| 02 December 2009
My wife and I had a recent conversation about our children’s education. Many of our friends have joked with me that our family should be well prepared for college because I know what the expenses will be. But it is precisely my knowledge of those expenses that scares me the most. So my wife and I have embarked on a plan that makes us save and spend more now in order to handle those costs. The saving part makes sense, but the spending is counter-intuitive.
Many times you will hear of businesses spending money in order to save money. For example, with this article you will be viewing our new web site. By spending some money today to update our web site, we will cut our web site expenses by approximately 50% starting in 2011. Our breakeven is only 12 months based on what we had to spend up front.
This is the same calculation many people go through when they refinance a mortgage – refinancing today costs money in closing costs which can make sense if you are going to stay in your home. Typically I recommend that someone needs to recoup their closing costs in three, and at most, four years with the new savings. If you stay in your home for longer than that, refinancing pays off.
Other examples of spending now to save later can include upgrading your water heater or furnace, putting timers on lights and sprinkler systems, insulating windows in the winter, or buying bulk groceries. All these things require a little more cash up front so that you spend less in the longer term.
Thus, my wife and I have decided to spend more now by paying more against our mortgage so that we can free up cash flow by the time our children get to college. It will be pretty tough for us to do this in 10 years, when our eight year-old starts. But by the time our third and fourth children get there, we might be able to do it. All we need to do is knock eight years off our current mortgage to make it happen.
We will not save quite as much for our younger children knowing that we will have cash flow to cover education costs, and in the process we will become debt-free a lot faster. Every family’s situation is unique so what works for my family might not work for yours. Check with your advisor before a major decision like this.