PT Money » Kids and Money

10 Money Lessons Every College Student (and Parent) Should Know

Guest — Thu, 02 Sep 2010 15:03:21 +0000

College can be an amazing experience. Late night pizza runs, cramming for exams and watching foreign films while discussing philosophy is all part of the fun. However, college doesn’t have to be about accumulating debt or seeing how many free t-shirts you can get by applying for student credit cards. Here are ten money lessons every college student (and their parents) should know as they head off to class.

1) Get a job. I’m sure your parents hound you about this. Guess what? They’re right! Students who get a job and are actually paying for part, most or all of their schooling tend to value their classes much more than those who survive each semester on student loans.

2) Live like a college student. You’re poor and on your own. You need to live like every penny counts. Maybe Joe Schmoe’s parents are paying for his college and he drives a Mercedes-Benz and lives in the high-end apartments on the good side of town. Problem is, you’re not Joe Schmoe and you can’t keep up with him because his mommy and daddy aren’t funding your education. Sit back, relax on the couch you picked up off the curb and dig in to those ramen noodles. Chalk it up as life experience. If all else fails, you’ll have great stories to guilt your kids with.

3) Set a monthly or semester budget based on the money you bring in and the expenses you have. The amount of time you have to earn money and the amount you earn is finite. Download a budgeting worksheet and get started today. Believe me, you will have a much better chance living within your means if you are using a budget.

4) Don’t be afraid to shop at garage sales and thrift stores. It’s really easy to get into the trap of thinking that college is about fashion. Maybe that cute guy or girl that you have your eye on is only interested in Armani or Gucci and you want to impress them. Resist the temptation and remember why you’re here. Besides, by the time you’re a second semester sophomore, your fashion decisions will be based on which t-shirt smells the best and which pair of sweat pants aren’t stained.

5) Live in the dorms. There, I said it. Despite what you see on T.V. or hear from your apartment dwelling friend who can barely pay the rent, dorms are a great financial deal. Most of them come with all utilities paid, Internet, a meal plan and a guaranteed space to crash. Listen, it’s not like you’re going to be living there forever. Besides, where else can you go into the lobby at 3 a.m. and join a philosophical discussion about parapsychology as it relates to the television show M.A.S.H.?

6) Scholarships and grants are your friend. Even if you have a couple of semesters under your belt, you should stop by the financial aid office and see what scholarships and grants you may be eligible to apply for. The reason is very simple: You don’t have to pay them back.

7) Pass up the credit card offers outside the student union. Who cares if you get a free t-shirt? Think of that t-shirt as 21% interest on debt that you’ll never get paid off. Even the best credit card rewards negate themselves if you can’t handle the card like a pro – and very few college students can.

Cut your costs on textbooks. You don’t need new ones. There are too many Web sites that offer you the opportunity to cut your textbook expenses by half or more. BigWords.com, Chegg.com, Amazon.com and many other sites out there can help you save a bundle on your textbooks.

9) Buy your own good quality computer and a color printer. Better yet, ask for one for your birthday or as a high school graduation present. Printing things off at 2 a.m. at your local copy shop is not a right of passage. These shops charge by the hour for your computer usage and your printouts will cost way more then they’re worth.

10) Just say no to cable television. It’s way too expensive. Besides, with that spiffy computer you just purchased back in point nine, you can watch free movies & TV online on Web sites like Hulu.com or Fancast.com.

There are many more things you can do to save money. I don’t recommend skipping showers or never doing the laundry. I do recommend establishing good spending habits, monthly budgets and being thrifty. In the end, your college experience is what you make of it and if you make the most of it without spending the most on it, you’ll thank yourself when you don’t have piles of debt to pay off for the next twenty-years.

This article was by Bob who writes for ChristianPF.com – a personal finance blog from a Christian perspective.

Editor’s note: Bob mentioned the free t-shirt thing. As previously discussed here at ptmoney.com (setting up your finances for college), the CARD Act put an end to the practice of giving away free shwag, like a t-shirt. But the point is the same. Don’t let some outside force drive your credit card decisions. Be intentional about your finances and get a card on your terms.

photo by chris.corwin

10 Money Lessons Every College Student (and Parent) Should Know is a post from: PT Money: Personal Finance by PT.

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Is College Still Worth the Debt?

PT — Wed, 25 Aug 2010 19:43:54 +0000

Last week I wrote a piece on how student loans and credit card debt can’t hurt your chances of efficiently building wealth using a college degree. To add to that conversation, I’ve brought in Scott Crawford, CEO of Debt Goal to share his thoughts on the value of education, reasons for rising costs, and what you can do about it. Here’s my interview with Scott.

Why do you think we over-invest in college in America? As a follow up, are there certain colleges or degree plans that are more “worth it”?

I do think we over-invest in college. It may be unpopular to say, but it’s the truth. Our secondary education system in the US isn’t rigorous enough to provide adequate signaling of a potential job candidate’s qualifications so many people look to a degree simply for credentialing. As a result, there are a lot of people who are genuinely not interested in additional schooling who perceive it as necessary to get ahead.

The logical conclusion to this has been diploma mills and for-profit colleges that don’t really provide a good return on your investment. There has been a lot of Congressional scrutiny in recent months about for-profit education where students graduate with tens of thousands in debt but don’t really increase earnings and have poor job placement records.

As part of this debate, there’s been a lot of discussion about education and debt in general with a higher focus on the return for different types of degrees. Some majors have higher starting salaries and students worried about taking on debt should make sure that job opportunities for recent graduates can support their debt loads. Unfortunately, many students choose to major in fields that really don’t translate into starting salaries that enable graduates to repay debt.

This is reflected in online polls we’ve done at DebtGoal. Over half of graduates with debt feel that their earnings don’t justify the amount of debt they’ve taken on and 70% state they’d do things differently to minimize debt if they could do it again.

Why has the cost of college grown so significantly? Are costs expected to continue to rise at these levels?

One of the primary drivers of cost is the fact that education, unlike manufacturing, is purely labor with no substitution of capital investment to drive productivity, so costs will increase faster than for other good. The surprising thing is that education costs have generally outpaced wage inflation. Education costs have grown so quickly because it’s perceived as necessary in our economy and there are few natural checks to keeping costs low.

Schools compete on diversity of programs and the “exclusivity” of the school. With schools all trying to offer many smaller programs, there are no economies of scale. When students compete to get into schools there’s little incentive for students to shop based on costs. Even if it seems expensive, both parents and students feel pressured to “stretch” to get the “best” education possible, regardless of the cost.

What are some ways parents and students can reduce the debt they incur because of college?

There are a few basic things parents and students can do:

Look carefully at the costs of education and choose a school that fits your budget.
Pick a major that will allow you to repay your debts.
Make sure you take advantage of scholarships and stipends.
Probably the biggest thing you can do is graduate in four years.
Work during school.

There are really no magic bullets. I’m a product of public college and feel that my degree was an excellent value that I continue to benefit from. But many recent grads will be struggling for 15-20 years to repay their student loans and have found that they’re putting off buying a home, getting married, or having kids because their student loans are such a burden.

Photo by Valerie Everett

Is College Still Worth the Debt? is a post from: PT Money: Personal Finance by PT.

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Kids Can Make Extra Money: 5 Businesses Your Money-Wise Kids Can Start Today

Guest — Tue, 24 Aug 2010 21:07:14 +0000

In today’s economy, many adults have to learn new skills in order to make extra money and save money. Often these new money making skills seem awkward, as they may not be what the individual has been used to in the past.

Learn About Money Now Rather Than Later

In order to have a head start, then, wouldn’t it make sense to teach your kids about making money now? Learning about money early in life can give your child the ability to start earning and saving at a much younger age, allowing them to more quickly adapt to the “real world” when the time comes for them to make their own living.

And, since most kids don’t have large expenses, earning money can also mean allowing them to build their savings nest egg at a young age and allowing those savings to compound and build exponentially over time.

How to Teach Kids About Money

Imagine never having to utter the words, “Money doesn’t grow on trees.” By teaching kids about money, you may never have to.

One great way to teach your child about money is to go shopping together. This will give your child a better insight about looking for the best deals, using coupons to save, and to not over-buy. Also, setting a good example by not spending impulsively or racking up credit card debt is another good learning experience.

You can also have your child stick to strict spending limits. Even if they have a full piggy bank from birthday money or allowances, setting a limit on how much to spend can be a real eye-opener for them. In addition, opening a savings account for your child can help them to better understand the concept of compound interest and growth.

5 Ways to Help Kids Profit

Understanding how money works can be a real motivator for kids to want to earn more of it! There are many businesses your child can take part in to start earning some extra cash. These can include:

1. Keeping America Beautiful
One Yard at a Time. Have your child start a lawn moving business. This can be as simple as asking several neighbors if they need their yard mowed. If you live in an area that gets snow in the winter, these same neighbors could be good candidates for snow shoveling services too.

2. eBay Their Way to a Clutter Free House
With the internet becoming more popular with the younger generation, your child can take advantage of the money making opportunities it provides. One of the best ways to make money online is to sell unwanted or unneeded items on eBay. Your child can begin selling items such as toys or clothes they no longer use. And, their eBay selling business can expand by offering to sell items for others on a consignment type basis.

3. Feeding (and Walking) the Hungry by Pet Sitting
Another business that’s in great demand is that of pet sitting. Many people travel several times per year for business or pleasure. And, those who have pets cannot always take them along. Therefore, your child can earn a great deal of money by offering to feed, walk, and check on pets. Even those who don’t travel may work long hours and would love to have their pets fed and walked on a regular basis.

4. It’s a Wrap – Making Money Wrapping Gifts
With the holiday hustle and bustle, many people simply do not have the time to wrap the gifts they purchase for their loved ones. This presents a fantastic opportunity for your child to make extra holiday cash by offering to wrap gifts for others. This business could also spill over throughout the year, by offering to wrap gifts for birthdays, special occasions, or even for businesses that regularly send gift items to clients.

5. Express Delivery – Starting a Local Errand and Courier Service
Individuals and businesses are in constant need of items being dropped off or picked up. Rather than taking time to do these themselves, a great majority of people would gladly pay someone else to do this. A local errand or courier service run by your child will not only allow them to earn money, but will also allow them to get exercise by walking or riding their bicycle to perform these services.

It’s Not What You Make, It’s What You Keep

Once your child begins earning money, have them set aside a certain percentage of it to be placed in a savings account. At first they may balk at this, however, once they begin to see their account grow, they could be motivated to add more to the account each month.

This could also motivate them to think twice about purchasing items on impulse, in lieu of growing their savings for potential future purchases such as a car.

This guest post was submitted by Ramsay who blogs for moneyedup.com

Photo by GoodNCrazy

Kids Can Make Extra Money: 5 Businesses Your Money-Wise Kids Can Start Today is a post from: PT Money: Personal Finance by PT.

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National Money Night Talk $50 Giveaway

PT — Tue, 24 Aug 2010 06:01:04 +0000

Families around the country are encouraged to sit down and talk about money and financial responsibility on September 16, 2010 in honor of National Money Night Talk. In a joint effort by American Express and Jean Chatzky, parents can visit www.moneynighttalk.com to make a pledge and get prepared to have “the money talk” with their kids by accessing exclusive Jean Chatzky videos, FAQs, talking points and resources endorsed by the Council for Economic Education.

This free online resource is available in three different tracks based on age: middle school, high school and college. So parents with young adults ready to head off to school can go online now to start and sustain the money dialogue.

How to Participate in the National Money Night Talk

Visit www.moneynighttalk.com.
Watch the main video, read the faqs, and get the scoop.
Take the pledge and decide you’ll make a little time for this dialogue.
Download the toolkit(s) appropriate for your child(ren) — middle school, high school or college.
Have the talk on September 16th, 2010.

How to Enter the $50 Giveaway

In celebration of National Money Night Talk, I’m hosting a giveaway around family finances! I want to know from you, what is one tip you have given your teen or young adult on ways to manage money better? Post your answers in the comment section and enter to win a $50 Amazon.com Gift Card, courtesy of American Express. I will pick one winner this Thursday at noon central time. American Express will mail the prize. Please use a valid email address.

In addition to winning the prize, American Express will pick their favorite tips from this giveaway to post on the National Money Night Talk website! Write your comments in today.

National Money Night Talk $50 Giveaway is a post from: PT Money: Personal Finance by PT.

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Does a College Education Equal Financial Security and Wealth?

PT — Wed, 18 Aug 2010 15:22:10 +0000

More education usually equals more earnings, right? People who don’t finish high school earn less on average that people who do. And people who go on to get a college degree earn more on average than those people who don’t. But neither one is a guarantee of wealth. There are plenty of people who are wealthy but don’t have a college degree. And there are plenty of people with degrees who are broke and in debt.

I’m a big fan of the college experience, not just because of the great time I had there, but because it will increase your chances of financial stability. I want my kids to experience the same things: moving away for college, living on campus, learning to love learning, building relationships and memories, and leaving with a degree that almost guarantees them a job. College is great. And I give partial credit to my college degree for helping me to become financially stable, and on the way to financial freedom.

I would bet that most people with kids, or with plans for kids, want them to go to college. And you want them to get that degree so they can get that job and go live their financially secure life. This is great. But I think two things are likely going to get in the way of financial security and true wealth for your kids, even if they go to college: student loans and credit cards. Here’s how it happens and how to avoid it.

The Student Loan Debt Cycle

Most of my friends are in their 30s now. When I take a rough poll, many of them either still have a small bit of student loan debt, or they just paid it off (like me). 10 years later! The average student loan debt is somewhere around $25,000 right now.

Our parents didn’t have to deal with this debt. College was an expense that could be tackled with current earnings. When they got their first job right out of college they could pocket the $100 to $500 a month that we now pay in student loan payments for their own retirement or short-term savings needs. Our parents didn’t pay for college after college. They could focus on savings and building wealth.

The truth is, college isn’t getting any cheaper, and parents and kids aren’t getting any more prepared with college savings ahead of time. So, I don’t see this cycle of debt ending. Kids will continue to take on debt and pay it off over the course of their careers. This debt will continue to grow into a burden that limits their ability to grow wealth. Of course all is not lost. Because of this new system, some kids and parents are learning that there are some ways to escape the debt cycle:

529 College Savings Plans – If you have a small amount you can contribute each month automatically, you can start a college savings plan and really give your kids a head start. Not to mention, help you avoid some taxes.
In-State Tuition – There’s no question that in-state is the way to go if you want to keep costs reasonable. You have, in effect, pre-paid college for your kids through state and property taxes. Why not take advantage of this?
Community College – Spend a year or two at a community college, where tuition is still reasonable. Then move to a four year school to finish the degree.
Military Service – Serve your Country and earn your G.I. Bill.
Work Study Programs – Both Federal and Non-Federal work study programs are available on your campus. Take advantage of this part-time work to help you defray some of the costs of college.

The bottom line is that parents and kids both need to be a bit more prepared and flexible when it comes to a college education. You can no longer show up day one at the college of your choice and try to figure out how to pay for it then. If you do, you’ll likely need to take on a massive amount of debt, which will inhibit your kid’s ability to build financial security and wealth.

I have been known to say that the student loan is the best kind of debt you can get into. It’s low interest, usually subsidized, and pays itself back in the form of future earnings. But as tuition rates rise, and as kid’s start leaving college with $80,000 in loans (unlike the $20,000 I had), this supposed good debt just gets really ugly, turning it into a burden that’s hard to overcome.

The Credit Card Knowledge Gap

Being in school means your child isn’t earning enough to pay for most of the things they want. But the wants still get paid for. How? By credit cards. Just like I did when I was in school, college kids today are opening up their first credit card and despite some good intentions, they will use it to pay for things they want, in addition to the things they need. When the balances rise and income is inconsistent at best, the card becomes a burden to the kid’s future. And like student loans, kids are leaving college with this debt and not able to properly achieve their other financial goals: car down-payments, retirement contributions, saving for a house, etc because they are making credit card payments. According to a 2009 study by Sallie Mae on undergraduate credit card use,

“Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost four years ago. Close to one-fifth of seniors carried balances greater than $7,000.”

Unlike college tuition rates and student loans though, with credit cards, much is being done on the institution side of things to help curb this problem. The government, via the CARD ACT has started forcing more disclosure on schools and credit card companies with regard to their on-campus solicitation practices. And credit card companies are now prohibited from taking on college-aged kids as customers unless the parents co-sign, or they can show an income.

But government intervention shouldn’t stop you from taking steps to help your kids control their credit card spending. Education is key. Teach them how to use debt properly. Teach them about interest charges, late fees, their credit score (and how proper balance-to-limit thresholds and on-time payments affect them). Create a system where they can only use the card for emergencies if needed. Instead of a credit card, push them towards one of the many free prepaid credit cards. Just like with student loans and tuition, you need to be proactive with your efforts here.

What’s your take? Were these two things a burden on your ability to create financial stability and wealth? Do you think they will be an issue for your kids?

This post is part of the group writing project at Go Banking Rates. Visit their site to read more stories on education and wealth.

Does a College Education Equal Financial Security and Wealth? is a post from: PT Money: Personal Finance by PT.

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5 Things Every College Grad Must Do in June

Austin — Sun, 30 May 2010 11:01:30 +0000

Congratulations Class of 2010! You’ve worked your butt off for over 15 years and now it’s time to put your skills to work and help out planet Earth. But one hiccup that prevents new grads from truly chasing their dreams is being behind on a bad money situation. You can’t go after the dream job or work the extra internship if you’re swimming in credit card debt or spending $800 a month at the bar.

Here are 5 things every college grad must do around graduation time.

Start Paying Off Credit Card Debt

Your greatest gift to your wallet will be starting to pay off any high-interest credit card debt you accumulated while in school. You’ll always be fighting an uphill battle with your finances if you carry a credit card balance every month.

With interest rates as high as 20%, paying your credit cards off will be the best return you’ll get on your money. If you’re 22 or 23 this should be your first financial priority when you graduate – don’t even look at investing if you’re carrying a balance with an interest rate over 10%.

Further reading: 10 Tips to Help You Reduce Your Credit Card Debt

Open a Roth IRA and Contribute Money for 2010

If you’re free of credit card debt, investing for retirement should be in your near future. Just out of college you have about 40-50 working years ahead of you to let your money grow. This means every year you make less than $105,000 you can put $5,000 in a Roth IRA.

If you do that for 45 years and get an 8% return on your investment, you’ll retire at 67 with $2.1 million in your Roth – and $1.9 million of that will have been return on investment because you started investing right out of college. The numbers don’t lie so open your Roth ASAP.

Further reading: Opening a Roth IRA for the First Time

Automatically Save a % of Every Paycheck

2010 grads are young and savvy. Make yourself money savvy and open an online savings account.

These accounts pay higher interest, have great web interfaces, and are absolutely free. Once you open an online savings account, link it to your checking account and set up an automatic transfer from your checking to savings to automatically save a % of every paycheck.

Start by saving 15% and over the next couple of months see if you can bump that up to 25%. These automatic transfers make saving money easy and before you know it you’ll have a huge chunk of cash in your savings account without even clicking a button.

Further reading: Save More Money: Automate and Separate Your Savings

Keep Your Expenses as Low as Possible

The month or two after graduation is hectic. Moving, new jobs, new life, no school, different friends, new setting. Your life is completely different than it was a month ago.

The best thing you can do for your wallet during this expensive time is keep your expenses low. You may have to buy a car, start paying rent, or buy some grown-up clothes for your new job. To cut costs move in with a roommate, go out to dinner once a week, and stop buying movies and music on iTunes.

The money will go fast with all of the start-up costs that accompany the first couple months out of college, but it’ll help you a lot if you keep some extra cash in your account by keeping your spending low.

Further reading: Are You Throwing Money Away? Unused Expenses and Untapped Discounts

Celebrate and Take a Breath

You’re done with school. Let that hit you for a second. If you’re going into the real world, the next year will be an interesting one so take some time to yourself and relax. Visit a friend you haven’t seen in a while, hit up the golf course, go to the beach, host a party.

Live your life.

It’s important to celebrate this transition to the next stage in your life and it’s important to take some time to yourself to reflect.

If you don’t have a job lined up, that’s ok. Live with your parents if you can and keep your expenses down. Take this time to really think about which direction you want your life to go. We often put this pressure on ourselves to continue down a path (I sure know I did) but this path isn’t real. No one loses points if they don’t transition from graduation on Saturday to a full-time job on Monday.

Life’s pretty interesting so grab control of your money at a young age so you can take advantage of the every opportunity that comes your way.

Photo by Beverly & Pack

5 Things Every College Grad Must Do in June is a post from: PT Money: Personal Finance by PT.

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Win a $5,000 College Scholarsip and Get a $25 Bonus to Start Saving

PT — Fri, 23 Apr 2010 15:14:21 +0000

CollegeAdvantage is the 529 College Savings Plan that anyone can participate in. You don’t have to be a resident of Ohio, or use the funds at an Ohio school. It’s a great tax advantaged way to save for your kids education costs. I’m using 2 529 plans from CollegeAdvantage right now.

$5,000 Scholarship

You can win a $5,000 college scholarship from CollegeAdvantage. Until May 16th, you can submit your entry into the contest. If you don’t want to receive their mail out packet, just designate that on the entry form.

$25 Bonus is Back

Get free money to get started with college savings. If you use the referral code 2506962, you will receive a $25 bonus for opening up your 529 savings account. And here’s another hint to save more. Once you sign up, you’ll get your own referral code. If you have a second child, you can then refer yourself to open another 529 plan. In total you could get more than $100 in bonuses from CollegeAdvantage towards your child college savings.

Win a $5,000 College Scholarsip and Get a $25 Bonus to Start Saving is a post from: PT Money: Personal Finance by PT.

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10 Opportunities for Teaching Kids About Money

PT — Wed, 31 Mar 2010 19:51:53 +0000

April is Financial Literacy Month. I thought it would be nice to come up with a list of opportunities you could use to teach kids about money. Little Miss PT is a bit young at this point for a lesson, but she’s already interested in our wallets and curious about the exchanges at the register. I’m sure some of you more experienced parents can share some good ideas as well. Let me hear from you in the comments.

Take Your Child to Work – I like this idea because it can fill in the blank when it comes to the “spend less than you earn” concept. Kids can grow up never knowing where the money comes from. It’s important to show them that Mom and Dad spend time and effort away from home to be able to afford to spend money later. The money for spending doesn’t just appear. This is also a good opportunity for you to ask them how they think they could earn money if they needed to.

Avoid the “Can’t Afford It” Excuse – I’m guilty of using these words from time to time. But I know it doesn’t add any value. Instead, I aim to use phrases like “it’s not our priority right now”, or “we’re spending our money elsewhere.” It’s a way of giving you back the control and showing your kids that you are making a decision instead of having life dictated to you.

Talk with Them at the Register – When shopping, use the time at the cash register to tell them that you are purchasing things with money that has been earned at your job. If you use a credit card, explain how that works and how it’s actually still using your money. And not some magical “get things free” card.

Show Them How You Pay Bills – Have them help you with the monthly bill payment process. Show them how to write a check and explain that concept. Discuss with them your online bill pay set up and how that works. While you’re online, show them these kids and money online resources.

Volunteer for a Charity and Discuss Needs vs Wants – Spend some time together as a family involved in a charitable cause. Teach them how you are providing for the needs for others.

Split Allowances Into 4s – If you give them a weekly allowance, implement a 4 jar method. Use 4 mason jars to split up their allowance into savings, giving, spending, and taxes. Tell them why it’s important to allot money to each jar. To explain compound interest, offer to match the amount that they put in their savings jar each week.

Open Up a Real Savings Account – Visit your local bank and have them open up a savings account. Or simply open up an account for them at one of the many online banks. A SmartyPig savings account would be a great idea. I still remember opening up my very first savings account. It was a passbook savings account.

Enlist Their Choices When Shopping – Don’t just pick everything out for them at the store. Give them choices as well. Let them choose between 2 different types of healthy cereal. Have them look at the price of each and allow them to make a decision based on that. Show them how to find a coupon online for their favorite items.

Discuss Commercials and Other Ads – We’re bombarded with thousands of advertising messages each day. My goal will be to avoid many of these messages by not watching too much TV, and by counter-acting the messages with discussions about intent, as well as wants vs needs. This is also a good time to refer back to that savings account. If kids see something they want on TV, have them go count their funds in the piggy bank or savings account.

Don’t Tie Grades and Basic Chores to Allowance – One opportunity I wouldn’t think would be a great time to talk about money is when you’re discussing grades and basic household chores. I view these as things my kids should be expected to do without pay.

So those are my thoughts on teaching your kids about money. What are some of your ideas?

10 Opportunities for Teaching Kids About Money is a post from: PT Money: Personal Finance by PT.

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Suggested Asset Allocation for Your 529 Plan

PT — Mon, 07 Dec 2009 10:30:53 +0000

Since we’ve been covering college savings and 529 plans here lately, I thought it made sense to have a quick discussion about how you might consider investing your funds with your 529 savings plan. Let’s discuss how to achieve a proper asset allocation within your 529 plan.

What is Asset Allocation?

Asset allocation is spreading your money over different types of asset classes. The three types of asset classes are stocks, bonds, and cash. If you’re investing for the long-term you can reduce your risk by allocating your funds across these different assets. Each asset responds differently to the various changes to the economy/market. Therefore, you’re less likely to see all your investment money go down because all three asset classes are unlikely to go down at once.

Two things typically affect your asset allocation decision: your own time horizon and your own risk tolerance. This is very personal decision.

Should Asset Allocation Be Different for a 529 Plan vs Retirement Savings?

It may not be. But typically since the time horizon for needing college funds is tied to the age of your child, and because your risk tolerance for those funds may be different, the asset allocation is different. You may not be retiring for 25 years, but your 5 year old child will need his college savings in 13 years.

Likewise, you may be more willing to risk your retirement savings vs risking your child’s education savings. Only you know. But, there are some suggestions out there. I stumbled upon these suggested asset allocations percentages while sorting through my mail from the CollegeAdvantage 529 Savings Plan:

Suggested Asset Allocation for Your 529 Plan

Child's Age	Conservative	Moderate	Aggressive
5 and Under	50% Stocks / 50% Bonds	75% Stocks / 25% Bonds	100% Stocks
6-10	25% Stocks / 75% Bonds	50% Stocks / 50% Bonds	75% Stocks / 25% Bonds
11-15	75% Stocks / 25% Cash	25% Stocks / 75% Bonds	50% Stocks / 50% Bonds
16-18	75% Bonds / 25% Cash	75% Bonds / 25% Cash	25% Stocks / 75% Bonds
19 and Up	100% Cash	75% Bonds / 25% Cash	75% Bonds / 25% Cash

Source: CollegeAdvantage.com

Remember that your own asset allocation decisions could vary greatly from this. These are just suggestion.

Mrs. PT and I just opened our 529 savings plan and we have the contributions going to a Vanguard aggressive age-based fund (0.23% expense fee). We’re along way from needing the funds (17 years) and we are comfortable investing 100% in stocks, so we felt like this was a smart option.

See the third column below for how our asset allocation will change over time. Of course, we’re just getting started and so we may adjust and invest directly in funds to have bit more control.

How do you have your assets allocated in your 529 savings plan portfolio? Is it similar to the chart above?

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Common Questions About 529 Plans

PT — Mon, 30 Nov 2009 21:25:45 +0000

I’ve had some questions come in lately regarding saving for education expenses using a 529 Plan. Since I just recently set up a 529 Plan for little Miss PT, the topic is fresh on my mind. I thought I’d take today to attempt to answer some common questions about 529 Plans.

What is a 529 Plan?

A 529 Plan is a savings plan for educational expenses (named after the Federal tax code) set up by individual States or institutions. They’re designed so that you are encouraged to help save for your child’s education (college or trade school). The encouragement comes in two forms: the ability to save money free from Federal taxes and the ability to receive a deduction on State taxes.

The 529 Plan is really the Roth IRA of the college savings world. Your savings grows tax-deferred and the withdrawals are tax-free as long as you use them for qualifying educational expenses. They’re really a good deal.

What About Prepaid vs. Savings Type Plans?

529 Plans usually come in two types: prepaid and savings. It’s important to know the difference. Some States offer one or the other, both, or a plan that combines the features.

Prepaid 529 Plans usually give you more tax benefits and college discount for schools in that particular State. The prepaid plans are considered inflation-busting, since they allow you to save for college at today’s prices.

But they also come with more restrictions. For instance, if you decide to use a prepaid plan in your State and then later send your child to a college out-of-state you’re going to forfeit some of the savings you were able to get by being in an in-state prepaid plan. This varies greatly by State plan.

529 Savings Plans are more flexible. You can usually use these types of plans at any accredited college or university in the Country. I’m a resident of Texas and have a 529 Savings Plan with Ohio’s College Advantage Program. Since it’s a savings-type plan, I can use the funds where ever I want, as long as it’s for qualifying education expenses.

What if my child doesn’t end up going to college?

The savings and earnings from the savings are always your money. The donor (you) always maintains control over the funds. The beneficiary (your child) has no control. You can switch beneficiaries at any time (typically once a year).

So, if your first kid doesn’t go to a qualifying institution, then you can switch the plan beneficiary to another child, yourself, or whoever. Or, you can withdraw the funds. There is generally no limit to how long keep the funds in the 529 plan account.

The only thing that you may forfeit for not using the funds for educational spending is the tax savings on the funds, and a 10% penalty on the earnings from the savings.

As an example, let’s say:

You deposit $50,000 now into a 529 Plan.
Fast forward 18 years and your funds are now worth $60,000. You’ve earned $10,000!
Let’s assume your child decides to skip college.
If you withdraw those funds and use them for yourself on Twinkies, the $10,000 would be subject to the tax and the penalty.
You’d roughly owe the Federal Government $3,000 to $4,000. You’d walk away with around $56,0000 of your $60,000.

But, the 10% penalty can be waived if your child becomes disabled, dies, or gets a scholarship.

What if my child gets a scholarship to college, then what happens to the 529 Plan funds?

Like I said above, you generally have a few options: transfer to another beneficiary and give it to them, sit on the funds until another option becomes available, or withdraw the funds penalty-free (you just have to pay the taxes). The penalty is waived if your child gets a scholarship though.

Should I open a separate 529 account for each child or should I have just one account?

Yes, open an account for each child. To my knowledge you can only have one beneficiary of the funds from an account.

Do I have to use my State’s 529 Plan?

No. But there may be a good reason for you to. Typically the savings in State taxes is the biggest factor. The best guide I’ve found for helping me determine this is Kiplinger’s Best 529 Savings Plans. They will tell you if there’s a reason to stick to your State’s 529 Plan or go with a top 5 plan from another state.

Can you withdraw 529 Plan funds for an emergency with or without pentalty?

Generally, you have complete control over the funds in the plan. You can withdraw your funds at anytime, for any reason. As I mentioned above though, you’d be subject to a tax and penalty on the earning from the savings. There is no hardship rule that I know of that would exempt you from the penalty.

What age or when do you HAVE to withdraw the 529 Plan funds?

There generally is no age or time limit for withdrawals.

Could the 529 Plan act as a nest egg fund for my children?

Using the 529 Plan for anything other than educational expenses would be an inefficient use of the plan. If you’re looking for a place to stash some emergency savings, consider an FDIC insured high-interest savings account.

Should I consult a CPA, CFP, and understand the plan I’m getting into?

Yes, yes, yes! Please visit a fee only financial professional to understand your full range of college savings options. There are other options like Coverdell ESAs that might be a better for your situation.

And each State plan and tax implications have an impact on your decision. Lastly, take time to research the plan you’re getting into. Read the guidelines of the plan. Call up your State’s plan administrator and have them explain it to you.

Good luck getting started with your college savings!

Photo by cogdogblog

Common Questions About 529 Plans is a post from: PT Money: Personal Finance by PT.

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