Pay for the Kids, Save for the Future

Editor's note: This article is adapted from Kiplinger's 2008 Success With Your Money guide. Order your copy today.

Building a career, paying the mortgage, caring for kids -- and at the same time saving for college and retirement. That's the juggling act you face during the family years. Factor in soaring gas prices, food inflation and a volatile stock market, and the challenges escalate.

But they're not insurmountable. For inspiration, meet the Jeffers clan, of Coolville, Ohio. When it comes to children and savings, Steve and Patty Jeffers have more of both than most American families. Their six children range in age from 2 to 19. They support the kids on Steve's income as a plant supervisor with Kraton Polymers. Yet they've managed to save well over $400,000 in Steve's 401(k) retirement plan and to find creative ways to put aside cash for college.

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Their secret: a combination of discipline, resourcefulness and living below their means. With six kids, the Jefferses had to watch their expenses even before the recent run-up in gas and food prices. They live in Steve's childhood home, which they purchased in 1990. The 1978 home is small by modern standards, with just four bedrooms and one and a half bathrooms. But the family doesn't mind. "I always tell my children, 'Don't buy too much house,'" says Steve, 43. "Put your money into your 401(k) instead."

The house may not be huge, but it's situated on 54 acres of wooded land, giving Steve and Patty other opportunities to make and save money. With the help of family members, Steve built a cabin that he rents out to generate extra income of $100 a month, and he's planning to build a second cabin. He also created two sites for trailer hookups, which bring in another $320 a month ($160 per hookup) from renters.

To save on utility bills, Steve replaced his furnace and water heater with an outdoor wood-burning heater that cost $6,500 three years ago. He figures the system paid for itself within two years and now provides heat and hot water for 80% less than gas. Steve chops the wood himself, from trees on his property.

When the Jefferses needed a new vehicle earlier this year, Steve shopped locally for a preowned Buick Century, a model he had owned previously that got good gas mileage. When he couldn't find one for less than $9,000, he logged on to eBay and saw a listing by a car dealer in Richmond, Va., for $3,700. To stretch his savings, he flew to Richmond to collect the car, had the tires replaced for $200 and drove it home, saving hundreds of dollars in shipping costs.

"We Just Stop Spending"

Meanwhile, Patty, 43, is a champ at keeping a lid on household expenses. She makes all purchases with one credit card, which she pays in full each month. But here's the most effective weapon in her budgeting arsenal: She monitors her balance at the card issuer's Web site and never exceeds her self-imposed monthly spending limit. "When I hit $1,500, we just stop spending on anything but necessities," says Patty. "At $2,000, we simply don't buy more until the following month."

She purchases food in bulk when it goes on sale, so no one goes hungry when she hits her spending ceiling. Last spring, for example, she loaded up on 30 packages of sale-priced Oscar Mayer hot dogs, which got the family through summer barbecues. If you have the need and the storage space for bulk purchases, buying in advance is also a good way to hedge against food-price inflation.

To make sure neither food nor money is wasted, Patty goes through her pantry once each season and uses up everything. Eating out is a treat, and it usually involves a trip to the Golden Arches.

Each month, Patty travels 200 miles round-trip to Columbus to visit her mother. To get the biggest bang for the bucks she spends on gasoline, she stops at a discount store that sells household goods at half-price (recently she stocked up on eight bottles of liquid dish detergent) and at her favorite secondhand shops for the kids' clothing. "Many items get rotated among my five daughters, especially the youngest three," says Patty.

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No Skimping on Fun

Like Steve and Patty Jeffers, Marc and Jennifer Martinez have come up with a budgeting system that works for them. Jennifer checks their bank balance daily and maintains two checking accounts -- one for fixed costs and the other for variable expenses.

Marc, a digital-video editor, left his full-time job at a local television studio last February to go solo. That was a risk, but it also gave the Martinezes, who live in San Ramon, Cal., the opportunity to save on child-care costs by staggering their work schedules. Marc is able to complete the bulk of his work at night, so he can mind Matthew, 8, and Mallory, 3, while Jennifer works as a marketing representative. Then she takes over as primary parent in the evening.

To shave their grocery bills, the Martinezes switched from Whole Foods to Safeway, which has "more variety and lower prices," says Jennifer. The family's weekly Friday-night splurge is a take-and-bake pizza from a local chain that offers a $2 coupon.

As for vacations, they skipped their annual trek to Hawaii. Instead, they purchased a family pass to Disneyland for $379. Even though they had to pay for gas to drive from their home, which is about 400 miles away, they figure they spent only about a third of what they usually spend on airfare and accommodations -- without skimping on fun.

And the Martinezes don't skimp on saving, either. In addition to contributing to their own retirement accounts, they put $100 into Matthew's college fund each month and add to Mallory's when they can afford it. They're also putting aside $200 a month toward future vacations.

A Foolproof Retirement Plan

Aside from keeping a tight rein on their monthly expenses, Steve and Patty Jeffers have discovered a couple of other secrets to finding the cash to save for retirement: Start early and let someone else do it for you. Kraton has been depositing Steve's contributions to his 401(k) plan automatically for 18 years. Contributions come off the top of his salary, which prevents him from spending the money. "If it never reaches your bank account, you'll never miss it," he says. Plus, the company matches Steve's contributions up to 6% of his salary.

In 2008 you can deposit a maximum of $15,500 to your 401(k) plan, or your 403(b) or 457 plan (plus an additional $5,000 in catch-up contributions if you're 50 or older). Contributions are pretax, so if you're in the 25% bracket, a contribution of, say, $5,000 reduces your take-home pay by only $3,750.

Saving is getting easier now that more employers will automatically enroll you in their 401(k) plan; you don't even have to sign up. More than half of all employers expect to offer automatic enrollment this year.

The most effective new plans pair automatic enrollment with an option to increase the amount you contribute to your account each year. (Steve Jeffers made it a point to bump up his contributions until he had to start paying college bills two years ago.) It's generally recommended that your target for retirement saving should be 15% of gross income, including employer matching contributions.

If you are automatically enrolled in a 401(k) plan and don't actively select an investment, your employer is now required to direct your contributions to an appropriate long-term investment, such as a target-date retirement fund, also known as a life-cycle fund. Investments in the fund are geared toward your retirement and automatically adjust to become more conservative as the date gets closer.

Automatic enrollment and investment are making saving so effortless that you can't help but succeed. If your employer doesn't offer a retirement plan, or doesn't offer a match, you can open your own Roth IRA and deposit up to $5,000 in 2008 (plus an additional $1,000 in catch-up contributions for those 50 and older). You don't get a tax deduction for your contributions, but all your withdrawals are tax-free in retirement.

To contribute to a Roth IRA this year, your income can't exceed $169,000 if you are married and filing jointly (or $116,000 if you're single). But you can get around those limits if your employer offers a Roth 401(k) plan. Roth 401(k)s have the same contribution limits as traditional 401(k)s. Contributions aren't deductible, but income is tax-free in retirement. And there are no income-eligibility limits.

Paying for College

Early in their marriage, Steve and Patty decided to make saving for retirement a priority -- even ahead of financing college for their kids. Most financial advisers would agree. As the saying goes, "You can always borrow for college, but you can't borrow for retirement."

Steve confesses that the college bills snuck up on him and Patty when their eldest daughter, Amanda, was a high school junior. "We always felt that college was far in the future, but we finally got serious when Amanda was 16," he says.

The Jefferses contribute $2,000 a year to state-sponsored 529 college-savings accounts for Amanda and Sarah, now 16, with Ohio's CollegeAdvantage plan. The plan also gives them a state tax deduction of up to $2,000 per year. About two-thirds of the states offer some form of tax break on 529 contributions, which helps make them the preferred way to save for college. (See our Paying for College center to find the right 529 for you.)

Given his family's living expenses and emphasis on retirement savings, Steve admits that funding 529 plans for his two oldest children put him "right up against what I can afford." But here again, the Jefferses have come up with creative strategies for paying for college. For instance, Amanda receives a partial merit scholarship from Marietta College, in Marietta, Ohio, which lowers her total annual costs to $16,000.

Steve and Patty plan to open 529 plans for their other four children as soon as they can afford it. They also hope to reduce college costs by sending the children to a local high school with a technology-oriented curriculum. The program allows students to take tech-related classes at a local college and offers up to two years of free tuition (daughter Sarah starts the program this fall).

The Jefferses are also putting aside money for college by using a credit card that funnels rebates into their 529 accounts; so far they've accumulated $1,700. One such card, the BabyMint College Savings Credit Card, issued by Silverton Bank in Atlanta, offers a 1% rebate that can be deposited into any 529 plan you designate. Such cards make sense only if you pay your bill in full each month; otherwise, interest charges are likely to exceed your savings.