YNAB BLOG

“Your kids can borrow for college. You can’t borrow for retirement.”

piggy bank

It’s been a fun week on the blog, with Bill’s Big Budget and Bill and Wife’s spectacular reply. In the middle of all that, I snuck in some questions about my financial goals, and the community gave me a couple thousand words of great advice. I wanted to acknowledge the quality of the advice by following up with my revised thought process about the goals.

1. $5,100 Buffer, followed by a $15,000 Emergency Fund

The comments on the post the other day helped me finally sort out in my head how I can distinguish between my buffer and my emergency fund. The difference is the intended use of the money. Buffered money, as soon as there’s enough of it, will be used in your budget. Emergency fund money ideally will not be used in your budget. That’s why I’ve now broken them out as different categories.

I think some people have questions about the sequence: buffer or emergency fund first? Until I’m fully buffered there’s really no difference, right? If I’m in the process of building a buffer, and then I have to spend $1,400 fixing my car, the buffer is the emergency fund.

So the goal is to fight like crazy to build the buffer (using tax refunds, work bonuses, extra paychecks, proceeds from selling stuff – and maybe even a freelancing gig), then use that buffer to live on last month’s income…then apply all that cash hoarding energy to building the emergency fund.

So my plan is to get fully buffered, then save up the full emergency fund, then…

2. Attack Debt

As one or two commenters pointed out the other day, my debt is an emergency. So why wait to attack it until I’d saved up the buffer and the emergency fund? Won’t that cost me (at least) hundreds in interest I’d have saved by going after the debt first?

I could go either way on this one, but I’m leaning toward saving the emergency fund first for two reasons:

1. I’m a pro at paying off debt. In 2010 I paid off about $75,000 in balances. In spite of that crazy year, I still managed to stay stressed, close to red line with cash, and a poor money manager. I want to learn to be a saver, and I’m willing to pay a few hundred dollars more in interest as my “tuition.”

2. Emergencies happen. I’ve spent over $4,000 at the dentist this year. A $1,000 emergency fund would have been no help to me, and I’d have been swiping the Visa if not for the business sale proceeds sitting in the bank.

With no ugly debts, I’d be moving on to…

3. Save at least 15% of my income for retirement.

The snowball required to achieve pay off the debt will make it easy to transition into putting away a big chunk for retirement.

The interesting mental switch for me with this goal was to not think about it in strict sequence with other goals. For some reason, I always want to put things in order, ie “once that’s done, I’ll move on to the next thing, then the next…” Maybe it’s part of being an awful multi-tasker.

The point is, you’ve set me straight and once the debt is paid off I’ll think about retirement savings the same way I think about tithing. Tithing is the first 10% off the top, retirement is the next 15%. Automatic.

I realize that’s common sense to most of you, but it wasn’t until I read through the comments the other day that it finally clicked for me.

So why not start saving for retirement before the debt is paid off? Math. The interest rate on the residential lot is ~10% and the Deep Shame 2nd Mortgage is at 8.625%. Doesn’t make sense to be paying a blended 9% interest while earning 7-9% in the market, does it?

Where does that leave my last two goals?

4. College savings goes on the back burner.

The best line in the comments the other day was “Your kids can borrow for college. You can’t borrow for retirement.”

That’s good stuff. I don’t know if that’s a Dave Ramsey quote, but it’s quality.

Another smart commenter pointed out that I don’t really need to save up for the kids’ education if I’m serious about my goal of earning $200,000 per year. If I manage to reach that income, sending $50,000 per year off to school for the 6-10 years I have kids at college won’t be a big issue, especially if all my debts are paid off. Great point.

Bottom line is I shouldn’t prioritize college savings ahead of retirement savings. Thanks for walking me through it.

And finally…

5. Finishing the basement and other home improvements.

It will happen when it happens, and it doesn’t have to happen all at once. With the debts paid off, the emergency fund built, and the retirement saving habit established, the improvements to the house can happen as cash (and bartering opportunities) become available. A third (and especially a fourth) kid will make this house feel a little cozy, but I have a friend who has eight kids in a 3-bedroom, so I think my little family could manage without a finished basement for a while.

That’s my thought process. Thanks again for helping me get some clarity. Hopefully the conversation benefited someone other than me. :)

40 Responses to ““Your kids can borrow for college. You can’t borrow for retirement.””

  1. Jessica

    I can assure you, Dave Ramsey did not suggest a kid borrowing for college :)

    But, looks like you have a nice plan for saving! Nice work!

    Reply
    • mark

      Ha – good point. Helped me think through things, whoever it came from.

      Reply
      • Lissa

        I heard this one from Suze Orman, who also gives great, practical advice (especially for what to do with the money you save Dave-Ramsey-style or otherwise!)

        Reply
  2. talda

    Thanks for writing this series and for sharing your financial goals. It’s encouraged me to make my own YNAB/financial goals and has gotten me excited to use YNAB all over again.

    Reply
    • mark

      Glad to hear it, Talda! We’re all working with different numbers, but we need to make our plan and work it.

      Reply
  3. Anne

    I have a different take on the buffer and the emergency fund. The buffer (£3000) is there already and will hopefully never be touched but gives me the security of knowing that “this month’s income” will always be there even after I’ve spent it/ allocated it.

    My emergency fund (£5000) – not quite there yet but getting there – is for things that turn up that I hadn’t expected, but I also have a fund for house maintenance and repairs (£2000), appliances needing replaced (such as dishwasher etc) (£2000), car repairs (£1000) as well as a new car fund (currently empty). My car is 5 years old,is regularly maintained and has a low mileage so I think it will last for quite a few years. Anyway I think that £13000 available at any given time will cover most emergencies and some planned expenditure (e.g. laying new patio in the garden.)

    I’m retired, I have no debt, my kids are grown up, I have a pretty good pension (work and state combined), so my situation is very different from yours but I still try to save and to budget for the things I want.

    Good luck in meeting your goals!

    Reply
  4. Christine Griese

    Honestly, the kids borrowing for college scares me. Costs are so high now a days. But, I also struggle with the saving for college bit. I want my kids to work for it but at the same time, I don’t want them to leave college with $100,000 in debt before they even have a job. We are trying to put some money away for college, but it will likely only “help”, not pay for it.

    Great job on your budget thought process. It’s been neat watching everything through this thread…..

    Reply
    • mark

      I’d hope the kids won’t have to borrow for college, if they decide college is for them. The point for me is that if we’re getting right down to worst-case scenarios, they could borrow for college, while I can’t borrow to fund my retirement.

      I agree with you, a kid leaving an undergrad program with $100k in debt is a nightmare considering their job prospects with that degree. $100k for law school? Okay. But an undergrad needs to be done on the cheap for it to be worth it, in my personal opinion.

      Glad you’ve enjoyed the series!

      Reply
      • Right track?

        sadly, you can borrow for retirement. There are loans against retirement savings, reverse mortgages, second mortgages and the dreaded CC. That being said, I am not advocating ANY of that. But, your kids could get through college, even if you were unable to financially help them, with an old fashion concept called “work”. Many people have done it, and your kids (and hopefully mine) could join those ranks..

        Reply
        • Minda

          The people I know who have worked their way through school are all my parents age. Tuition has risen much faster than pay. I don’t know anyone in my school that is funding their education on work alone. Usually they have to borrow or receive money from their parents as well. A few of them get scholarships too, but you have to be exceptional at either academics or sports to get a significant amount in scholarships. finaid.org is a good site for current and projected tuition data.

          Reply
        • Kate

          If you have withdrawn pension funds over the years, in some cases you can use a Home Equity Line of Credit (HELOC) to buy back those pension years. If you outlive the cost of the buyback and your home’s value stays the same, or rises, you will come out ahead eventually.

          Reply
  5. Emlyn

    True. Dave Ramsey would never suggest borrowing for anything (except a house, with some strict guidelines). I did not borrow for college (my husband is another story).

    However, I am one of those who made “the best” comment (go me!) and it boils down to this: There’s no such thing as retirement loans, so fund (save for) that before you fund (save for) college. Dave Ramsey does indeed say that.

    These goals look great and it makes me want to fine-tune ours with some more definite dollar amounts. Yes, the conversation benefitted a lot of us. Thanks, Mark!

    Reply
  6. Bea

    I think you missed one of the salient points about saving for retirement. It’s not so much about the interest rate you earn, but the number of years that you have to benefit from compound interest. Dave Ramsey has a great chart on this. It’s important to get rid of the debt, but from my vantage point at age 60, I wish I would have worked on both of them equally.

    Reply
    • Lissa

      Being someone who started saving early (age 24) for retirement, only to lose a huge portion of it in 2008, I heartily disagree. I look at the balance now & take comfort that, yes, it’s more than I would have had if I hadn’t started socking money away at that time, but I have that luxury because I didn’t have to choose to save it over paying down debt (I didn’t have any, thanks to my saver parents who taught me well!) If I had a debt balance today, I’d be so discouraged that I hadn’t used my retirement contribution money to get rid of the debt rather than putting it where half of it could just disappear!
      The thing about compounding interest is that it also compounds against you when you are in debt. And changes in the market never work to your benefit with debt the way they can work against you with savings. Pay off the debt, stop the compounding interest hanging over your head, and then start (as early as you possibly can) saving for retirement! And if you don’t have much debt, take Bea’s comment–and the incredible charts referenced–as a great reason to both stay out of debt and start saving! I’m 100% with the previous postings & Mark’s new priorities!

      Reply
  7. Rasta

    Thanks Mark. I have struggled with these questions of what to prioritize as well. Your order of attack makes sense to me. We are buffered and almost have a $15K emergency fund. My other plan for attacking the residential lot is to slowly start rounding up the payment, from $465 to $500 to $550, etc. so that I can adjust to it gradually. I don’t know how to do the math to see if that would make a significant difference or not. But seems like I need to get rid of that before investing in retirement or college. Also, we have the “planned emergencies” of a 30-year-old roof and a 20-year-old heat pump, so we need to sock away extra at our emergency fund, knowing with pretty good certainty it will be used up in the next few years.

    Reply
  8. Kelly

    I’m not disagreeing with your post, however, due to the talks the last few days I just can not get behind not saving for your child’s college. My husband and I have talked about it and we both agree to put something, anything we can away. We look at it as, what a wonderful thing it would have been to get out of school and not had any debt. The idea is to teach our children the good budgeting/money management habits we are learning the hard way now in order to help set them up for the future. If they decide to go to college and we can take a chunk out of what will need to be borrowed or pay the whole thing, we are giving them more financial freedom then we had. If the money is not spent on college or there is money left over, then they already have their buffer and emergency fund. In our opinion, this is just another way we can help set them up for success.
    Just our 2 cents on the subject.

    Reply
    • mark

      I get your train of thought, and appreciate your desire to help your kids. I’ hope to be in a position to do something similar. This goal prioritization just acknowledges, as one commenter put it, that I need to put my own oxygen mask on before worrying about the kids’.

      Reply
  9. Anne S

    I don’t know your particular details but I do agree with the poster who said that if you increase your income significantly as time passes, you’ll be in a position to cash flow your kids’ education. As a former SAHM, I have always been the college fund — meaning that I would (and did) go back to work when the child was getting ready to go to college. Do I wish we had saved more towards her college costs? Yes. But I like the balance in our 401K just fine. :)

    Reply
  10. Nick

    Another thing not often pointed out. Lots of kids would be WAY better off not having gone to college at all! You want to be an artist? Great, take the 70k and get a trade show booth and start making and selling art.

    Really college needs to be viewed from an ROI perspective and anymore it’s less and less ROI. Sure you want to be an engineer, yep you should go

    Don’t give me that “experience” bs. Backpack across Europe for a summer if you need some experience

    Unless your family is wealthy I suggest parents take a hard look at college. Don’t succumb to social pressure. College is not for everyone! That is a lie and there are lots of angry young adults paying a heavy price for that lie

    Reply
    • P.R

      So true. I went to college to keep my folks happy and also because it was the done thing amongst my peers. I had no aptitude and no real interest on my course and I dropped out to pursue what I really wanted to do. I do feel regret at wasting a year of my life.

      I have the best job in the world and haven’t worked a day of my life.

      Reply
    • Kenny1986

      Well, that cuts both ways :
      Some kids might not want to go to college, but will be pushed by their parents to go ( because of the ‘prestige’ ).

      Some kids might want to go to college, but will be discouraged to do so, because it costs too much money.

      Luckily ( at least in Europe ) , there are government funds which help in the costs, if you are below a certain income.

      Another problem here is the job market though : I did an internship in a company, and originally they just told me : it’s ok for an internship, but we normally only hire master degrees ( i was going for bachelor degree ) .

      After my internship, they called me back and offered a job.
      So clearly ‘bachelor’ was good enough after all :-)

      Reply
  11. foolala

    I didn’t get your (current) decision regarding saving for retirement vs. repay your mortgage early. Are your currently planing to save for retirement or do you wait until you cleared your debt?

    Reply
    • mark

      It depends what you mean by “clearing my debt.” Part of my debt is a second mortgage. My plan is to get aggressive about retirement when the 2nd mortgage is paid off, and just working the primary mortgage down over time (it’s a 3.99% fixed loan, so I don’t feel a lot of urgency about getting rid of it). Who knows how things will turn out, but this is the basic plan.

      Reply
  12. JayBee

    I believe it’s a Suze Orman approach to saving for college.

    And there is another element that people are forgetting: lesser priced university degrees. The important thing about college is getting the degree — not where you go to school.

    I went to a state university, and now I think even that’s too expensive. It’s insane. My husband went to private, but was able to get a GREAT package because his family didn’t earn much money. He left with only $13k in debt, but I had a fair amount more. After graduating, both of us were like, “holy geez, why didn’t we just go to a community college?”

    In general, community colleges cost 1/3-1/2 less than other colleges. Online universities can be even less expensive. And, both are used to dealing with “commuter students” so most classes fit around regular work days, meaning students can work full time and go to school. And, they can do internships in their field as they go through with local connections, and that will help them be more hire-able once they graduate.

    My husband also works for a university, so we are set, but we are very open about finances and how we feel about degrees: Stay out of debt! Go to an inexpensive school, so that you are free to do what you want upon graduation.

    Reply
  13. Micro

    I know I was much more conscience of finances because I had to pay myself and wasn’t getting any funding from my parents. I opted to take a RA position so I could work in exchange for free room and board in the dorms. It meant I couldn’t go live with my friends off campus and party but it saved me money over the course of my schooling. If I had been receiving free money, I might not have been too concerned about saving during college.

    Reply
    • P.R

      “If I had been receiving free money, I might not have been too concerned about saving during college.”

      So very true. I saw a lot of this going on during my brief spell in college. I saw students taking loans so they could go party and buy themselves a new car. They didn’t really understand the consequences. I bet they regret it now.

      Reply
  14. Kenny1986

    I have :
    - category emergency fund money : only for emergencies
    - fully buffered for next month
    - an ‘unassigned’ category : where any surplus of the month goes ( because I don’t want it to roll over to next month automatically, it confuses me )

    - a ‘general savings’ category : this is for saving in general. I use because there might be something I hadn’t foreseen yet in a more specific savings category . I then create a new savings category, and transfer money from there.
    Anything still in the unassigned category at the end of the month also goes there.

    For my retirement, I make a yearly payment to a pension fund.
    Though sometimes I feel I’m putting money aside that I can use right now :-(

    But what is considered an emergency ?

    I’m moving to an apartment, and I inquired the costs of connecting to the utilities ( water,electricity ,etc… ) , and it’s much,much higher than I had budgeted.

    To me, that’s certainly an emergency. So I’ll use the emergency money to cover it
    Now everything has to go into filling up the emergency fund again.

    I’m very grateful to YNAB for the advice and the great software.
    Before, this would have been a disaster. Now, I’m basically just angry at myself for not inquiring about the costs sooner ( and thus budgeting it better ).

    Reply
  15. Joy Pollard

    In Australia we have HECS for university. Higher Educatyion Contribution Scheme. It is an interest free loan from the government that is started to be repaid through the taxation system when you start earn a certain amount. A law degree here costs $10,000 per year. That’s just fees and its a 6 year course. So yes I will be using HECS as ill never get a loan that cheap.

    Reply
    • JayBee

      I have to say the systems in many countries in Europe and in Australia really do work out well for students.

      Reply
    • Tamsin Young (@Inspire_Results)

      HI Joy

      I agree, Australia has a wonderful loan program – it is now called HELP (!) Higher Education Loan Program – it’s not really interest free – it is indexed each year at CPI – so it is a minimal increase, which you will never get anywhere else – and I think the fact that you only have to repay it when you start earning, and earning at a certain level – is fantastic – it’s not like student loans where once you’ve finished studying, you start repaying – banks didn’t care whether you had a job or not!

      Reply
  16. No Waste

    Put away for retirement and ensure your financial security.

    You may look up when your kids get out of college and realize that you’re so far ahead that you CAN help them by offering to pay-down some or all of their debt.

    The last thing you want to do is be a financial burden on them later.

    Reply
  17. Marcus

    Hi Mark, even though I share most of the values and ideas in the comments, I strongly disapprove with the „Your kids can borrow for college. You can’t borrow for retirement.“ idea. It sound incredibly selfish to me!

    In my world my children come first and I believe every parent should struggle to create a better life and a brighter future for theirs. The idea is that my kids should have a better life than their parents. Isn’t that the big promise of mankind and modern society? They should have better chances in life, more open doors, more paved roads ahead and more opportunities than I’ve ever had … even though if that means that I have to cut back when I’m retired. I want my kids to be able to see the world, study abroad, get a car when they want one and I definitely don’t want them to pay for student loans just because I put myself and my retirement first. A good, free education and a debt-free start into their own (family) lives is the best present I can give them and it’ll pay off – if not for me and my retirement, then at least for them.

    True, „Your kids can borrow for college. You can’t borrow for retirement.“, but in my world things should look like „Your kids don’t have to borrow for college. You can cut back when you are retired.“.

    Reply
    • Right track?

      We could just teach our kids that, back in the old days, before entitlement mentality and microwave philosophy really took hold of our society, people used to get by on a now long lost idea… It’s called WORK. People used to do it. We can teach our kids that work nets them income, which provides for things like food, clothing, shelter…. college. Also, there are scholarships.

      If you do you kids’ college, first, and then come back and do retirement, you may find yourself looking to those same kids for support. I am not sure that being a burden on my kids is their best shot at a bright future.

      Plus, if you get compound interest to work for you (investments) instead of against you (loans) you will find that it takes far less of today’s money to equal tomorrows wants and needs.

      Reply

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