College saving on a tight budget

NEW YORK (Money) -- Question: I have a modest salary and can set aside only $50 a month toward my nine-year-old son's college fund. My problem is that the 529 college-savings account I would like to open requires a minimum of $1,000. I don't want to raid my savings account to open this fund, so what I should do to begin saving for my son's future college expenses? - Shelly Losoya, Sacramento, California

Answer: I admire your instinct to begin putting away money for your son's future college education. But given your modest salary and the fact that you're having trouble meeting even a $1,000 minimum investment requirement, I wonder whether your $50 a month should be going toward a college fund in the first place.

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After all, it's not as if investing fifty bucks a month for nine years will come close to giving you enough dough to pay your son's tuition and other fees. If you earn 8 percent a year on $50 invested monthly, you're talking about accumulating less than $8,000 by the time junior is ready for his freshman year. In the grand scheme of things, that's not very much money for college.

Besides, there are plenty of options these days for a family of modest means to drum up money for college costs, including scholarships, loans to the parent or student and work-study arrangements. You can investigate such options by checking out sites like Scholarship Help, FinAid, The Princeton Review and the College Board.

All of which is to say that before you start funneling money into a 529 plan or any other college savings vehicle, you ought to make sure you're taking care of obligations that don't offer a helping hand like scholarships and loans and such - i.e., your retirement.

Here's what I recommend you do: Go to our What You Need to Save calculator and plug in your age, salary and the amount of money you've already set aside in 401(k)s, IRAs and any other retirement accounts. Click on the Submit button, and you'll instantly get an estimate of the percentage of salary you must sock away between now and age 65 in order to retire on 80 percent of your pre-retirement salary (excluding the amount you save).

If you're already putting away that amount or more every year - and you're taking care of any other financial priorities, like creating an emergency fund equal to three months' expenses - then, fine. You can throw your $50 a month into a money-market fund, wait until the balance reaches $1,000 and then open up the 529 account.

But if you're falling short of the savings target recommended by the calculator, then I'd recommend that you put that $50 a month - and whatever other money you can spare to reach or exceed that target savings level - toward your future retirement.

Start with your 401(k) plan at work, if you have one. Your contribution is automatically deducted from your paycheck (which makes it incredibly simple and convenient), plus you get a nice tax break since you contribute pre-tax dollars. Chances are you'll also get a matching contribution from your employer, typically something like half of the first 6 percent of salary you contribute.

If you've contributed at least enough to your 401(k) to get the full employer match and you still have money to save, you can move on to an IRA, either a traditional deductible IRA or a Roth IRA. (For tips on choosing which is right is for you, click here.)

Should it later turn out that you still want or need to kick in some moolah for junior's college education and you have no other alternatives, then you always have the option of withdrawing money from your IRA (although depending on the type of IRA you have and how much you withdraw, that may involve paying tax).

And if you need still more dough, you can borrow from your 401(k), assuming your plan allows withdrawals, as most do. (For details on both these options, click here.) I can understand if you feel uneasy about this approach because it puts your needs ahead of your son's. But you've got to overcome that parental guilt.

Ultimately, I think the course I've recommended is the smarter way to go because accumulating enough money for a comfortable retirement is likely to be a bigger challenge than scaring up funds for your son's college education. So focus on meeting the more difficult challenge first and then move on to college financing if you still have sufficient resources. But don't jeopardize your retirement security by spreading yourself too thin.

After all, I'm sure the last thing that you and your son want is for him to have to use the splendid salary he stands to earn as a result of that college education to support you in retirement.