Step 6: Save for Your Kids’ College Tuition, Pay Off the House, or Tackle Any Other Big Goal
Congratulations! If you’ve gotten this far, your finances should be in tip-top shape. So it’s time to address your remaining priorities. Create savings goals and sock away money until you hit the targeted amount. If you’re saving for multiple objectives at the same time, keep the funds in separate accounts rather than lumping them all into one. (That way, you won’t wipe out your emergency fund when you’re, say, remodeling the kitchen.) Among the major goals you may still want to hit are these.
Saving for your kids’ college tuition: When it comes to this expense, defining the anticipated cost is tricky. Will your child attend a four-year private school or a public one? Run the numbers for both scenarios to see if saving 100 percent is realistic for you. Use the calculator at Savingforcollege.com, which factors in the rate of tuition inflation. Be aware that the cost may well exceed what you’re going to be able to provide. For example, the site suggests you save $686 a month (!) to send a now five-year-old to college in 2024, assuming you’ve already saved $5,000. Therefore you may ultimately decide to modify your budget so you can save more or adjust your savings expectations. If you do put away money for college, consider a 529 plan. It allows contributions to grow tax-deferred, and withdrawals used to pay for college are federally tax-free. (Go to CollegeSavings.org for info.)
Eliminating other debt (such as a car or home-equity loan): If you plan to use your savings within five years, keep your money in an account that’s stable and liquid, like a CD or a money-market, savings, or interest-earning checking account.
Buying a cabana in the Florida Keys, remodeling the kitchen, or some other lifelong dream: As long as you have more than five years before you head for a warmer climate, you can afford to take some risk, so go ahead and invest a portion of your money in the stock market.