Cash Flow It Or Save It?

Dave and his wife recently paid off their house. In eight years, their oldest child will start college. They're considering cash flowing it. Is this a good idea?

QUESTION: Dave in Kansas City and his wife recently paid off their house. They’re 38 and 36 with $100,000 in retirement savings and $15,000 as an emergency fund. In eight years, their oldest child will start college. They’re considering cash flowing it. Is this a good idea? Dave says it’s a weak plan, because their income could dissipate.

ANSWER: It’s not crazy to think that, but it’s probably a weak plan to have that as your only plan, because something could happen to your income. You’ve got eight years, you’re doing beautifully, your house is paid off. I’m going to save something toward college.

As an example, what ended up happening at the Ramsey house was, we were in a similar situation to what you’re doing and we were saving monthly toward the kids’ college funds. In our case, we made too much money to do the ESA or 529s. We just simply did an UTMA, which means we opened a mutual fund in the kid’s name—Uniform Transfer To Minors Act. We were saving money in the kids’ names for them to go to college. When college came, it wasn’t any big deal. We just cash flowed it. When they graduated from college, got married, and started their lives, we just handed them a really nice mutual fund.

You really can’t mess up by saving money. I think it’s probably okay to think you’re going to cash flow this. At the time we started saving for our kids, we didn’t think that, but it ended up that we were able to. That money that was nicknamed the “college fund”—although it was simply a mutual fund in the kid’s name—was just handed to them. Of course, that’s an indication that they were living a life that that money didn’t do harm to.

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