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.

The Beauty of the US – Everyone Has an Equal Chance


I was thinking the other day about what it would be like to go out on your own, a few hundred dollars in your pocket, and try to make it in the world.  Thinking about trying to find a place to live, find a job, buy clothes, food, and other necessities.  One thought was that it would be difficult for someone who came from an impoverished background, with both parents on welfare because of medical conditions or lifestyle choices, to get a decent job because such an individual would not be able to get the education needed to move into better paying jobs.  It seemed like they would be at a great disadvantage to someone from an upper-class or middle-class background.

But then it occurred to me – those in the US whose parents are poor have an equal ability to pay for college, even at elite school, as those who come from wealthier backgrounds.  If anything, they are in better shape than the typical middle-class family.  How so?

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There is an enormous amount of educational welfare available, coming from both the Federal Government and the schools themselves, that really make the ability to pay for school equal for all, or even to the advantage of those from poor backgrounds.  A student whose parents make $150,000 per year will probably pay something like $25,000 per year to go to Duke University or Harvard.  If that same student’s parents also had a couple of million dollars in the bank, even if they made $80,000 per year instead of $150,000 per year in salary, they would probably pay most of all of the $45,000 per year it costs to attend Duke or Harvard, including room and board.

Someone whose parents make nothing and have nothing saved up would pay nothing to go to those same schools.  They could go to a community college, a state school, or even an elite private university and pay nothing to do so!  Between the reductions or eliminations in tuition that these schools provide to students who show financial need and the grants given out by the federal government, which do not need to be paid back, students from poor backgrounds see little if any cost for going to college.  So there is really no financial reason for a student not being able to leave home and gain the education needed to make very good money in the US even if his/her parents didn’t make more than $10,000 per year their whole lives.

So the first lesson for those reading this article from poor backgrounds:

There is no financial reason that you cannot learn the skills to increase your income.

Now it is totally different for someone whose parents do make decent money, but are not willing to support their children financially for college.  In this case, the schools and the federal government will look at your parent’s wealth and income and expect them to support a portion of your educational costs based on what they could fund if they wanted to, even if they choose not to do so.  This is really unfortunate since there are parents out there who do cut their children off when they leave home even if the schools and the government expect them to provide support.  It is understandable from the school’s prospective, however, since if colleges just took your word for it, virtually everyone would not give any money to their children for college so that they could go for free.  (Boggles the mind to see that people who would never take charity for other things see nothing wrong with having others fund their children’s education when they could do so themselves, but apparently there’s no taboo when it comes to accepting college financial aid.)  So this is a lesson for parents of middle-class or upper-class background:

Your children will likely get little in terms of financial aid, regardless of whether or not you have saved up money for their college education, so start saving early and plan on footing at least part of the bill to keep them from being buried in student loans.

There are some ways out get out from under this cloud, including waiting until you are 23 or older to go to college, or getting married right out of high school.  Some of the other criteria for not needing to include your parent’s information on financial aid forms are listed here.  There are also a lot of scholarships out there that can help cover college costs that don’t require showing financial need.  These might be an option if you generally have good grades and have been involved in various activities to show you are well-rounded.

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Now, there are other factors that keep children from impoverished families from going to college and raising their income.  Many don’t have good grades while they are in grade and high school, which is understandable if they have no one at home pushing them at all, or even have a home life that makes it difficult for them to perform well in school.  But again, there are still ways to make a better life for yourself than a series of dead-end, low-pay jobs.

Community colleges:  If you are able make it into a community college, which again could be free for you if you come from a poor family background, you have another chance to change your destiny.  If you concentrate on your studies and get good grades at a community college, many universities would then accept you into their schools.  If you are fortunate enough to get in, spend at least two hours per week doing homework and studying for your classes for every credit hour you are taking.  For example, someone taking 12 hours should be doing 24 hours of work outside of class, for a total of 36 hours per week.  Also, go to office hours for help if you don’t understand something, and spend time getting to know your professors since you will need them for references when you apply to the university.

Trades:  Jobs in the trades pay a lot of money.  If you can do electrical work, plumbing, carpentry, computer repairs, and other similar jobs, you can make a lot more than you will working in retail or at a fast food job.  Many jobs in these areas are earned through experience with a professional in the industry.  If you are willing to be a good worker, showing up on time, being willing to work hard and get the job done, and are willing to learn all that you can while you are on the job, you can get a job with a trade professional and learn what you need to eventually do work on your own.

A final issue for those from poor backgrounds is that their families may continue to drag them down.  Someone whose parents have serious drug or health issues may feel an obligation to take care of siblings still in the home or their parents after they leave the house.  Realize, however, that you can’t save someone from drowning if you yourself are barely keeping your head above water.  It can be better for you and for them if you work to get yourself on firm financial footing first and then help where possible instead of trying to support siblings and parents by working a low-pay job and giving them what you can.  You might also be preventing them from getting welfare because you cause the income of their household to be too high to qualify for food stamps and housing assistance.

While it is difficult, the best option may be to cut financial ties temporally and concentrate on getting through school and raising your income, and then helping them out.  Encouraging your siblings to do what they can, such as getting a job while still in high school and/or working hard at school to get the grades needed to qualify for college is also better than trying to support a family on a minimum wage salary.  Two, three, or four people can do more than a single person can do alone.  Remember that anyone who has health has substantial wealth, even if they have no money in their bank accounts.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or 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.

Are Your Parents Likely to Move In? If So, How Should You Prepare?


Don’t look now, but if your parents are in their late fifties or sixties, chances are pretty good that they’ll be moving back home – to your home – in ten to fifteen years.  They’ll still be healthy.  The issue will be that they’ll be out of money since many people in their late fifties and even early sixties have just a fraction of the amount of money needed to make it through a 20-30 year retirement.  Many just have enough to make it five years or less.

There are a couple of things you could do.  You could just ignore the issue and believe it won’t happen.  You could move away and leave no forwarding address, hoping to hide somewhere.  Or you could take on the issue head-on, figuring out if you are likely to need to take your parents in, perhaps help them take steps to delay the inevitable, and make choices now to be ready when the day arrives.  Here are some steps to take:

Have the talk

People say that the two conversations parents and children find most difficult are those about sex and money.  But if your parents are heading into retirement in the next ten or twenty years, now is the time to get a gage on how they are doing.  You may not be able to get them to talk about specific numbers, but maybe you can find out things like 1)Do they have a pension plan at work or a 401k?   2) If they have a 401k, have they been putting away 10% or more right along (if not, suggest they start putting away 15% now) 3)If they have they have a 401k, have they let it build up their whole career or have they pulled money out?  4)Are they planning to stay in their home in retirement or downsize and use the savings for living expenses?  5)Have they talked to a financial planner about their readiness for retirement?

Hopefully, they have a pension plan or they have been regularly contributing to their 401k with no withdrawals.  If they are planning to sell their home and downsize, they may be able to stretch their retirement savings a bit.  If they have gone to a financial planner, hopefully he/she has started to help them realize whether or not they have saved enough.  If from the answers to these questions it does not look like they have done much planning, brace yourself for the worst.  At the very least, see if you can set up a meeting with a financial planner to discuss their status and look at options.

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If you do get specific numbers, you can calculate the amount they have total in retirement accounts and other savings/investments (their net worth) to determine how much money they have available to generate income for retirement.  (Do not count their home value in the total unless they plan to sell.)  Once you have their net worth, subtract $400,000 for a couple or $250,000 for a single from the total to account for medical expenses in retirement, then divide by 25.  That is the yearly amount they’ll have available to withdraw each year to fund their retirement and probably make it through without running out-of-money.

For example, if they have $500,000 saved:

Yearly Amount = ($500,000 – $400,000)/25 = $4000/year

In the case above, they would be able to generate about $4,000 per year before starting to deplete their savings.  Add that to maybe $12,000 from Social Security, and they would have about $16,000 per year to spend.  That would not be a good lifestyle for most people and they would need help with bills and expenses.

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Set a Target

If you figure out that they need to be saving more, figure out how much they will need to pay for yearly expenses, and then figure out how much they need to save up to reach that target.  Assuming they’ll receive $12,000 per year from Social Security, here’s how much they would need to save up to generate different yearly income levels:

Monthly Income Yearly Income Single Account Value Couple Account Value
$2,500.00 $30,000 $700,000.00 $850,000.00
$3,333.33 $40,000 $950,000.00 $1,100,000.00
$4,166.67 $50,000 $1,200,000.00 $1,350,000.00
$5,000.00 $60,000 $1,450,000.00 $1,600,000.00
$5,833.33 $70,000 $1,700,000.00 $1,850,000.00
$6,666.67 $80,000 $1,950,000.00 $2,100,000.00
$7,500.00 $90,000 $2,200,000.00 $2,350,000.00
$8,333.33 $100,000 $2,450,000.00 $2,600,000.00

Realize that without the expenses of work clothes, maintaining a car for work, and things like professional dues and meals out, the amount needed in retirement will be less than their income while they are working.  If they pay off their home and cars, this will lower the amount needed even more.  They might therefore be able to set their retirement income target at 70% of their current take-home pay or so.  Of course, setting the target high reduces their risk in retirement.

Encourage them to save/invest if needed

If it looks like your parents aren’t ready, you’ll need to help them get into the best position they can.  Have them pull together a budget using the income you expect them to have in retirement if things don’t change.  Perhaps seeing what their life will be like if they head into retirement with $50,000 will cause them to decide to get passionate about saving.

You can then help them develop a savings plan to reach their goal.  If they are five years or less away from retirement, just subtract the amount they have from what they need, then divide by the number of years they have left until retirement to determine how much they need to put away per year.  Divide that number by 12 to determine how much they need to put away each month.

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 If they have more than five years until retirement, Multiply their monthly savings rate by the factor from the table below to estimate how much they’ll need to save each month since they’ll be able to invest to enhance their savings.

Years to Retirement Multiply Monthly Amount by
5 0.9
10 0.81
15 0.4
20 0.27

So, for example, if you calculate that they’ll need to raise about $2,000 per month to reach their goal and they have ten years until they will retire, they will actually only need to put away $2,000 x 0.81 = $1620 per month.  This assumes that they invest the money in a diversified set of stock and bond mutual funds or a target date fund appropriate for their retirement date.

Note that they will only need to save 27% as much if they start 20 years early – their investments will make up the rest.  If they are only five years away, they’ll need to raise about 90% of the difference through hard work and saving.  There is good reason to start saving early.  It may be too late for your parents, but you still have a chance.

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Encourage them to work longer

If they don’t have enough saved up and it is clear that they will not be able to do so before their expected retirement date, encourage them to think about working longer.  Not only will this allow them to pile up more money, but it will also reduce the number of years they’ll be drawing an income from their savings, reducing the amount they will need to have.  As long as they are healthy and don’t have enough saved up to live comfortably, they should continue to work, even if it is only part-time near the end.

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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.

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.

Empty Nest Insurance- Start Your Kids with a Nest Egg


Today the news is full of stories of children returning home to stay after college.  The recession has certainly made it difficult for some to find jobs.  In some cases parents may also be making their homes a little too comfortable. With few rules, no expenses and no responsibility, who wouldn’t want to stay?

By starting children out early learning about saving and investing, and by giving them a little nest egg with which to start, you can dramatically reduce the chances that they will be knocking on your door, duffel bag in hand after college.

Starting an investment fund can be very quick and easy.  It simply takes a couple thousand dollars and some mutual funds.  If you start a fund about the time they are born, and add to it as they get those checks from relatives early on, and then match their contributions once they start to earn their own money, you can build up a substantial fund by the time they leave the house.  This is money they can then use when they have the unexpected expenses that always occur instead of running up credit card debt.
              

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The first step is to find a fund family with a low enough minimum.  I personally like Vanguard because their funds have very low expenses and the minimums for many of them are only a couple of thousand dollars.

You are looking for a fund that invests in a large number of stocks over a broad range of the market.  Good choices would be a largecap fund such as an S&P500 fund or a midcap or smallcap fund.  Selecting specific sector funds or ETFs is probably not a good idea since you want something you can hold for years rather than needing to move in and out of it, incurring capital gains taxes.


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Once you have selected a fund, simply create a custodial account in the child’s name and send in a check.  (Warning:  When your kids go to college, the college may see the custodial account and expect it to be used for tuition before they’ll kick in financial aid.  If you’re worried about this, keep the money in your name and then gift it to your child over a period of a year or two, staying below the gift tax exemption, when they are near graduation.)  As time passes, add extra money to the fund.  You should avoid the temptation to make many if any changes – you want to minimize expenses and taxes.  Just let it grow with the economy.  If you need to do something, wait for dips and buy more shares.

Once the fund has grown large enough, you should consider selling part and using the proceeds to buy another fund in a different sector of the market.  For example, if you’ve amassed $15,000 in a largecap fund, you may want to sell half and buy a smallcap fund.  This diversification will reduce the risk of losses and smooth out the fluctuations that occur.  In general, different sectors of the market do well at different times.


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Note that capital gains and dividends will be tax-free below a threshold amount, but be sure to check with your accountant on what those minimums are in any given year.  They are generally less for investment income than earned income.  You may also need to file tax returns in some years if the income is large enough even when they haven’t made enough to pay taxes.  Payment of quarterly estimates may also be required.  Minimization of trading, and thereby the realization of gains, will delay the time at which you will need to start preparing tax returns for their accounts.

Once the child reaches 18, the money will be theirs (you have no say over this).  You therefore should have been teaching them all along that the money is there to help them in emergencies, such as when the car breaks down, and not just for day-to-day expenses.  You should also be teaching them to leave the principle alone and just spend the interest/dividends.  In that way, even though they may waste some, hopefully there will be enough remaining when they are older and wiser to help secure their financial security.

By giving your children a nest egg with which to start their lives, you can help keep them out of debt, help them have a down payment for a house when they are ready, and be able to stay out on their own between jobs and other issues. You will also give them an extra source of income that they can use throughout their lives.

 

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 Worth It to Put Money Away for College?


Most of the time it feels good to live a financially stable life, which is where we are after spending the last 20 years doing things like buying used cars, a smaller home than we could get a loan for, and eating in.  It is nice to have money in the checking account to pay for the various $600 emergencies that come up like car repairs.  It is great to be able to pay for unexpected medical bills that come with having kids without worrying about finding the money.  A few months ago, we even bought a few acres of land to use for camping or just hanging out and were able to do so by just selling a few stocks.  Really, the land is almost an investment in that it will keep up with inflation at least.  The only cost is property taxes and a minimal amount of upkeep.

There are sometimes, however, when you wonder about being financially responsible.  The first is when real estate is really doing well and your friends with the 80/20 loans and HELOCs up to their eyeballs are seeing their net worths increase a hundred thousand per year because home prices are climbing quickly.  At times like that you wonder if you really should have accepted the lure of leverage like everyone else and bought a bigger house with a lot less down.  Luckily, times like the 2008 housing bust are there to remind you of why you made that 20% down-payment and then paid off your 15-year loan in twelve years.

  

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The second time where i wonder if saving up is worth it, which is what we’re staring straight in the face, is when you start to look at college tuition and financial aid.  We have a son who is just two short years away from college, which means that we’ll be sending out applications late next year and seeing what offers we get on tuition.  Looking at tuition offers is something I’m not looking forward to.

Our income really isn’t that high.  We’re upper-middle class, but are on one-income and certainly not making the salary of doctors and those high up in the business world.  Based on income alone, I’m sure we’d receive some tuition relief from many colleges.    With our net worth, however, I’m sure we won’t get any offers of financial aid from the government, nor should we.  I am hoping that there are some true scholarships – where they bribe your child to go to their school because of his/her grades and accomplishments – that my son can win since he really deserves them.  He’s had straight A’s since 6th grade and already scored in the 30’s on his ACT during his first try as a Sophomore, sans any prep classes.  Because I’m thinking that our net worth will knock us out of the possibility of any sort of financial aid – I probably wouldn’t even bother filling out the forms, except I’m sure some of the scholarships, such as the state lottery scholarship, will probably require it.

      

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It’s not that I mind just paying for college.  I think everyone who is able should do so.  It is irritating to see Money Magazine  giving out all sorts of advice on how upper-middle class people, who could pay for college if they wanted to and made it a priority, can manipulate their accounts and financial situation to “maximize their student aid.”  What is bothersome, however, is how I perceive college tuitions are set by the colleges.

You see, just as with healthcare, the prices on the books for most colleges are not the real price.  They are like the MSRP sticker on the car window.  It may say that tuition is $40,000 per year, but almost no one actually pays that.  After you get an offer, the college looks at your financial situation and decides how much you really need to pay.  Some people pay nothing.  Some people pay $10,000 per year.  Some people pay $25,000.  And it isn’t like the people paying nothing have any different classes, access to professors, or dorms than those paying full price.

And I’m not taking anything away from someone who came from a home with one parent who worked extra jobs to put food on the table and obviously didn’t have any money to put away for college.  In that case I think the student should get a break because there are great students who come from everywhere and we don’t want just the kids of upper-middle class parents and the wealthy going to colleges.  Plus, making an investment in a child that made good grades and prepared for college without a parent looking over his/her shoulder constantly and driving them also makes great sense as a society.  Such a child has shown that they are self-driven.  These are the kind of people you want to provide with tools to create things and to lead people.

What irks me is seeing people who have the means having no penalty for not putting money away for college, as would be the responsible thing to do.  In fact, there appears to be a penalty for being responsible.  From what I’ve heard, when schools decide how much you need to pay for tuition, they may look for any money in the child’s name, like custodial accounts that were set up when they were minors, and assume that money would be spent on tuition.  They might also look at college savings accounts like 529 Plans and Coverdell Savings Account (educational IRAs) and count that as the family’s expected contribution.


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So let’s say that Sammy Student walks up to the bursar’s office at WhatsamattaU, which has a list price of $25,000 per year, and has $20,000 in mutual funds that he gained by putting away birthday gifts from relatives and summer jobs.  Let’s also say that his family has put away $36,000 in an educational IRA, which has grown to $80,000 with investing.  The family makes $80,000 per year in income.  The school might then decide that Sammy must pay the $80,000 in tuition over the four years since they assume he’ll use all of the money in the educational IRA and the money in his mutual fund account for tuition and some of the $80,000 in room and board over the four years.  They assume the family will kick in another $15,000 per year for room and board from their income, so Sammy and his family end up paying $160,000 of the full $180,000 price.

Next comes Franklin Freshman, whose family also makes $80,000 per year.  Franklin spent all of the money he got from birthday gifts.  His parents just figured that things would work out for college somehow and went on an extra vacation each year instead of putting any money away for Franklin’s college.  When Franklin gets to the bursar’s office, because he and his parents have no money saved, the school decides that his tuition would be $5,000 per year, expecting Franklin’s parents to pitch in $20,000 per year, including $15,000 per year for room and board.  Franklin and his family get the same education, but only pay $80,000 – half of the price Sammy’s parents paid.  Both families have the same income and the same advantages.  One just chose to save for college and the other did not.  Part of the money Sammy is paying therefore goes to cover some of Franklin’s expenses.

So, we’re basically encouraging people to not save for college, because if they do save they’ll pay more than if they don’t.  That makes me wonder, am I being a sucker for saving up?  Should I encourage my kids to spend their birthday money on games, fun, and maybe a car while they’re in high school, rather than saving and investing?  My goal is to have them start an emergency fund to help them get a good start in life, rather than hitting the streets with nothing after college, but maybe the college will just scoop up any savings they have anyway.  I’m a bit late on the college savings accounts, having saved for 16 years already.  Maybe I should have just invested it elsewhere or just bought a new car or two along the way.

Has anyone out there already made it through the college tuition game?  What was your experience?  Is it worth it to save up?  Are there advantages?

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.

The Nobility of the Spender in College Financial Aid


We’re told from a young age that to save is good.  We get a piggy bank and are told to put our change into it.  The old piggy banks didn’t even have a hole with a stopper at the bottom, so you needed to “break the bank,” literally, to get your money out.  You didn’t do that unless it was something you really, really wanted.  As we get older perhaps the bank comes by the school and gives away toys to those who open a savings account.  Maybe we get savings bonds for birthday gifts from aunts and uncles, being to told to save for our futures.

And then we get to college and are handed the Free Application for Federal Student Aid, inconveniently called the “FAFSA.”  With the FAFSA, saving is bad.  In fact, those who learned to save are penalized, while those who learned to spend are noble.  Save up a couple of thousand dollars in a savings accounts, having kept all of those gifts from aunts and uncles?  Great, you can pay that towards tuition.  Did your parents create a stock account for you when you were young?  Even better, you can pay that for tuition too.   Did you decide to ride a bike and save all of that money from your summer jobs?  Great, more money towards tuition for the college.  But spend everything from your summer jobs on cell phones, cars , and junk, and you get a grant.  If you parents did the same, you get an even bigger grant.  Spending, good.  Saving, bad.

So what is the cost of college?  It isn’t the $40,000 to $60,000 per year figures you see in US News and World Report for state schools and the $100,000 per year you may see for some private colleges.  Almost no one actually pays those amounts since they get deals and “financial aid” from the schools.  Instead, it is “all that you can pay.”  And if you have money saved up, you first pay all of that, then the school will “help” with whatever is left, the amount of help you get depending on how much your parents make in salary and their life choices.

So here we learn that making “good ” choices is bad.  Saving is good, but having money saved up is bad.  Being responsible when deciding to have children is good, but having only one child instead of eight on a $60,000 per year salary is bad.  Staying in the same job at a low salary for 20 years?  Good.  Advancing up the ladder?  Bad.  (Don’t get me wrong here – I know there are limits to where each person can advance, both from natural capability and choices/situations growing up.  Certainly college shouldn’t be closed for children of good, hard working people who are just not able to move above a certain income level.  These are the people financial aid is really meant to help.  My point is that if you choose to stay in a low wage job, you’ll pay less for your children to go to college than someone else who worked to move up the ladder, so the pricing structure makes it better to stay put than to advance.  Is this a good thing?)

Perhaps the worst thing about college tuition is the lack of connection to the value of the product that the pricing scheme creates.  Someone who only makes $80,000 per year might look at a $100,000 per year tuition and wisely decide that it really isn’t worth the money, just as the same person would probably decide a $100,000 sport car was not worth the money and there were better vehicles to get them to work.  But what if that sports car only cost you $40,000 if your salary was only $80,000, and cost you $100,000 only if you made $300,000 per year.  Suddenly there would be all sorts of people driving around in $100,000 sports cars.  Likewise, there are a lot of people from $80,000 households with Harvard or Yale stickers in their $20,000 cars’ windows because their children attend at greatly reduced tuition rates.

The odd thing is that college financing starts at the end of the process – after all of the bad choices have been made.  Wouldn’t it be a lot less expensive for the people actually paying tuition if financing decisions started earlier?  For example, what if you submitted the FAFSA when you first had children, and it was determined then that you needed to contribute a certain percentage of your salary into an educational savings account?  Or maybe the amount that you would need to pay was determined at that point, and you could then decide how you wanted to pay for it?  Maybe you would make payments over the next 18 years, or even over the next 24 years.

This way, the amount of aid you would receive would be based solely on your ability to pay based on the kind of job you had, instead on both your job and your spending habits.  People would be encouraged to save up for college instead of being encouraged to spend all of their money so that they wouldn’t be charged as much for college.  Think of how much the sticker price could drop if most people were paying the full cost, but just paying it over 20 years instead of four years.  And think of how much less student debt there would be when people came out.

We’d make the saver noble instead of the spender.  That seems like a good thing.

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.

Year-End Financial Forget-Me-Nots


BikeThe new year is of course a time of resolutions and soul-searching.  People see the coming of a new year as a time to change and make themselves better.  People resolve to lose weight, pay off debt, or maybe spend more time with friends.  If you haven’t been doing so already, hopefully one of your resolutions will be to start and keep a budget.  In our house we didn’t do so well in that department this year – only getting a yearly budget together and then a couple of monthly budgets along the way.  After years of saving and investing our finances can take a little abuse, but still I don’t like the feeling of not having control over how we’re spending our money.  I want to know if we buy this doodad, or go on this trip or that, that we’ll still have the money to put away for college and retirement during the year.  I also don’t want to see our account balances declining because we’re spending more than we’re making, so getting back on course with a good budget will be one of my resolutions this year.

 There are a lot of things to do before the new year, however, that you don’t want to forget during all of the holiday madness.  Probably the thing to do is to get these things out-of-the-way in October before the holiday madness really begins, but if you haven’t done these things already, maybe take a little time between Christmas and New Years to get them done and start the next year out right.

1.  Take some losses.  If you have sold some stocks at a profit and had a lot of capital gains in the stock market this year, now is the time to sell some of the losers remaining in your portfolio to offset those gains and reduce your taxes.  You can also deduct up to $3,000 in losses against regular income. (Always check on things like this.  I’m not a tax guy, plus tax rules change all of the time.)   Note that you can’t buy back a stock you sold at a loss for thirty days after the sale, and you can’t buy the same stock less than 30 days before you sell at a loss or the transaction will be called a wash sale and will not be deductible.  The IRS doesn’t want you to take a loss when you really stay in the same position.

Also, note that your investment strategy is a lot more important than saving on taxes, so only sell stocks you were planning to unload anyway.  Don’t sell some stocks you really like but that have just dropped a bit since you bought them just to take the loss, because chances are you’ll never buy them back even though you think you will.  A small move in the price of a stock will make up for a lot of taxes that you pay.  If you would buy the stock again today, don’t sell.  Again, back earlier in the year you could also have bought more shares, waited 30 days, and then sold the shares on which you had the loss, but you might then have a large position than you want.  You could also sell now and hold onto  the cash for thirty days so that you could buy the shares back later, but you run the risk of missing a big move up in the mean time.  Really, it’s best to sell because you no longer want the shares, but think about the timing to take advantage of tax rules rather  than to let tax rules drive your investing.

2.  Pull together a yearly budget for 2017.  Get together with your spouse and talk about the new year.   Talk about how much you want to spend on vacations and luxuries during the year.  If your car is ready for a trade, talk about where the money will come from for that.  Also, talk about the things you want to start putting money away for like home repairs and the next car, then put it in the budget so it actually happens.

3. Start an IRA.     OK, you really don’t need to do this before January 1st because you can make contributions for 2016 through April 15th, but if you go ahead and get the account open, maybe you can contribute some year-end bonus money and get the account funded rather than waiting until April when you may be low on cash.  You can also then save up quickly and make a 2017 contribution early rather than waiting until April 15th of 2018.  The longer you have the money invested,  the more time it has to grow, so it is better to invest early in the year than to wait until the last-minute to make next year’s contribution.  Also, use this time when you are home from work for a few days to actually get an IRA open and choose your investments so that you don’t miss another year.

4. Start an educational IRA.  If you have kids at home, you should start up an educational IRA and start putting money away for college yesterday.  They will be heading out the door to campus before you know it.  As with an IRA, you actually have until April 15th to make a contribution for 2016 (see rules here), but with college such a short time away, any extra time you can give your investments to grow is really golden.  If you start putting away money early and often, you can let the markets help pay some of the costs.

Got an investing question? Please send it to vtsioriginal@yahoo.com or 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.

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.