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How to Save for College as an Adult
By: Gen and Kelly Tanabe


8
Don't neglect your IRAs.

Compared to a good 529 Plan, using an individual retirement account (IRA) is not the best way to save for college since you don't get the tax-free growth. However, there are some benefits that make building your IRA a smart idea.
When it comes to determining financial aid, your retirement accounts are exempt from consideration. (529 Savings Plans count as part of your assets.) In other words, colleges can't touch these retirement accounts when they try to determine how much money you can afford to pay for college. Plus, you can withdraw money from an IRA before you turn 59½ and avoid the 10 percent early withdrawal penalty as long as the money is used for college expenses. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA or a SIMPLE IRA. If you want to learn more about these different IRAs, take a look at the IRS's Publication 590. Remember that you might have to pay income tax on part of the money that you withdraw, but at least you avoid the huge 10 percent penalty. Speak with your accountant to determine if this is a good strategy for you.


9
Use your credit cards responsibly or don't use them at all.

While credit cards are virtually a necessity in our society, they can also lead to a lot of trouble if used irresponsibly. Anyone with a credit card can be tempted to spend indiscriminately, but putting it on the plastic means you have to face the consequences 30 days later when the bill is due. If you don't pay your balances in full at the end of each month, you subject yourself to interest payments and late fees that can potentially destroy your budget.

Avoid the trouble altogether by paying for everything in cash or check. One student who got into trouble with his credit cards instituted a 100 percent cash system. He discovered that he became acutely aware of how small impulse purchases could drain his stash. In fact, he became so cost conscious that he ended up saving money each month. By the end of the year, he had a pile of extra cash in the bank.


10
Don't stop saving once you're in college.

Once you become a college student, you'll quickly find that your pockets are more often empty than full. So when you do have some pocket change, you want to do everything you can to make it stretch. To save money, you need to get serious about how you spend your money. This begins by being honest with yourself. Take one of your spiral bound notebooks and write in a big, fat marker on the front "Monthly Budget." Track all your expenses for the entire month. Every dime should be accounted for in this notebook. After the first month, review your expenses and figure out how much you spent on necessities versus non-essential items. Most students are surprised to see what they actually spend their money on.

You need to have an accurate idea of where your money is going before you can implement any savings strategies. Once you have identified your weaknesses in spending, you can work to address them by finding cheaper alternatives. As you begin to save, continue to keep track of your budget until you are confident that you are in control and meeting your monthly savings goals. If you ever find yourself falling back into bad habits, re-open the notebook and start recording your expenses again.


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Final Thoughts ...

As you can see, there are lots of things you can be doing to boost your own ability to save for college. Besides the actual dollars that you'll have to put toward tuition, there is also another major benefit of saving—your savings can offset the amount you might need to borrow. If you are like most students and need to take out a student loan, you will find just how valuable your savings account really is! Let's say that you need to borrow $50,000 to pay for college. At 8 percent interest over 10 years, you would end up paying more than $22,700 in interest. But if you were able to save half that amount and borrow only $25,000, you would pay only $11,400 in interest. That means your personal savings just helped you to avoid $11,300 in additional interest charges. For each dollar that you save, you will need to borrow one less dollar and that means that you also save on the interest that you would have to pay.

The bottom line is that your savings is your money. You have total freedom to use it at whichever college you want. Nothing is as flexible as your own money.



About the Author

Gen and Kelly Tanabe
Founders of SuperCollege and authors of 13 books on college planning.



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