Cash Flow is King!
By Joe Messinger, CFP®
July 18, 2019
If you are a parent of a teenager, you are very familiar with cash flow. The cash flows in to you and out to your teen–clothes, food, fun, etc. But using cash flow can be an important part of a smart college funding plan.
For many families, paying for college is really a cash flow problem. The reality is mom and dad will be receiving a $25,000 to $60,000 bill they never received before every 6 months for the next four years! Hopefully scholarships will help pay for a good bit of this bill if you make an informed college selection choice, but very few students get a full ride. So the question remains, how will you pay the rest of the bill? Well for most families money to pay the bill is split into three buckets:
- Savings (529, mutual funds, stocks, bonds, etc.)
- Cash Flow
When you start looking at how much money you have available to pay for your child’s college education, people often limit their thinking to money saved and set aside specifically for that purpose (#1 above) and use loans (#3) to fill the gap to pay the total cost of attendance including room and board.
So what do we mean by “cash flow” (#2)?
How is cash flow part of the college funding plan? Maybe you were hoping to not have as much “flowing” every month once your teenager has left home for college? Well, at Capstone as part of our 3-step plan to graduate college with less debt, we take advantage of this cash flow situation when figuring out how much you can afford to pay for school. Using your cash flow can help keep your student loan amounts lower.
How much are you spending on your son or daughter every month now? $400 per month? $500 per month? (Seems like more, doesn’t it?!) This money needs to be included in your resources!
Take a look at our sample funding plan worksheet:
This family spends $400 per month on their student—that’s $19,200 for four years! That $19,200 can be included in the resources available to you when you sit down to figure out how much college you can afford—your pre-approval amount.
Take advantage of payment plans
Another important thing to keep in mind is most colleges offer a 0% interest payment plan allowing you to pay them monthly over the course of the semester–an under-utilized resource. Instead of giving that $400 or $500 to your teenager every month, you use that cash flow to keep loans down and pay as you go.
This type of pre-planning is at the core of what we are all about here at Capstone. Long before you even begin visiting colleges, you need to have a conversation with your spouse or co-parent, and then with your student about your college budget.
Consider all available funds and “Know before you go!”:
- Student resources (savings, UTMA, job earnings)
- Parent resources (529 savings, other assets, and cash flow)
- Parent loans (hopefully zero!)
- Student loans (federal max $27,000 for 4 years)
- And other sources (maybe grandma or grandpa?)