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!

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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.

Get Ready Millenials – Mom and Dad are Coming Home, to your Home


Hey millennials, glad that those in your generation, who came home after college and stayed another ten years, are finally getting their own place.  Sure, Mom and Dad are footing the down-payment, but at least you’re finally starting to venture out on your own like your parents probably did when they were 18 or maybe 21.  I’m sure that plenty of you also moved out and got a modest apartment when you graduated college or high school like your parents did – it is unfair to stereotype an entire generation – but there are more millennials living at home at age 28 than there were in any of the past generations, at least since about 1950.  There are also a lot of 30-somethings who still have their parents paying their phone bills or helping with other expenses, even when they are adult children living mainly on their own.

Many of us in GenX were worried about this development of delayed maturity.  The hashtag, #adulting, is truly assinine.  Note that Jack Daniels started his brewery at age 14, so it is possible to become self-sufficient and even do some pretty remarkable things way before you turn 25.  We wondered what would happen when your parent’s generation started to retire and people were needed to do all of the important jobs that they had done.  I’m sure your grandparents were also worried about who was going to pay for their Social Security if no one was working.  Also, what would happen if your generation never grew up and moved out before your parents retired or died and were no longer able to take care of you.  Solar Charger, 8000mAh 3-Port USB and 21LED Light Solar Power Bank Portable Battery Cellphone Charger, Solar Panel for Emergency Outdoor Camping Hiking for IOS and Android cellphones (Black)

But this morning I realized that we were worrying about the wrong people.  I’m sure that while 35 is the new 20, eventually those student loans will be paid off and you’ll be working your way up the corporate ladder.  I know that many of you are just waiting for your parent’s and grandparent’s generation to retire and get out-of-the-way so that you can advance.  I’ve also got to believe things like having kids will make you want to get your own space and a refrigerator on which to hang artworks from your elementary schoolers.

The real issue is your parent’s generation.  They don’t have anywhere near enough money to continue to live on their own all the way through a 30 or 40-year retirement that the are expecting to have.  To generate a $50,000 per-year income, which is probably about what it would take for them to continue to live in their home and continue to live about how they are now, they will need to save up about $1M by the time they retire.  Really they should have about $2M since there are also medical bills and a lot of retirees want to do some traveling when they retire.  The trouble is that the average person approaching retirement has about $135,000 saved up.  And that is the average, which includes some people who have several million saved tipping the scales.  There are a lot of people who have $50,000, or $20,000, or $2,000 saved beyond their home.

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In the past, many in their situation would have had the option of selling their home and moving somewhere cheaper.  If they were to move to a small apartment in a safe but unspectacular neighborhood, and not a condo on the beach or in a high-rise in downtown, that would help them get maybe a decade or more before they ran out of money. The issue is that a lot of them still don’t own their home.  They refinanced their mortgage and took out money to put you through college, or upgrade the kitchen, or pay off your student loans or credit card bills.  Many people bought bigger homes in their late forties or fifties and started all over again with a 30-year mortgage.  That means their home won’t be paid off until they’re 80, and they’ll only have maybe 20-30% equity when they hit retirement age since you pay mostly interest at the beginning of a loan.

So what happened with your parent’s generation that didn’t with your grandparent’s?  The issue is that your grandparents had a pension plan where their employer put money away for them and paid them less in salary.  Because they had a lower salary, they had smaller homes, took fewer vacations and cheaper vacations, and cook at home most meals.  Your grandmother is probably a much better cook than your mom, and that is because she has had 30 years of practice.  She didn’t do take-out unless it was a casserole she took to a church potluck.  Your grandparents also probably didn’t have two cars, the expense of two sets of work clothes, the daily lattes, and the cost of childcare.   They also had college tuition costs of about $3,000 per year in today’s dollars since they could not afford any more than that so universities kept frills to the minimum and didn’t ask for high tuitions.   In exchange for this more meager living, they had a pension plan waiting for them at retirement.

Your parents instead got higher salaries with the expectation that they would then save up for their own retirement.  This was actually a better deal since the returns on pension plan investments aren’t as great as returns one can get investing for oneself since the pension plan manager needs to be conservative (and get lower returns) all of the time to ensure there is enough money to keep the payments for current retirees flowing, but an individual can be aggressive during the first 30 years and then shift to a more conservative mix near the end.  The trouble is that your parents used the extra salary to buy bigger houses, take more lavish vacations, pay high college tuition costs and living costs for their college students, and eat every meal out.  Retirement was always something that they would worry about later when they didn’t have this need or that crisis to take care of.

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With $130,000 in savings, living in a standard home even without a mortgage, they’ll probably be able to eek out 5-7 years before they’ll run out of money.  This is assuming that they don’t have any major medical expenses, don’t travel the world, and that the stock market cooperates to a good extent.  A bear market, a mortgage payment, or a big medical bill could cause them to run out much sooner.  And what will happen then?

The most likely thing is for them to give you a call.  At that point you’ll be over at their place, having a big yard sale to sell off all of the stuff they’ve collected over the years (some of it will end up at your house), then they’ll be moving into that home office, guest bedroom, or workout studio you’ve made at your home.  Maybe you’ll still be living at your parents home, so you’ll just take over the mortgage payments and the grocery bills.BarksBar Original Pet Seat Cover for Cars – Black, WaterProof & Hammock Convertible (Standard, Black)

It will be nice to have them around to help out with watching the kids, assuming they’re interested in that.  But the house will suddenly feel a lot smaller, and there will be the inevitable power struggles and in-law struggles that come with multi-generation households.  Meals out will become a lot more expensive, as will vacation since you’ll be getting extra hotel rooms and tickets.  This is not a terrible arrangement, with many advantages such as your children getting to really know their grandparents, the ability to share some of the household chores (assuming your parents don’t decide it is your turn to take care of everything), and an easy transition when they become old enough to need a lot more help with things.  It is actually very common in Asian countries, especially in areas where housing prices are astronomical, and was the standard in the US for many families when most people were farmers.

Still, you had better start thinking in terms of how you will handle having a full household, both in managing expenses and living arrangements.  In the next post, I’ll go into some steps to take to get ready, starting with having a frank conversation with your parents about their finances.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

Have a question?  Please leave it 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.

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.