FAMILY FINANCE FRIDAY
My toddler Eliza has entered the first of what I’m sure will be many stages of rebellion. I’m knee-deep in reverse psychology, reverse-reverse psychology, and even triple reverse psychology to try to manipulate her into listening and doing what I say. Let’s put your shoes on honey. NO want it, sandals. Okay, let’s put your sandals on. We don’t like sandals. How about your shoes then? Daddy eat it? I’m putting your shoes on. BOOTS! I WANT BOOTS! Fine, let’s wear the boots. No! I want shoes. This is essentially how every conversation in our house goes these days. We have our soft moments and I love her wildly, but I am sensing this underlying foreshadowing that my oldest daughter is going to spite me at every turn as she gets older. Thus, sitting here writing about what I’m doing to save for her college has me assuming she’ll bypass college altogether and laugh in my face.
Shifting quickly, here in America there are these reasonably attractive college savings plans affectionately called 529s. A 529 is a tax-advantaged savings account that allows people the ability to invest and grow college savings with the promise that any growth will be available at the time of college tax-free. Thus, we have a handy little savings tool for the fiscally meticulous cheapskates (that’s me). While 529s can manifest in the form of prepaid tuition, I’ll share mostly on the college savings portion and how we have used it in the past and continue to do so. College tuition is currently doubling if not tripling the national inflation rate, so saving a few scraps here and there grows more and more important.
The most common form of the 529 is the college savings, which is what I am currently using for my daughters. I basically invest a certain number of dollars into our state-run 529 and an account grows in each daughter’s name. To walk this example out in real life, let’s say I received $500 from friends and relatives on the birth of a child. I can put that $500 in a 529 account in the child’s name and, most importantly, I can place that money into a mutual fund or similarly invested option. The account grows at the investment return rate and also has 18 years to begin to compound. Let’s say I invested just $500 per year for 18 years; that would leave us with $9,000 principle in her college account. But, since that money is invested, 10% returns would turn that $9,000 into nearly $23,000. And the best part of the 529 is that the extra $14,000 gains are completely tax-free (assuming it is spent on qualified expenses of course)!
I fell in love with the 529 a few years ago as I was saving cash to return to school. I funneled all our savings to myself through a 529 and was able to take a $6,000 state income tax deduction each year of my MBA (the tax deductions are on a state-by-state basis). Even though the window was quick between deposit and withdrawal, I also managed to snag an extra few hundred dollars in investment returns. The deposits were a breeze and the withdrawals even easier. At the completion of my Master’s program, I immediately opened an account for my oldest daughter and followed up with a second account when daughter #2 was born. We have automated monthly transfers feeding into their accounts and throw in random birthday and Christmas checks into the funds as well. The 529 can be transferred between siblings, so if Eliza doesn’t attend college it can roll on to Everly. It also has special penalty-free withdrawals should Eliza go to college, but receive scholarships or grants removing her need for the fund. If all goes according to plan, we……….still won’t be able to pay for their college, but we’ll at least have a start!
I’m a terribly sarcastic parent and sometimes raise my eyebrow to my wife and whisper “Should we really be saving for college? I’m not sure that’s in her future,” as we both watch her eat a dried piece of yesterday’s dinner she hid in her highchair cover. Furthermore, as I mentioned previously, if her teenage years are anything like her terrible two’s, there’s a great chance she’ll do the exact opposite of what I have been preparing for. So perhaps if I tell her NOT to join a convent or nunnery, she’ll do exactly that and I’ll be off the hook for the troubling teenage years when boys enter the picture…