Don't Pick Single Stocks Over College Savings

Aaron and his wife have a 4-year-old son. They haven't begun to save for college, and his wife wants to start. Aaron wants to hold off because he'll have to cut the amount he's putting into stocks at work.

QUESTION: Aaron in Mississippi and his wife have a 4-year-old son. They haven’t begun to save for college, and his wife wants to start. Aaron wants to hold off because he’ll have to cut the amount he’s putting into stocks at work. Dave agrees with Aaron’s wife.

ANSWER: I would stop purchasing stocks from your employer. Let me give you the basis for that. I don’t even know who your employer is, but I want you to go do this. Go look at their stock and how much it has gone up and how much it’s gone down—what the high and the low in the last 52 weeks are. It’s pretty easy to do. Most of the time when you’re buying this stuff, you’re not even buying within the variation in a year, meaning that you’re buying into a volatile thing. You can lose that 15% discount before you even get the transaction done because a single stock’s just too volatile and too risky. I would not play single stocks while my kid’s college fund is not funded.

Here’s a better idea. Why don’t we get out of debt, have the college fund, be saving for retirement in your 401(k) with the match and a Roth IRA, and when they get to college, the house is paid for, you’ve got a pile of money to send them to college, you’ve got your retirement underway—now you’re just being wealthy. Why figure out a way to dodge it? Just save up and pay for the kid’s college. That’s what I would do. And here’s the weird thing. They didn’t have ESAs (Education Savings Account) when our kids were little. We had to just save in the kid’s name. It’s called an UTMA (Uniform Transfers to Minors Act). We just opened up a mutual fund in the kid’s name and saved. By the time the kids got to college, we had gotten out of debt. We had become wealthy. We’d done these things, and we just wrote checks and sent them to college. We cash flowed them, and then when they graduated from college, we handed them the money that was in that mutual fund as their graduation and get married and all that kind of account. Start your life off. Stay out of my basement. It’s the stay-out-of-my-basement fund.

I don’t think you need to dodge this. I think this is a case where—Aaron, you’re not going to like this—your wife is right.