If you have stepped foot into a big box store lately, it is abundantly clear: back-to-school season is among us. This can be a source of anxiety for many parents as they navigate the aisles buying every notebook, pencil, and folder the school list calls for. Oh, and don’t forget the new clothing, shoes, backpack, lunch box, etc., the list goes on and on. Now rinse and repeat for multiple kids.
August can be intimidating for parents trying to budget while still making sure their children get everything they need for a successful school year. We have a few tips to help ease the pain.
Estimating Expenses: Back-to-school calculator
The first step we recommend for organizing your finances and starting a budget is by estimating the expenses you will incur. With so many little things to remember, it can be easy to forget something and go over budget. Most schools will send a letter or post online which school supplies your children need for the year. Print it out and highlight the bigger ticket items to help determine what to expect.
TIP #1: Once you receive the supply list from your children’s school, schedule a pickup order from your store of choice (such as Target, Walmart, OfficeMax, etc.) and add all of the items needed. Not only will this help you to determine the cost of supplies, but ordering online is useful for comparing products/prices and you (or your children) will not be tempted to throw extra items in the cart!
Once you have an idea of the cost of supplies, set a realistic budget for clothing and accessories (backpacks, shoes, lunch boxes, pencil cases).
TIP #2: Be thrifty! Shopping second-hand or finding sales can greatly help to extend your budget even further. Be sure to include items for all seasons so you do not have to buy a whole new wardrobe when the weather changes.
Now that you have supplies and clothing budgets set aside, start thinking of anything additional to add a budget for. This can include school sports/activities, haircuts, laptops, etc. If your child is going into college, you will have additional expenses, such as room/board, parking/technology fees, and, of course, furnishing a dorm room/apartment.
After determining all of your expenses, you can add them up on your own (or use a calculator like this one).
How to save
Ideally, you would have started your saving well in advance of the back-to-school season. But, for many parents, it can slip their mind with everything else going on. (Let’s be honest– this summer FLEW by!). If your budget is tight this year, start by determining what things are necessities versus wants. Can you or your child re-use the same backpack?
You can also start by buying the necessities. And then in a few weeks after re-evaluating, you can go back for any additional items. Another idea is to look around for back-to-school sales and clip coupons. Let’s also not forget about the tax-free weekend, which allows parents to buy supplies and other approved items with no sales tax. Check here for a list of your state’s tax holidays.
Lastly, while it is easy to get overwhelmed, do not forget about another important item to budget for: your child’s future. Professionals suggest starting a college fund for your child as soon as possible to begin saving. Costs of higher education have risen exponentially, and with inflation in 2022, it is expected to rise even more.
“There’s no question that compared to previous generations, colleges are charging today’s students more for higher education. Between 1980 and 2020, the average price of tuition, fees, and room and board for an undergraduate degree increased 169%, according to a recent report from the Georgetown University Center on Education and the Workforce (Forbes).”
The amount actually needed will (of course) depend on factors, such as scholarships/grants received, in-state versus out-of-state tuition, state or private school, etc. It is better to over-prepare and have excess funds than to come up short.
There are a few different products on the market to save for college expenses. The most commonly used product is the 529 Savings Plan. This plan is popular because you contribute through post-tax earnings and can invest the money with no taxes on your returns. When it comes time to withdraw the money, you can do so with no penalty for all educational (approved) expenses. The downside to this account is that any non-approved expenses will be subject to taxes and a potential 10% withdrawal fee. This account is best suited strictly for college savings and does not have contribution limits.
An alternative to the 529 plan is the Coverdell Education Savings Account (ESA). This account is similar as it offers tax-free growth and withdrawals but with a Coverdell ESA you can fund certain K-12 expenses with the money. A downside to this account is that you must be within the income limit and there are caps on the maximum contribution.
Another product is a Custodial Account, which is essentially a savings account for your child that will transfer to them at 18 years of age. There are no contribution limits, but the account will be taxed at your child’s tax rate. This account offers more flexibility if you aren’t sure whether your child will pursue a traditional college route. The funds can be used for anything that “benefits” the owner of the account.
A few other options include traditional savings accounts and Roth IRA. A traditional savings account might be good if your child is closer to college age and you need to keep the money more easily accessible and are not worried about growth.
A Roth IRA is a newer method used to save for college (as it is typically used for retirement). The concept is that a Roth IRA typically cannot be used until 59 ½ years of age, but the caveat is that any contributions can be withdrawn (tax and penalty free) just the growth cannot be disbursed without penalty/tax until retirement age. One downfall is that the account has a maximum yearly contribution of $6,000.
The great thing about this option is that the money is more flexible and can be used for things other than educational expenses (such as a down payment on a home or a vehicle). Or your child could just use it to get an amazing head start on their retirement fund!
College (saving for college AND while in college)
For those in college currently, your money situation probably looks a little different. Budgets are likely to be a lot tighter during college years and it can be hard to save for unexpected expenses.
To calculate your college expenses, we suggest starting the same way as those planned for K-12 children. Make a list of all of your supplies needed for the school year (including laptops, textbooks, etc.) Include expenses, such as parking tags, bus-pass, meal plans, or anything that needs to be paid before you start the semester. Check out this calculator to help determine your total expenses.
Come up with a game plan of how you will budget for expenses. Use your money from a summer job? Take out a loan? Another option is utilizing a credit card that offers zero interest for 12-18 months to take your time to pay off big-ticket items.
Should I save for retirement while in college?
This is entirely dependent on your individual circumstances. If you are using borrowed money (loans or from family members), it is NOT recommended to start retirement investing. If you are going to school debt-free and have some extra income from a job, then go for it! We always encourage our clients to start as soon as possible. The earlier you begin investing, the more you will be able to take advantage of compound interest.
To speak with a trusted financial professional regarding retirement investing or investing in your child’s future, contact us here.