Do you have children? Do you think you might have children someday? If the answer is yes, then you may be wondering about college costs. Here's an article from a reader who has saved $130,000 for their children's education fund in 9 years. Enjoy!
Saving money for your kids will give them a great head start in life. It will also reduce the burden on you when it comes time to help them out!
Today, I am going to tell you how we've saved $130k for our children's education fund in 9 years.
- I Thought I Was Too Good For Community College
- 21 Ways You Can Learn How To Save Money In College
- Cutting College Costs: Understanding The Cost And Value Of Your Degree
- How I Paid Off $40,000 In Student Loans in 7 Months
About Mr Fundamental
I am 39 years old and a computer engineer. My wife, Mrs Fundamental, and I live in Canada with our three lovely children.
We have a 9 year-old daughter, and 7 year-old boy/girl twins. My wife is an amazing stay-at-home mom. As a result, this has saved us huge amounts in day-care expenses over the years.
It has also meant that our kids always have a parent available for them after school, and during school on those nasty sick days.
Mr Fundamental believes in focusing on the fundamentals to have more fun in life. “What does this mean?” you ask. It means keeping things simple, and looking for ways to get the most bang for your buck in life. Some of my favorite topics include: early retirement, frugality, investing, and having fun while doing all of it.
If you spend the bulk of your time and effort on the most important things, you'll have great success in whatever you pursue.
Mr and Mrs Fundamental have been married for 12 years. Back in the day (2009), we thought maybe 3 or 4 kids would be the right number for us. So, we got to work, and we had a beautiful baby daughter in 2010! After we had our first child, we started to think that maybe 3 children would be just perfect. So, we got to work again, but this time we had twins! We had a lovely baby girl and a handsome little boy. The year was 2012, we had 3 children under the age of 2, and things were just peachy. Family complete!
I asked my eldest daughter recently what she wants to be when she grows up. She told me she's planning on being a veterinarian. I asked my youngest what she's going to do, and she's also going to be a veterinarian! My son tells me he's going to be a computer engineer — just like his dad!
I thought I would do a bit of research and see how much each of these career paths might cost. The cost to study veterinary medicine at our local university is $10,737 per year. Since veterinary medicine is not a direct-entry college, you're likely looking at 3-5 years of undergrad plus 4 years of veterinary school. That means the total tuition cost will likely be about $70,000. That is just for tuition! If you add in textbooks and cost of living expenses, $100,000 is probably a fairly conservative estimate.
The cost to study computer engineering is approximately $8,800 per year for tuition. Multiply that by 4 years, and you're looking at about $35,000. If we add in the textbooks and living expenses again, $50,000 total seems like it might be reasonable.
I think these cost estimates are likely comparable to the costs in the United States as well. Of course it will vary, depending on if you go to a public or private college. Costs will also fluctuate based on if your child can live at home, or needs to travel and rent additional accommodations.
The programs of study I chose above are just a few examples. They are by no means the most or least expensive options. For example, dentistry at our local university costs a whopping $35,667 per year! It is also a non-direct entry program, so you could easily spend $150,000 or more just on tuition. You will need a hefty children's education fund for that! Arts & Science is one of the least expensive programs. However, it is still fairly expensive coming in at $6,755 per year.
The student loan problem
Student loans have gotten more and more out of control over time. Many students have to borrow all of the money to fund their post-secondary education. This means that when they do finally graduate, they are already playing catch-up because they have a big debt to repay.
As of 2018, outstanding student loan debt totals $1.5 trillion in the United States (source: Wikipedia). Student loan debt in the United States has doubled over the last decade. Canadians have similar issues, as the Canadian student loan debt totals are greater than $15 billion.
Starting off your career with a bunch of debt is not a fun thing. Many people spend 10-15 years of working before their student loan debt is repaid. If you don't have a large debt like this to service, you can focus on doing better things with your money (such as investing, paying off your mortgage, etc).
Why save for your children's education fund?
As all Fundamentalists know, financial independence is one of the key elements to happiness. Once you've achieve financial independence, you have the ability to get up every day and work on exactly what YOU want to work on.
Who knows, maybe you don't even feel like working on anything on a given day. That's fine! If you have achieved financial independence, you have the freedom to do what you want. Wouldn't it be fantastic if you could help your children on the road to their financial independence as well?
Besides, can you really say that you are financially independent if you don't have a plan in place for your child's education? Mr Fundamental says no.
Your children are still going to have to do all of the hard work of earning, saving, and investing if they want to achieve their own financial independence. You're just giving them a head start and letting them get out of the gate debt-free. I was lucky and had enough help with my education (along with a few scholarships and summer jobs) such that I was able to graduate college, debt-free.
This was great and let me get an early start on my savings and investing. Wouldn't you like to give your child a similar, or better, opportunity.
The investment vehicle
Here in Canada (your polite neighbors to the north), we have something called a Registered Education Savings Plan (RESP). A similar plan exists in the USA. It is called the 529 Savings Plan. The major benefit both of these education savings plans is that they offer tax-free growth.
RESPs in Canada have the added benefit of offering a 20% matching grant up to $500 per child, on your first $2,500 contribution. “But Mr Fundamental!” I can hear the Americans say, “What about us? It isn't fair that Canada gets this 20% match!”
Calm down, calm down.
529 plans also have their own extra benefits.
The benefits vary state-by-state, but most states offer either a tax deduction or tax credit associated with making 529 plan contributions. Tax credits directly reduce the amount of tax you owe, while tax deductions reduce how much of your income is subject to taxes.
Sounds pretty sweet, right?
I'm starting to think the Americans have it even easier than the Canadians here! You can think of it this way. In Canada, I contribute $2,500 and get a bonus $500 from the government. In USA, you contribute $3,000, but then get some amount of that back in tax credits/deductions. I think they will work out to roughly the same thing, but it will vary by state.
We chose to open a family self-directed RESP plan, and used TD Direct Investing as our financial institution. There are some benefits to having a family-based plan vs 3 separate accounts. There is a bit less paperwork and more withdrawal flexibility. Imagine that one child wants to go to college for 8 years, while the other one only has plans to do 2 years of post-secondary education. You are allowed to divvy up the money any way you see fit.
With our family plan, we can withdraw $100k for each of the veterinarians, and only $50k for the computer engineer, and it is no problem. When it comes to 529 Savings Plans, you can only have a single beneficiary per plan. However, you can change the beneficiary and/or transfer money between the individual plans. It seems to me that this amounts to being roughly equivalent to a family plan. No worries!
We have religiously saved $2,500 for each child, every single year since they were born. This means we also received $500 per child, per year, in the form of the matching grant. Saving $2,500 for each child every year might seem daunting. You need to think of it as an investment. It is a great investment that provides an instant return. In Canada, you instantly get a 20% return on your money from the $500 matching grant. In the USA, you instantly get a return in the form of tax deductions/credits.
If saving the $2,500 is challenging, maybe you can find some other aspects of your life where you can become more frugal? I know Michelle has many money saving tips on her blog.
Mr Fundamental also has a few ideas, and will be coming up with many more in the future. I understand that saving is not easy for many, and feels next-to-impossible for some. However, if you can even save a small amount, the magic of compounding and time will result in a significant amount of assistance for your children.
Mrs Fundamental and I have been saving $7,500 ($9,000 if you include the grants) every year for the 3 little Fundamentals. We'll keep it going until we max out the lifetime grant maximum per beneficiary, which is $7,200.
This means we'll likely stop after about 15 years of contributions per child. Saving this much per year hasn't always been easy. We've made choices along that way, and have prioritized saving and investing for both our children's education fund and our retirement funds.
Here are some ways we have saved money:
- We always buy used vehicles. Made the mistake of buying new once 12 years ago.
- I cut my own and my son's hair, instead of paying a barber. Been doing that for 20 years for myself.
- We use meal planning to avoid last minute expensive restaurant food. We buy everything from Costco once a week.
- I bring my lunch to work almost every day. Exceptions are allowed for special occasions, or the occasional treat!
Ah, now for the exciting part — the investments! Mr Fundamental is a big believer is the 100% equity portfolio (and you should believe too!).
We've invested all of our RESP money in low cost index mutual funds in this account. I went with the TD e-series index funds, due to their low management expenses and the fact that they are no-load funds. This means that they can be bought and sold with no commission or sales charge. They can also be purchased in small increments (increments of $100), so it is easy to get started with relatively little money.
Here is the approximate breakdown of the investments for the children's education fund:
25% – TD Dow Jones Industrial Average Index Fund.
This index fund's benchmark is the well known Dow Jones Industrial Average. This gives us exposure to 30 US blue-chip companies, such as Apple, Microsoft, and McDonald's. This fund has achieved an annual rate of return of 15% over the past 10 years.
25% – TD U.S. Index Fund.
This index fund's benchmark is the S&P 500. This gives us exposure to 500 of the largest US companies. We've managed an annual rate of return of 14.92% per year with this one. Not too shabby!
30% – TD Canadian Index Fund.
This fund's benchmark is the S & P/TSX Composite Total Return Index. This fund has given a return of 7% per year over the last 10 years. Not as good as those juicy US indices, but still reasonable for the long run.
20% – TD International Index Fund.
This fund's benchmark is the MSCI EAFE Index. This gives us exposure to a bunch of companies in developed countries outside of the US and Canada.
What about ETFs (exchange traded funds)?
If you're wondering why we chose index mutual funds, as opposed to ETFs, you have a valid question! The underlying holdings of an equivalent ETF portfolio would be nearly identical to the one above. ETFs that are based on all of the same benchmark indices can be purchased. Each of ETFs and index mutual funds have benefits.
For instance, ETFs typically have lower management expense ratios. This is a good thing, because you get to keep more of your returns. Index mutual funds don't cost anything when it comes to commission fees.
As a result, that means every time you buy or sell your index mutual funds, you don't have to pay a fee. With ETFs, you do have to pay a commission fee. It might be around $10 per transaction, depending on your brokerage. So, yes, you could also build a similar portfolio using ETF index funds and do just fine! In fact, if I lived in the United States and was doing it all over again, I'd probably just put 100% into VTI and relax.
After 7 long years of contributing $7,500 every single year, and 2 years of contributing $2,500 before that, we've accumulated approximately $130,000! How amazing is this?!
I'm pretty sure my parents had between $5k-$10k saved for me when it was time for me to go to college.
While this was enough, and I definitely appreciated it, it was peanuts compared to this ridiculous number.
I can hear some of the readers murmuring to themselves, “Yeah, but it is EASY to save and invest in a bull market — this guy just got lucky!”
Yes, we have been extremely fortunate to have been investing during one of the longest bull markets in history. However, history has shown that one can reasonably expect a return of about 8% with an equity-based portfolio. If you take our contribution amounts and apply a return of 8% per year, you'd still wind up with about $100,000.
I estimate we'll have around $300,000 saved by the time these little Fundamentals go to college or trade school. While this may not even be enough to foot the bill for two veterinarians and a computer engineer, it should certainly cover most of it and will provide a great feeling of security.
We'll definitely be encouraging the little gaffers to work as hard as they can to earn scholarships, work summer jobs, and save up their own money where possible. This makes me feel all warm and fuzzy inside. Knowing that our children will have enough money to do whatever they want (but not enough to do nothing) is a good feeling, indeed.
Do you plan on saving money for your children's education fund? If so, how do you plan on investing the money?
Love, Mr Fundamental
Note #1: Mr Fundamental is in no way affiliated with TD Direct Investing, other than the fact I bank there. I receive no compensation for mentioning them in this article.
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