote it all out for BFS. Thanks sweety! I will say in advance that I only made minor edits like spelling and bolding the titles…this is all hubby. My comments are in italics like this.
You did it! They said it would be nearly impossible, but you did it! You have saved enough money to put your child through college! The acceptance letters are coming in and you breathe a sigh of relief because you’ve got it covered. There is enough to cover tuition, room, and board. Today you are on top of the savings world.
But then you hear the news, she got a scholarship – a big one. Awesome!
(I always knew if we have a kid that he wants a girl…)
This can be both a wonderful and nerve racking experience – having saved and saved for ten, fifteen, or even eighteen years, you now realize that you don’t need (or only need a part of) all of that savings. So what do you do now? The answer to this question has a lot to do with how you got to where you are today.
One common thing is for parents to save for their child’s college fund by skimping on their own retirement savings. If this is the case, now is the time to catch up. Depending on your age, many retirement vehicles allow for an additional catch-up contribution in the years before the “normal” retirement age. Alternatively, if you participate in an employer sponsored 401K, consider significantly upping your contributions for a year or two - making up the difference with the college fund.
Depending on what you have been using to grow that college fund, you may find it more beneficial to leave it there and let it grow. In this case it can become a retirement savings plan in and of itself. Whatever your specific situation, look to retirement first.
If your retirement situation is looking good, you have been a skilled saver. Perhaps though, there is that nagging debt still hanging around. Credit cards, cars, home, all of the above – whatever your particular poison, if there is debt in your life, now may be the time to reduce or eliminate it entirely.
Here it is simply a numbers game. Take a look at the balance and interest rate of all outstanding debt and create a plan of action. You may be in a position to eliminate all of your debt and still have money left over to do something else. Perhaps you noticed you could pay off the remaining balance of that old credit card and put the rest toward retirement. Maybe you simply need to make a big dent in those very old student loans. Whatever your situation, take a look at the numbers and find what works best for you.
Another alternative to consider (perhaps after retirement and debts are seen to) is to give the money to your child as a gift. No I don’t mean write a check.
Sometime soon after college, she will be looking for a home of her own. Consider getting her off to a great financial start by turning the college fund into a down payment on her first home. Perhaps a wedding is on the horizon. Funding the dream wedding/honeymoon may be something that you have both wanted. This could be the way to make it work. Is she business minded with that entrepreneurial spirit? Perhaps you could provide a boost to her first business.
Many of these decisions depend on the child, but it can be a wonderful boost to their quality of life to begin their adult lives with such a huge advantage.
Don’t Forget About You
Don’t forget who saved all that money! Who sacrificed? Who drove the kid to practice every day? Uphill! Both ways!
When a big windfall hits, it is tempting to either completely overlook a small reward for yourself or to go to the other extreme and get a little extravagant. If there is something that you have been wanting and putting off, especially if you have been specifically putting it off for the purpose of saving for your kid’s college education, now may be the time. This may be the retirement or debt I mentioned earlier, or it may be new carpet, a second honeymoon, your emergency fund, or even a new pinball machine. Now may be the time.
The important thing is not to take this as an opportunity to blow what you have spent years saving in a shopping blitz. Make sure that your self-splurge lives up to the time and effort that went into saving the money that you are now spending.
Every situation is different and no one formula can calculate how much to allocate to everything. If you have experienced a sudden windfall from unused college savings or any other cause, take a good long look at your own situation and prioritize what areas of your life need the most attention. Give special consideration to your retirement savings (it will be here before you know it) and any outstanding debts. The most likely outcome is that you will see a need for a little here and a little there. Take advantage of the opportunity to improve your situation – find the weakest point in your financial health and address that area.
What would my vote be? Assuming the number make sense, there is much to be said for starting your child off on the right foot. My parents used my college savings as a down payment on our first house. It allowed us to get out of renting faster than most others our age and put us in a great position to pay off the house much earlier than expected. It also seemed to give us a sense that we wanted to live up to the gift – we wanted to make sure that we did not squander that incredible help.
Thank you so much to my inlaws for greatly helping us toward our 20% downpayment! And thank you to my parents for supplying all of our main appliances! We would have had to wait 2 more years for home ownership without all of that help. We also made sure that we would never need further assistance. We each wanted both sets of our parents to know that we were going to be more than okay. That is one reason we have always prioritized savings and debt freedom. We hope our parents know that they did a great job with us.
What would you do with a windfall?