You Make X, Save Y: When You’re a Dad, ‘Y’ Matters More Than Ever

This a story about a family that represented tightwads back in the day. They referred to this treasured tradition as being, ‘frugal,’ but when you’re a teenage kid, you define it as ‘cheap.’

The best expression I ever heard that referenced frugality was, ‘alligator arms.’ I.e. one’s arms are too short to reach into one’s pockets to pay for anything.

It does, however, serve a purpose – to give one pause to consider how much one is saving versus spending. If nothing less, think for a moment about what you make (or your spouse) and what you save.

It’s simple math, but when you’re a new dad and a tidal wave of costs hit you in the first two years of your child’s life, you can get lose sight of long-term financial goals. After one pays for the crib, a thousand diapers, baby formula, baby gates and a new wardrobe of infant clothes every four months, is there any money left?

Sometime in the third year of your child’s life, you may ask… “Where’s the cash for our Punta Cana vacation!”

Most likely than not, that money was punted down the field a while back. What’s even sadder is you didn’t even know the money was spent. That’s not your wife’s fault, your child’s or your own – because you were probably focused on more important things like toddler safety and paying to keep the lights on.

But if you can save ‘Y’ throughout the process (or moving forward), that’s all that matters. If ‘Y’ can maintain your standard of living, but you sacrifice a few things along the way, you’ll be ahead of the game down the road.

The game I’m referencing is called retirement and college savings. Here a quick math trick to know what you need to save for retirement and college.

First, I’m going to just say it – by the time your child is ready to enter college, you should have $300,000 banked to pay for it. Yes, if you live in a state like Georgia, perhaps your kid can go to college in-state for free. There’s no question that’s awesome. He may qualify for a scholarship or perhaps he’ll be an outstanding athlete…

… or he could surpass your wildest expectations and go to an ivy-league level school. If he can, he should and reciprocally you should try to cover the majority related costs. Ask any millennial who is saddled with college-loan debt and they will highlight how much more challenging their lives are compared to the baby boomers who went to college for a few thousand bucks.

I’ve researched this myself and $300,000 represents the most logical number to aim for if your child (like mine) will graduate sometime in the 2030s.

Let’s assume your plan for retirement is not far removed, time-wise, compared to the year your son or daughter will graduate college. Here’s the formula to understand where you need to net out before junior enrolls:

•    Take your salary and divide that number by 4%.

•    Add the $300,000 college tab to that number.

That’s it. Most financial advisors will tell you the most you should draw down from your retirement fund is 4% on an annual basis. The remaining balance, if it follows the historical trajectory of stock and bond markets, will grow by five to eight percent. That four-percentage-point figure reflects your current cost of living. Financial advisors will also tell you a person’s cost of living does not drop significantly once he/she retires.

Work the numbers backward to see what you need to save, each year to afford both your retirement and paying for college. Yes, it is daunting, but what is the alternative, working until you’re 70?

Don’t you plan to take surf lessons down in Costa Rica when you’re 60? Wait, you don’t think you need lessons? Surfing’s a bitch, trust me, I’ve failed miserably at it.

If you agree with this premise and plan to save $300,000 before your child goes to college, I’ll share the annual savings goal. It’s hard to swallow, but not impossible. Based on a 6% return in the market, the annual savings tab equates to $9,000. I’ll share a post next week about tax-advantageous solutions that can help to offset the cost of college savings. If you have dealt with college debt yourself you know how challenging it is after you graduate. How awesome would it be to give your kid an advantage after he graduates? You’ll end up providing the next generation with a fantastic upgrad

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