An Easy Way to Make College Affordable


Paying for college is a concern of many parents, and well it should be.  College debt is a concern of many graduates, and well it should be.  An issue is that the children of parents who decide to do something about paying for college by saving up money and doing without some things so that they will have at least some of the money needed for room and tuition end up with about the same amount of debt as those whose parents save nothing.  This is because colleges just raise the tuition for those children whose parents have saved.  OK, they actually reduce the tuition for those whose parents have not saved, but it is really the same thing.  Go into college with $50,000 in a college savings account and the college will figure that you can pay $50,000 more than someone without a savings account.
Now if the child with the $50,000 account came from parents who made $250,000 per year while the child without anything came from a family making $30,000 per year, the difference in tuition is understandable.  But often both families may make $80,000 per year.  One family just choose to maybe drive older cars or vacation locally so that they could put a few thousand dollars away each year into an Educational IRA, while the other family was trading in cars every few years and vacationing at Club Med, living for today and figuring that they would worry about college later.

              

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The issue with this system is that it encourages exactly the kind of behavior you don’t want.  It encourages spending and penalizes savings.  This means that more people show up at the financial aid office with no savings.  People are not foolish — they will find ways to go to college for less or for free if they can.  Why save up if there is no advantage?  As a result, not only do only children from poor backgrounds show up with nothing to contribute.  Many children of middle-class families who could have paid a significant portion of their own tuition and room-and-board show up as well without any savings.

Because colleges need to provide a lot of grants (as does the Federal Government) to prevent their colleges from being full of only the children of the wealthy who can float the tuition with their yearly income, they raise the base tuition so that those who can pay, pay more.  This provides more money for grants and scholarships, so long as people don’t decide it isn’t worth the cost and as long as all colleges do the same thing.  Because the cost is higher, however, it means fewer people are able to pay full tuition from income, which means more student debt and less people saving up since when the amount they can saved is dwarfed by the cost, they figure, “Why bother?”

So what is the easy solution to fix his issue?  Simple – stop using college savings when determining eligibility for tuition reductions and other grants.  Instead, base tuition rates purely on income.  Children who come from families with little income would still find a lower tuition bill that they can afford, but those from a family with a higher income will need to put away more money, use more of that income to cover tuition, and/or take out student loans.  Because tuition would be lower for everyone (since the colleges would be giving out less tuition aid because more people would be paying most or all of their bill), the cost would actually be lower for everyone.

Several colleges could also band together and establish a birth-to-college saving plan where parents could contribute an amount each year based on their income as their children grow with the guarantee that tuition and a certain portion of room-and-board would be covered for any of the colleges in the network.  This would eliminate the uncertainty we currently see when it comes to college tuition and also means that everyone will be paying what they can.  Parents whose children decide not to attend college could have their money returned with a reasonable interest rate applied.

So what do you think?  Would it work?  Do you have a better idea?  Let’s hear it!

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Become An Owner Instead of a Worker


When we’re young, we trade our health for money.  We work long hours.  We lift heavy things and wear down our tendons. We spend hours typing or doing other repetitive motions that cause carpal tunnel syndrome.  We spend hours on our feet and wear down the disks in our backs and develop heel spurs.

We trade this wonderful gift of youth and health that we’ve been given, the ability to keep pushing it for may hours, to bounce back when we fall down and heal fast when we get cut, for cash by working way too many hours.  We go in before dawn and leave after dark, never getting out to see the sun and the woods and the oceans.  We work hard to go on a vacation, which is then rushed and filled with work thoughts and emails back to the office the whole time.  We buy large, beautiful homes that we spend all of our free time maintaining and cleaning when we aren’t working to pay the mortgage.  We buy things on credit and then spend a quarter to half of our time working to pay interest payments.

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While we’re young we can make extra money by just pushing it a little harder.  We can make that car payment if we work overtime on weekends so we can drive that shiny new car to work and have it sit in the parking lot all day, slowly decaying away.   We can take on that second job and get all of the cable packages and five different web streaming services.  We can keep buying clothes to impress people we don’t like and buying all of the latest gadgets to look good for people we don’t even know.

When we get old, we trade our money for health.  Any money we’ve saved up through those long hours of work goes to treatments, surgeries, and drugs to reduce the pain our weary bodies feel.  We spend money to try to have the ability to walk and run and jump and heal like we did so easily while we were young.  We get surgeries to be able to walk after long hours of carrying heavy loads have destroyed our knees.  We buy prescriptions to lower our blood pressure after years of sitting idle at a desk, eating poorly, and letting our health decay.

Stop.  Stop today.  Stop right this minute and change your life.

Become an owner instead of a worker.  Instead of getting that new car, drive your old one for a few more years and send those car payments you would have made into a stock mutual fund and become an owner in a group of companies.  Buy a smaller house for cash and invest the money you save on interest.  Stop buying things to impress people and just buy what you need so that you can spend time with your family who don’t care what the label on your blouse or jeans says.

Start building a portfolio so that you will be getting dividend payments and capital gains instead of paying interest payments and penalties.  Let others work for you so that you don’t need to work those extra hours.  Expand your lifestyle by waiting a little while to buy things, instead investing the money in mutual funds, then using the distributions from those mutual funds to add to your income.  Direct some of that money back into buy more mutual funds, and your income will expand on its own.

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Everybody can become an owner.  You can start a mutual fund account with Schwab for only $1.  You can start investing through Vanguard funds for only $3,000 ($1,000 if you start a retirement account).  Start an account and start sending a little of your paycheck in each month to build your wealth.  Own things.  Build things.  Stop just using all of your effort to generate entropy.  Stop having your money flow into your back account through direct deposit and then back out again to bills through auto pay without your even seeing it.

The next SmallIvy book, Cash Flow Your Way to Wealth, will be coming out in about a month.  It gives the game plan to go from worker to owner.  Subscribe to this blog to make sure you get your copy when the time comes and don’t miss out.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Would you Rather Have a Million Dollars, or a New Car Every Three Years?


Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over $1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that $1 million will turn into $2 million by the time you are 62, $4 million by the time you are 69, and a cool $8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost $30,000 will be worth about $15,000 in four years.  This means that the car will lose an average of $3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you $10,000 (because he wants to make a profit from the sale of your used car to someone else).

 

              

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The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for $30,000 after four years when it was worth $15,000.  Even if it drops in value to $7500 over the next four years, you’ll still only be losing $1,875 per year.  This means that you will save $1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is It Possible to Save for College?


About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Cooking – An Easy Path to Wealth.


Of all of the things you can do, learning to cook and cooking most of your meals at home is probably one of the best ways to improve your financial future.  Meals out are a huge expense, not to mention the sodium content and calories.  If you just eat in most meals, limiting your eating out to about a meal a week, and invest what you would have spent at the restaurants you can easily retire a multi-millionaire just from the savings.

Unfortunately, with the push to the two-earner household of the 1960’s many twenty and thirty-somethings today have no idea how to cook.  All of their meals were at restaurants or they grew up on pre-processed, frozen meals.  Many people also feel that they don’t have time for cooking at home.  For this reason, I thought I’d share some of the basics for learning to cook and some tips to save time that we have learned and that have served us well.  If you plan it right, you could actually spend less time cooking than you now spend driving to and then waiting at restaurants to eat.

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The Ingredients

The first step in starting to cook at home is to gather the basic foods you’ll need.  While some recipes call for special ingredients, there are some basics you’ll want to keep on-hand since many recipes will call for one or more of them.   Here is a list of supplies that we normally buy and keep regularly since they are used all of the time in the meals we cook.  While the initial expense may be fairly high (probably $300 or so to initially stock the pantry), with these ingredients you’ll be able to cook a wide variety of standard American meals.  (If you’re cooking Asian, South American food, or food from some other culture from around the world, there will be a slightly different list (particularly spices) that you’ll need to figure out, but you’ll probably see many of these staples as well.)  Also, once you have bought the initial supply, many ingredients will last for a long time and be used in several meals.  There are always some fancy ingredients beyond this list that you may find in recipes, but those can be bought as needed.  In fact, you may be able to leave many of those ingredients out of some recipes or substitute something you have on hand (since the left-over niche ingredient will just sit on your shelf for years anyway).

Here are the basic ingredients you should always keep in stock:

Basic foods:  Bread, potatoes, eggs, bacon, milk, flour (unbleached if possible), cheddar cheese, carrots, celery, fruit (apples, pears, oranges, etc…), lettuce, greens (spinach, mustard, collard, chard, or turnip greens), onions, butter or margarine, cooking oil, olive oil, vinegar, bread crumbs, shortening, baking powder, baking soda,  sugar, frozen vegetables, canned vegetables and beans (green beans, corn, tomatoes), cream soups (mushroom, celery, or chicken), kidney beans, great northern beans). pancake syrup, jams and jellies, corn meal, and rice.

Meats:  Each shopping period you would buy the meats you would use (for example, chicken, pork chops, steaks, ground beef, and fish).

Spices:  Salt, pepper, garlic power, paprika, ground dried mustard, bay leaves, basil, thyme, cinnamon, nutmeg, cumin, and chili powder.

Note we don’t tend to use a lot of the short-cuts like pre-made biscuits, pie crusts, and pizza crusts.  These are actually fairly easy to make with just flour, salt, shortening, and baking powder, but having them would save a little time (in exchange for a little extra expense). Pancakes are really easy from scratch and a lot better (the secret is to whip the snot out of the eggs with a whisk).  We also don’t tend to use a lot of the spice mixtures like Italian Seasoning since you can just add the separate spices and having the mix takes up extra room, but these can save a little time looking for spices.

Tools of the Trade

In addition to a stocked pantry, you’ll need a set of basic tools.   There are always a lot of things out there you could buy.  A lot of gadgets advertise that they will make cooking a lot easier, but the truth is that most of those gadgets only add value if you are cooking in bulk.  For example, if you are making gallons of salsa, it makes sense to pull out the Cuisinart.  If you are just cutting up an onion, however, you’ll spend ten times as much time dragging the thing out and then washing it and putting it away than you will actually spend cutting the onion.  You’ll find that most of the time it is just easier to pull out a knife.

Here are the items that a well-stocked kitchen should have:

Wet and dry measuring cups

  • 1 set of plastic dry measuring cups (1/4 cup, 1/3 cup, 1/2 cup, 1 cup)
  • 1 set of measuring spoons (1/4 tsp. 1/2 tsp. 1 tsp. 1 tbsp)
  • 2 spatulas, two large spoons (one solid, one slotted), a whisk, 2 rubber spatulas, 1 two-pronged fork, 1 set of tongs

example tool set:  Gibson Home 99202.20 Total 20 Piece Kitchen Tool/Gadget Prepare & Serve Combo Set, Black

      • 2 frying pans (cast iron is best), 4 sauce pans (small, medium, large, and extra-large) with lids

Example cast iron skillet and set of pots and pans

An example set of spoons

  • 1 grater
  • 1 set of pot holders
  • 2 cutting boards (one for meat, one for everything else)
  • 1 set of cake pans (round)
  • 1 9×13 rectangular pan
  • 1 9×9 square pan
  • 1 muffin pan

example: Farberware Steel Bakeware 46650 (for Kitchen and Housewares only) Farberware Promotional Bakeware 10 piece Gray

These are nice to have, but are used less often:

  • A blender, a salad spinner, a waffle maker, a toaster over, a crock pot.
  • A pastry cutter
  • An extra spatula (never have enough)
  • An extra small sauce pan
  • A ladle
  • A bread pan
  • Apple corer (metal)
  • Egg slicer
  • Food processor
  • Hand mixer

Saving Time

Unfortunately, a lot of people who try to start cooking get a recipe that is too complicated, get every pan in the house dirty, then decide to go back to take out and frozen dinners.  Cooking does not need to be complicated and time-consuming, especially for every day meals.  You might want to spend a few hours in the kitchen and put out all of the gadgets for a special meal, but not when you just want something to eat after work.

Here are a few tips that people who cook regularly use to save time and make cooking doable with a busy schedule:

1.  Don’t try to cook like someone from the Food Network.  Also, forget those elaborate recipes you find in the cooking magazines that require umpteen ingredients.  Just learn how to make the basic meals (chicken, pork chops, hamburgers, fish, spaghetti, stew, etc…).

2.  Buy a general cookbook that will give you the basics. Good ones are The Joy of Cooking and Betty Crocker.

Pick up one of these great basic cookbooks

3.  It takes the same amount of time to make six portions as four.  Cook a little extra and you’ll have a lunch that is the envy of your office the next day.

4.  Make a big salad and keep it in your refrigerator covered in plastic wrap.  Only put in lettuce, carrots, celery, and other root vegetables.  Add fruits like apples and tomatoes (that don’t do well in the refrigerator) during the meal to each portion.  You can also make a big portion of soup and heat some up for meals during the week.

5.  Many meals freeze well.  Make a double portion one week, then freeze and reheat the next week.  Be sure to write the date you made it and plan to eat it within a month or so.

6.  Plan you meals.  Write what you plan to eat during the week or next two weeks, then make your grocery list from the ingredients needed.  Freeze any meats you won’t use for at least three days.  The day before the meal, put the meat for the next meal in the refrigerator so that it will be defrosted and ready to go (it will taste better if not defrosted in the microwave too).

7.  The crock pot is your friend.  All of your soups and stews, and even things like ribs and chicken, can be made in the crock pot.   You can even put them together the night before, put it in the refrigerator, then start it on low in the morning before work.  When you get home, you’ll have a hot meal waiting.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Investing a Coverdell ESA/Educational IRA during the Last Few Years


Clingdome2It is pretty easy to plug a few numbers into an investment calculator and expect a return from your stock portfolio in a certain number of years.  The issue is that returns are hard to determine over relatively short periods of time.  If you’re investing for retirement and you’re starting at age 18, you can reasonably plug in a 12 or 15% return into an investment calculator and probably come fairly close to makign that return over 40 or 50 years.  If you’re investing for shorter periods of time, like ten to twenty years, you’re almost guaranteed a positive return over the period, and that you’ll do better than you will in a savings account, but the return you’ll get is more difficult to judge.

The issue is that those 12% to 15% returns include some really fantastic periods like the 1980’s and 1990’s.  Go without them, and your returns can be a lot less.  The 2000’s were pretty rotten, starting with the dot com bust in 2000 and including the housing bubble burst in 2008.  Luckily, we’ve had some good years, such as in 2003 and 2004 after taxes were cut, 2009 and 2010 after the housing bust when investors rushed in to buy cheap stocks, and even 2013 and 2014 thanks to historically easy monetary policy.  This has helped reduce the sting.  Still, it hasn’t been the roaring eighties or the roaring twenties.

In bad timing from an investing standpoint, my son was born in 2001.  We started an educational IRA/ Coverdell ESA the year he was born and invested $2,000 in it each year.  We put mostly mutual funds into it with a few individual stocks (probably a 60%/40% ratio).  Some of the individual stocks have done very well, others not so well.  Our best pick was Stryker, up 110% from what we paid back in 2010.  The worst was Pier One Imports, which lost about 50% of its value before we sold it.

Estimating a 12% return, I expected the account to have about $95,000 in it by now.  With the market issues we’ve seen, however, and some iffy stock picks, we have about $40,000, or an annualized return of about 4%, which is just a little better than the return of the S&P500.   That leaves me with a tough decision over the next few years.

With $40,000, I should be able to cover tuition at a four-year instate school.   It is, therefore, tempting to sell most of the stocks and invest in income and cash investments.  That would lock in the gains I have and mean that tuition was covered.  We or our son would just need to come up with living expenses.  That is probably what I would do if this was all of the money I had for college expenses since I couldn’t take a chance of a loss, which is a real possibility with only three years left until our some goes off to school.

Because we do have other money available for school expenses, if need be, I’m thinking of staying mostly in stocks, with a few income elements.  If the market does really well over the next few years, I might be able to raise the balance to $60,000 or even $80,000, which would be enough to pay for most of his college costs.  Also, because I don’t necessarily need to cash it all out his Freshman year, I actually have about six years to invest – not just three years.  I could, therefore, wait and watch, taking an opportunity that arises before he heads off to school or a few years into school to cash out.  If another 2008 crash occurs, I would probably make most of the losses back if I were able to wait a year or two.  Most crashes recover quickly.

Really this is the flexibility that comes with saving and investing so that you have reserves available.  It allows you to take a few more risks that may very well work out well.  Even in retirement, I plan to stay invested mostly in stocks because I expect to have more than enough to generate the income I need to pay for necessities.  I will take a portion of my portfolio and manage it like a retiree – with an appropriate mix of stocks and bonds – producing enough income to provide for expenses.  The rest can be left in stocks and tapped as the opportunity arises to increase the income being generated.

So what are your plans to pay for college for your children?  Are you saving and investing?  Planning the student loan route?

Got an investing question?  Got a great idea to share?  Please leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Let Imperfection Keep You from Growing Wealthy


 
IMG_1836I have a confession.  We haven’t put money into my kids’ Educational IRA accounts yet for 2016, even though the year is about 3/4 over.  We also don’t pull together a budget every month, and haven’t for a few months.

We have done good things like starting IRAs when we first started jobs and have contributed to them most years.  I also got into the 401k at the first opportunity, although I only contributed about 10% of my pay between our IRAs an my 401k the first ten years or so of work.  Today I’m contributing around 15%.

We do eat dinners in most weeks except for one diner out as we have been doing since we were first married, but we have started going to lunch or breakfast after church or if we’re out on a Saturday here and there.  We also probably impulse buy at places like Wal-mart and the guy really saw me coming with that Kirby vacuum.  (I have noted, whenever I decide to just “buy something nice for once,” I usually end up regretting the purchase.)

Obviously, even though I write a blog that is about personal finance about 80% of the time, I don’t have a perfect financial life.  I’m like the fitness guru who has a doughnut and a cup of coffee sometimes before work.  Yes, I know better, but that doesn’t mean I always do better.

We have been able to pay off out home in about 12 years, however.  We have also not had a car payment for something like 15 years now.  I purchased a new car on payments back when I was credit-ignorant, and probably won’t do so again.  But who’s to say, maybe in a weak moment I might.  We also have put away money for our childrens’ college and I’m predicting we’ll have way more than enough for retirement.

The point is that no one is perfect in anything, even when it comes to personal finance.  Often we try to find gurus to improve our lives, but then give up and stop taking their advise when we find we can’t do everything perfectly.  We also watch and wait for those who seem perfect to slip up, then use their failure to be perfect as an excuse for our not even trying.

Yes, you’ll end up better financially if you never buy stuff on credit, put away 15% of your paycheck for retirement religiously, and buy a really inexpensive home.  You’ll be better off if you budget to the penny every month and stock to your budget.  You’ll do better making sure you eat every one of your leftovers and avoid wasting money on food that you throw away.  You’ll probably be better, both financially and physically, if you never buy a car and instead ride a bike to work everyday.  But you probably won’t do these things, or do all of these things, every time.

But don’t let that stop you from making good choices as often as you can.  Don’t think you need to be perfect financially or it isn’t worth doing anything financially.  And just because people who give good advice sometimes fail doesn’t mean it isn’t good advice.  Nobody’s perfect.

Your investing questions are wanted. Please leave a comment and let me know what you think.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Six Simple Rules of Financial Literacy


 

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Handling your finances need not be that difficult.  In fact, you can simply practice some basic behaviors and end up far better off than your peers.  These behaviours are not hard – they’re quite simple, in fact.  Here are six simple rules that will put you on the right path for financial success:

1.  Spend less than you make.  Very simple advice that most people ignore.  In fact, if you look at spending at any income level, ranging from the checker making $25,000 per year to the executive making $250,000, you’ll find that most people increase their spending until all of the money they make in a month goes out the door to bills and frivolous expenses.  NBA stars quickly go bankrupt after they retire unless they get an apparel deal just as quickly as the clerk at the local gas station does when she loses her job.

If you want to build wealth and develop financial security, you need to spend less than you make, putting money away every month.  This provides you with a safety net when you lose a job or just need to get the car repaired.  It also allows you to increase your income through investments.  Don’t forget also that you have retirement coming some day.  You’ll need to save up enough money to live another 30 years without working.  that is done one paycheck at a time.

2.  When you borrow money, you decrease your effective income.  When you work and are paid, you are trading hours of your labor for hours of other people’s labor.  When you work and save, you can get something that takes a long time to make, because you spent a lot of time working to save up the money you needed to buy it.  Things like houses take thousands of hours for people to build, and therefore can take thousands of hours of work to afford.

People borrow money in order to get something they want right now instead of waiting until they have worked enough to afford it.  You get your new car now instead of working for six years, saving up, and paying cash.  In fact, by the time those six years are up and you’ve paid for the car it may be time to sell it and buy another one.

The trouble with doing this is that you pay more for things.  If you buy a car on credit instead of paying cash, you’ll end up paying thousands of dollars more for the same car as someone who paid cash.  Those are hours that you worked for which you don’t get any benefit — unless you consider getting the car faster worth the extra hours you give up.  If you choose to wait instead, however, it gets a lot easier to pay for things like retirement and college since you’ll be able to use more of your money and lose less to interest.

3.  Make your money work for you.  When you borrow money, you end up paying more for things than you would if you paid cash.  When you save and lend money, you end up getting things for less than their cost – sometimes even for free.  Put $10,000 in a set of 6% bonds and you can take a $600 trip every year without needing to work at all to afford it.  Plus in the end, you still have the original $10,000!

4.  Put the power of compounding in your favor.  When you’re deep in debt and making the minimum payments, the interest generated each month basically wipes out any money that you send in and your debt levels don’t seem to decrease at all.  When you have a small debt, you can pay it off easily because the amount of interest you owe is also very small.

With investing and saving it works just the opposite way.   For example, if you put away $100 per month, in a year you’ll have put $1200 away and maybe made $50 in interest/investment return.  If you’re really lucky you may make $100.  In twenty years, however, the $1200 per year you put away will be nothing compared to the amount of income your investments generate since you may be getting $200,000 per year in interest.  Over long periods of time, the money that your investments generate gets compounded – your money makes money on the money your money’s money made.  It starts slow but it builds up fast.

5.  Limit your spending on things that decline in value.  Cars go down in value over time.  So do boats, mobile homes, campers, clothes, and motorcycles.  Money you put for these things gets used up and is no longer available.  You are destroying wealth when you buy them.  If you limit the amount of money you put towards these things over time, the more wealth you will accumulate.  Spend your money when you buy things like land, quality furniture, and ownership in companies.  Limit your spending when you buy other things.

6.  Be a lazy investor.  People reduce their returns substantially when they spend a lot of time fiddling around with their investments.  This is because most of the return in the stock market is made on just a few days and weeks over a period of many years.  Be out of the markets when one of these periods happens because you heard from CNBC that stocks are overpriced and you’ll cut your future net worth considerably.  The best investors are lazy investors.  Just get an investment plan and stick to it, maybe rebalancing once per year.  Otherwise, find other hobbies.

Got an investing question? Please leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Buying a New Used Car


Avalon

It’s not easy being SmallIvy.  Last weekend we were in a car dealer in the next town, looking for a car to replace our main vehicle.  I had found an 2013 Toyota Avalon on TrueCar and we were in the dealership to see that car and also look at other Avalons to see if that is a model that we like.

My son was absolutely aghast, asking how I could be at a car dealer and why I was thinking about spending so much on a car.  I was SmallIvy, after all.  I was supposed to only buy cars from private parties and then always inexpensive cars.  He then started asking how he was going to be able to go to college with us blowing all of this money.  I guess that all of those lessons on budgeting and managing your money must have sunk in.

I’m not sure, however, that he quite got the point.  The point of budgeting and saving is not to never have anything and surprise everyone when you die with tens of millions of dollars in the bank.  It is to get yourself into the position where you are financially sound, at which point you can start to expand your spending a bit and start getting some of the nicer things that others have been getting using credit, except you’re actually buying them with cash and owning them.  Where others have a facade of wealth, you actually own what you have and aren’t subject to a financial calamity should you lose your job or have some other sort of fiscal setback.

And even once you’ve reached that point, you still put critical items before luxuries.  You make sure you have enough for retirement so you won’t be a burden on others.  You have life insurance so that your family is taken care of should you or your spouse die unexpectedly.  You also have important luxuries such as college savings for your children set aside or well in progress.

Once you have done all this, and after you have been saving and investing such that you have an income stream beyond your job from your investments, you can start to expand your lifestyle.  If you have done things right, your investments will replenish the cash you spend on luxuries while still allowing you to grow your wealth.  You also save up money for big expenses like new cars and home improvements, rather than putting everything on credit as others are prone to do.

Other than making the stupid purchase of a new Jeep Cherokee when I was in my last year of school and before I had “seen the light,” my wife and I have been very thrifty with cars.  When I started working, we bought a six-year old Toyota Camry with 150,000 miles on it for about $4,000.  I’m sure we could have qualified for another 6-year loan like we had on the Jeep, but we chose to not have another payment.  We drove that car for about eight years and sold it for $1500 with 300,000 miles on it.  Cost per year for depreciation, about $300.  We then bought a four-year old Camry for about $8,000 from another private individual and have driven that car for 8 years as well.  At worse, we spent about $800 per year for that car, which now has 250,000 miles on it.

Compare this with buying a new car, as many people would do, and losing $6,000 per year or more in depreciation and interest payments.  While we put a little money into repairs, on the order of $800 per year during the last few years, we came out well ahead of where we would be with a new car and new car payments.  (Actually, I’ve been very pleased by just how little we’ve had to do in repairs with these Toyotas.)   We’ve been able to use that money to do things like put money in college funds, put the money away for retirement, and invest the money for the next car so that we’d have the cash available.  That is where we are today.

Now that we have reached this point, paid off our home (saving about $800 per month), advanced in career, saved up to the point that we have extra income from investments, and have enough in savings to weather several years of unemployment if needed, we can start to move up in car.  The 3-year old Avalon we’re looking at would cost about $26,000 with tax.  Compare that to about $35,000 we’d pay for a new Avalon with tax.  We’ll be losing about $3,000 per year in depreciation for the first four years and $1500 per year for the four years after that.  That is compared to the $4500 or so we’d be losing on depreciation for a new car, not counting payments.

We will probably never buy a new car again (we paid the Jeep off three years early and I still drive it today although it is 18 years old), but we can continue to trade up in cars each time since our investments and investment income will be growing.  We’ll stick to newer used cars to reduce the loss to depreciation – in three years we’d be in the same place and be several thousand dollars poorer if we bought new. Maybe we’ll decide instead that we’re happy with Avalons (or maybe go back to Camry’s) in eight years and instead spend more money on trips and home improvements.

The point is that there is nothing wrong with spending within your means so long as you’ve put first-things-first.  The other point is that your means will increase with time as long as you keep saving and investing.  So don’t think if you’re staring out and decide not to use credit that you’ll never be able to keep up with the Joneses.  In fact you’ll pass the Joneses someday, and you’ll always sleep better at night.

 

Your investing questions are wanted. Please leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

 

How Much Should a College Student Be Spending on Living Expenses


 

Million DollarsCollege tuition is obviously a big part of the expense of college. but if you attend a state school or get a scholarship, living expenses will often be more than tuition expenses.  Part of the problem is that a lot of students spend a lot more than they really should, especially if they are borrowing the money on student loans.  Everything you borrow will need to be paid back with interest, and that loan balance can really add up quickly when you’re adding to it every year without feeling the pain of actually paying anything for it (yet).

Today I thought I’d look at the expenses that a typical college student has and what those expenses should be if you’re really trying to save and not start your life with a huge student loan balance.  Here’s what I found:

Rent: $400/mo or $4800/year

One of the biggest expenses is rent.  While you may be able to save a little money on rent by going home during the summer months, you’ll probably need to sign a yearly lease, so expect to spend money on rent during the summer as well.  Summer can also be a great time to take a couple of extra classes and increase the likelihood that you’ll graduate within four years, and since each year saved means a year saved on tuition and room and board, trying to get out fast is definitely a good strategy.

I think that most students should be able to get by with $400 in rent or less per month.  Note this may mean taking on roommates and/or getting creative if you choose a school in an expensive area.  Just remember that this is temporary and you’ll be able to get out into a better living arrangement in just a few short years.  Maybe also take a look at apartment prices when looking at colleges.  Don’t want to have 5 roommates?  Maybe San Francisco isn’t the city for you.  Looking further from campus might also be a good option since places near campus often fetch a premium (apartments are a lot cheaper just across the bay from San Francisco in Oakland, for example).  Another option to the standard apartment is to rent a room in a home instead of a full apartment (which can be great if you get to use the kitchen and other parts of the home as well).  Perhaps you can even get a special rate for helping out around the place or providing tutoring and some part-time nanny services for the family’s children.

Food: $200/mo or $2400/year

At $200 per month, assuming 90 meals, that’s a little over $2.20 per meal.  While this may not seem like much when compared to restaurant prices – even the fast food chains anymore – it is actually quite doable if you cook at home and are selective in what and how you cook.  Specifically:

  1. Learn to cook basic meals.  Cooking for yourself will cost a lot less than eating out or even buying TV dinners.  Avoid complex recipes that call for 50 ingredients and instead focus on learning to cook basic things like meats and vegetables by themselves.  You can also find many books with easy recipes and limited ingredients.  A basic cooking book (or an online version) like Betty Crocker or the Joy of Cooking is also a good way to learn cooking skills.
  2. Limit meat, making things like chili and stews that can be stretched with beans and potatoes and which use lesser cuts of meat.
  3. Make batches of things and then freeze portions.  This both saves time and allows you to save on food prices since buying more costs less per pound.
  4. Grow a container garden for some of your fresh produce (or see if you can start a small garden plot if you’re renting a room in a home).
  5. Use budget stretchers like rice, potatoes, and beans.  Each of these can be bought extremely cheaply but are filling.
  6. Avoid processed foods.  Not only does processing often add things you don’t want to your food like lots of salt, but it also adds costs.  Buy dry beans and rice, buy ingredients instead of pre-prepared meals that you heat up.  In general, the less that was done to the food before you buy it, the cheaper and better.

Insurance: $1500/year

Here I’m assuming your health insurance is part of your tuition or your parents are paying for it on their plan.  That leaves auto insurance, which might set you back $1500 per year because of your age.  You don’t need renter’s insurance – just don’t have anything in your place that is really valuable.  You also don’t need life insurance unless you have dependents.

Clothing: $100/mo or $1200 per year

Fashion should not be your concern when trying to get through college.  You can get the basics for about $100 per month, maybe asking for clothing as gifts around the holidays as well.  There is also nothing wrong with blood drive shirts and other “free clothing” you gather up.  Thrift stores are also great places to get some nice clothing if you head there often and learn when the new things come in.

Alcohol:  $20/mo or $240/yr

If you have student loans you have no reason to be buying $8 drinks or $4 beers in bars.  It is much cheaper to buy alcohol from the store.  You can also make wine for about $3 per bottle or less and beer for a quarter a bottle or less.  If you go out with friends, just stick to cokes or waters, maybe buying one beer.  Is this a sacrifice?  Yes, but that’s how you get out of college without a lot of student debt.

Gasoline:  $200/mo or $2400/yr

Assuming $40 per tank, $200 will allow you to fill up a little more than once per week.  If you’re living on or near campus, you may not even need that much.  This does not leave a lot of gas for cruising around town, but it is plenty to get back and forth from campus and make an occasional run to the store.   You can also cut your costs by riding a bike to school.

So really, that’s about it for expenses.  Adding them all up, you end up with about $12,000 per year in expenses.  It may not seem like a lot, but if you really cut back to the minimums, it is possible.  This isn’t how you’d want to live your whole life, but it is worth it to live this way for four or five years and graduate with maybe $25,000 in student loans instead of $100,000 or more.

Got an investing question? Please leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.