Paying for College and Homes vs. Retirement
By Ric Edelman
Once upon a time, Americans built their own homes -- all it took was an ax, a saw, hard labor, and help from family and friends. Later, people started paying others to build houses, but that took a lot of money -- which most people didn’t have. To boost home sales, the government introduced mortgage loans, enabling people to buy houses with little or no cash of their own. Today, the large majority of new home buyers buy houses with borrowed money, according to the Federal Reserve.
Thus, homeownership has become a pay-as-you-go system: You pay for the house while you live in it. If you move out, you stop paying for it (by selling it and paying off the loan balance).
College is undergoing the same metamorphosis. Through most of recorded time, education was free -- knowledge was handed down from elders. Eventually, people began paying for education, and its high cost (relative to incomes) meant that only the wealthiest of families could afford to send their children to institutions of higher education. Few college graduates left school with debt, primarily because loans were rarely available.
Today though, most college graduates emerge with a diploma in one hand and loads of college loans in the other. Why are students and their families willing to do this? Because they (correctly) regard college as a good investment: The degree enables the graduate to get a higher-paying job than he’d otherwise get, and this higher income more than compensates for the debt.
By paying for college over the course of his or her career, college, too, has become a pay-as-you-go system. However, this concept does not work for paying for retirement -- you can pay for a house while you’re living in it, and you can pay for college while you’re working, but you can’t pay for retirement while you’re in retirement!
That is why retirement is, and must remain, front-loaded: You must pay for it before you enjoy it, just as people once did with housing and education.
Therefore, if you can only save for one thing, stop focusing on saving for a house, and stop trying to save for college. Instead, save for retirement.
Originally published in Inside Personal Finance August 2005