Establish a 401(Kid)
Let’s face it: few kids save much, if any, of their part time and summer job incomes toward college. This much to the chagrin of their parents who see college costs looming on the horizon. After all, parents also feel some pressure when tuition bills come due and the student has nothing left to contribute.
How to bridge this gap? In particular, how can parents motivate students to forego near-term doodads and pleasures for the sake of longer-term priorities?
One helpful strategy to align both sets of interests and promote good savings habits is to establish a matching plan, a 401(Kid) if you will. Under such an arrangement the parents contribute to a college fund, but not until the students puts up money first. Once a student does bring something to the table for purposes of savings, then mom and dad match the funds and set them aside in a particular place for a particular purchase, much like an employer would within a workplace-sponsored retirement fund.
This process tends to have two effects on the student: 1) they are more likely to allocate their funds for savings because it’s hard to turn down “free” money and 2) they get mighty motivated to flip burgers or babysit when mom and dad stand by to double up an otherwise meager pay. Parents also tend to have more comfort putting money toward college now that their child has some skin in the game.
Parents who agree to the 401(Kid) should establish some basic parameters up front. The parties involved will want to specify (in writing, preferably) the percentage of the match, the placement of the funds, and the cap. It should go something like: “I will match fifty cents on the dollar any money you place into your 529, up until I have contributed $5,000.”
The only caution I would add would be to beware the potential financial aid pitfalls that arise anytime families earn or save money in the “wrong” spots.
Now go forth and save up some money … together.