A few years ago, Yvonne and Leon came to see me. We did a comprehensive financial analysis of their situation. We inventoried their goals, took a look at their insurance policies to see if they were sufficient, evaluated their portfolio, did a retirement projection, and completed a college tuition calculation for their two kids.
Given the ages of their kids, the colleges they had in mind, and how much they had already saved, we determined they had to save $250 per month for each child until their kids started college. They committed to that level of savings and religiously put that money in the bank. They also agreed to save an extra $400 a month for their regular investments, and another $375 a month to put into IRAs.
Recently, they came in to see me, and they were a bit forlorn. “Our income has dropped off,” they said. “The company we work for has reduced our benefits package, and as a result, our disposable income has gone down. We are going to have to make some changes. We don’t know where we’re going to come up with the $500 a month to fund our kids’ college.”
“Well, let’s take a look at it,” I said.
We compared how much they had saved to date to the amount needed for their kids’ college. Because they had saved religiously and because the return on their investments had been higher than we projected, it turned out that they had already reached their goal. I had assumed they were going to earn 5% after taxes, but they had actually earned 13%. I ran the numbers on three different computer programs, and in each case, the results showed that they had already saved enough.
“I have some good news for you,” I said. “You don’t need to make any more payments into the kids’ college funds.”
They were ecstatic, to say the least. Instead of saving for years to come, they could stop saving for their kids’ college expenses now.
They had been prepared to make significant lifestyle changes to have the $500 per month they had agreed to save for college. They were thinking of selling one of their cars, were prepared to stop eating out at restaurants except on rare and special occasions, and were considering cutting back on their retirement savings.
However, they didn’t have to alter their lifestyle even though their income had gone down!
Their story is a perfect illustration of the importance of reviewing your savings plans regularly. If you set up a savings plan for a specific purpose, you need to revisit it periodically to compare its actual performance to what you planned. Otherwise, you won’t know whether or not you are on track.