As the next step in CovingtonAlsina’s Hierarchy of Financial Priorities, we look at other goals beyond retirement. These may include college, buying a first or second home, home renovations, extensive travel, or other dreams.
When saving for college, we recommend the Maryland 529 plan for Maryland residents. This highly rated plan offers a state tax deduction of up to $2,500 per parent per child and has no commissions or advisory fees. If you are not a Maryland resident, there are several websites that can help you compare plans. If your advisor recommends an out-of-state plan, be sure to ask why and what they are being paid on that plan. I generally recommend the investment plan over the pre-paid option.
A general guideline is that, with the current cost of an in-state public university, if you save $400 a month from the time your child is born, you should be on track to cover most college costs.1 That may not be possible, but that doesn’t mean you can’t save anything. Do what you can: $25, $50, $100 a month. There are many ways to pay for college and we’ll dive into those in another column. You should also take advantage of the state matching program; if you make less than $175,000 as a couple, the state will contribute up to $500 to your child’s 529.
For other goals, we often set up a separate savings account for that goal. Assuming you have paid down credit card debt, have an emergency fund, and are contributing to retirement accounts, consider splitting your paycheck: divert most to your regular checking account, a small piece to your emergency fund, and another piece to the account for your other goal. The other option is to treat it like a bill, and transfer a set amount each month to the account. If you want $6,000 for travel, transfer $500 a month to the account.
Once you’ve started regular contributions, consider using how your brain works to your advantage and treat savings like a game. Put a picture on the refrigerator or a thermometer drawing on your bathroom mirror. Every time you transfer money for the goal, color in part of the picture. When you make a conscious decision not to spend money (we can eat out or we can make spaghetti and put $50 to the house fund), go color another piece. That constant reinforcement and using it to reward yourself for savings, rather than just depriving yourself of something you may want only in passing, will help motivate you to stick with it and save more.
You can find great resources, and calculators, plus register for our educational events on our website at www.covingtonalsina.com. If you have questions, email us at info@covingtonalsina.com. We’ll continue in the next column with a discussion on estate planning and philanthropy.
CovingtonAlsina is a Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
1 This assumes 18 years of payments invested at 6.89% in a tax-advantaged savings plan like a 529.
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