Ideas & Insights

How to Protect Your 529 College Savings Plan From Impulse Buys

December 06, 2018, No Comments

529 College Savings Plan

Education is an investment that can push you or a family member toward obtaining an advanced degree and a successful future. If you’re stashing cash away in a 529 college savings plan, it’s important to create a strategy that helps you grow your investment, meet your long-term goals and eliminate the temptation to steal from your financial future.

How can you protect your 529 college savings plan from impulse buys?

Research the Total Expense of College

When parents start saving for their children’s education, the amount to save may feel like a guessing game. In a recent study done by Fidelity Investments, 2,196 families that contributed to a 529 college savings plan shared their biggest realizations when it came to the investment.

Of the key takeaways, the following two were surprising:

  • 69% wished there were more specific guidelines on how much to save
  • 47% of parents said they needed more information on how to invest their college savings

The lack of financial knowledge left their savings goals unfulfilled. Even though the majority of participants in the study planned to cover at least 70% of the total cost of college for their children, most were on track to cover only 29% by the time their child reached college age.

By the way, the non-profit organization College Board found that during the 2017-2018 academic school year, the average tuition for an in-state public college was around $25,290 and tuition for a private college averaged $50,900.

Many of the families in the Fidelity survey also admitted they had the capacity to save more but just didn’t. With solid research and a plan in place, you don’t need to worry about the should haves or the would haves of wealth management.  Rather, continuously tracking your progress against your  financial goal, will dissuade you from spending impulsively — especially if it hurts your children’s finances in the long-run.

Make a Savings (and Repayment) Prioritization list

Finding the balance between saving for the future and repaying old debt can be a fine line to toe. Repaying debt is important so you don’t continue to accrue interest, but having savings is also a priority as your creep closer toward retirement age. Prioritizing and balancing between retirement, your children’s  education, and unexpected emergencies is an ongoing activity..

By writing out all of the items you need to save for or repay, you can get a clearer picture of where your money should be disbursed, and which should be the highest priority.

For example, your list may include:

  • Retirement
  • 529 Plan
  • Emergency Fund
  • Credit Card Debt
  • Future Medical Bills
  • Personal Student Loans

By dedicating a certain percentage of your income to each of these buckets, you can learn how long it will take to pay off or build each account. Work with a financial advisor, who has a broad view of your finances, to adjust the amounts in each bucket for an optimal prioritization list.

By the end of this exercise, you should also know  how much discretionary income you have.

Each time you feel the urge to make an impulse buy that goes above your discretionary limit, consider which bucket you’re stealing from. Is that brand new jacket worth a percentage of your child’s education? How much of a dent will your shopping spree put into your retirement savings? Use your advisor to hold you accountable for sticking to your prioritization list.

Budget For Expensive Seasons

From birthday parties to class projects, it seems like there is always something popping up that requires a bit of extra output. While some of these instances are a genuine surprise, other expenses can and should be planned for.

For instance, even though we know the holiday season is a common culprit of excess and overspending, it always seems to creep up on us. The pressure to buy presents, attend extra outings, or host dinner guests translates into surplus spending. Unbudgeted holiday expenses can easily throw off your long-term savings goals.

To ward off the temptation of stealing from your 529 college savings account, add a line item to your savings prioritization list. By keeping the holiday season in mind all year round, you can proactively prepare and therefore stay on track with college savings.  

Think About the Future Benefits

One of the biggest advantages of 529 accounts are the tax deductions and the ability to withdraw money without having to pay tax on the growth. Some states even dole out tax credits for participants of 529 accounts. Additionally, contributors to a 529 college savings plan can take advantage of 5-year gift tax averaging.

Further, funds in a 529 account set aside to pay for college tuition aren’t included in the "base-year income" on FASFA, which would reduce college financial aid eligibility.

By spending your money on impulse buys, not only are you robbing your children of an academic future, but you’re also decreasing the return you could experience from diligently utilizing a 529. Continue to remind yourself of the long-term benefits, to stave off impulse actions.

Change your Mindset

It’s easy to justify frivolous spending when you’re saving for an event that won’t occur for years. Stealing just a bit from yourself now, can easily be made up in the future, right?

When it comes to wealth management, be careful of lifestyle creep. Many people believe that as they age, they will advance in their professions or earn a higher salary, and in turn, have more money to spend and add to the savings account down the road. While these goals may come true, they also might not.

Escalate your savings by small amounts over time by dedicating a percentage of your raise or bonus to saving. Also, rather than planning for a life of financial ease, consider what might happen if your finances stay exactly the same, or even take a dip in the coming years. This mentality shift can be the incentive you need to live below your means and plan for a stable financial future.

Then, when you do accomplish your goals, imagine how great it will feel to have sufficient funds in your 529 savings account, and maybe even a surplus which you can invest or spend however you’d like.

Use Your 529 Early

As of January 1, 2018, the tax-free withdrawals addressed above may also include up to $10,000 in tuition expenses for private K-12 education.

It may sound counterintuitive to spend your college savings during elementary, middle or high school but, it might make sense in select cases, like if your child is likely to get a scholarship for higher education.  

Before deciding if this path makes the most financial sense for you, consult with a private wealth management firm to ensure your 529 college savings account has grown enough for this strategy to pay off.  

By leveraging your 529 early, you may be more dedicated to savings over spending as you see the immediate payoff.

Putting it Into Action

A 529 college savings account is a low maintenance way to invest in your child’s future. In order to successfully grow your account, ensure you have outlined your goals and a well-researched plan to keep you on the best path for you to reap the rewards.

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