Paying for College – 529 plans

College can be paid for in a number of different ways – you can save up in advance, you can work and pay along the way, you can excel in academics, sports or other areas and get scholarships, you can pay with grants or loans or you might just have a rich relative that is willing to pay it for you.

In today’s article I want to cover the first option – saving up in advance.

In 2013 the Center for Social Development did a study called “Small-Dollar Children’s Savings Accounts, Income, and College Outcomes”(1) where they share some interesting findings:

  • 61% of low- and moderate-income (LMI) children have no savings account for college.
  • An LMI with savings for college is three times more likely to enroll in college than a child with no savings, and more than four and a half times more likely to graduate.
  • Only 5% of LMI’s with no savings will graduate, while 25% of those with savings of $1-$499 will graduate, and 33% of those with $500 or more set aside will graduate.

These numbers are significant – compared to their peers from a similar socioeconomic background, setting aside between $1-$499 for your child or grandchild makes them three times more likely to enroll in college and four and a half times more likely to graduate. That’s not a lot of money for those outcomes.

In addition, the government has provided some great tax benefits to saving for college in special accounts called 529 plans. Each state has at least one 529 plan, but they all share these benefits:

  • Tax-free investment growth
  • Tax-free withdrawals for qualified expenses
    • Qualified expenses include tuition, fees, room and board, textbooks, computer, printer and software as well as any other required fee from a university or college
  • You can use the money to pay for education expenses in any state
  • The account holder maintains ownership of the account
  • You can change the beneficiary any time you want
  • If your child gets a scholarship you can withdraw up to the amount of the scholarship and just pay taxes on the earnings
    • Non-qualified withdrawals (i.e. those not for qualified expenses) are subject to taxes and a 10% penalty on the earnings
  • Legally there is no maximum amount, though in reality most people want to keep the annual contribution below $14,000 if you are single, and $28,000 if you are married(2)

Many states offer a tax deduction or credit of some kind if you live in that state and invest in that state’s 529 plan. NerdWallet has created a list of which states offer a deduction or credit here:

https://www.nerdwallet.com/blog/investing/529-plans-list/

Which plan should you invest in? You want to find a plan with low fees, direct-investing (which means you pay no commissions on the investment) and, if possible, a tax deduction or credit.

Consumer expert Clark Howard said, “Utah is by far the single best plan in the country.” He also lists Iowa, New York, Georgia and Michigan as great plans.(3) Morningstar rates Utah’s plan as “…one of the best in the U.S.”(4)

You can explore your state’s plan further from the NerdWallet link above, but if you are looking for a great plan you can’t go wrong with the Utah Educational Savings Plan (https://uesp.org/). It is direct-sold, has low-fees, and has good investment options with Vanguard. There is no fee to open the account, there is no minimum investment and Utah residents can get a Utah State tax credit for contributions.(5)

Remember – saving as little as $1-$499 for your child’s college education dramatically increases the odds of them going to, and graduating from, college, which will increase their lifetime earnings, decrease their chances of living in poverty and decrease their chances of being unemployed.(6)

 


  1. https://csd.wustl.edu/publications/documents/wp13-06.pdf
  2. Note that it could actually be much higher than this if your plan allows it, but that gets into estate planning issues, which we aren’t going to get into here.
  3. http://clark.com/education/clark-updates-his-529-guide-for-2010/
  4. https://uesp.org/morningstar-utah-educational-savings-plan-is-one-of-the-best-in-the-u-s/
  5. This is not tax advice – check with your tax advisor or preparer to ensure you get the maximum benefit.
  6. This is assuming they choose the right major, but that will have to be covered in another article.

Are Credit Cards Evil?

If you listen to certain radio talk-show hosts you might think that credit cards are evil. Credit cards are NOT evil. They are a tool, but just like with any other tool, they need to be used responsibly. If you can’t handle a tool you shouldn’t use it.

I think you should have one or even several credit cards. I have one main one that I use for cash back, a Delta card that I used to get a free flight, an Amazon card that gives me 5% cash back on Amazon and the Costco credit card that I use to get 4% cash back on gas.

But what about all the credit cards versus cash spending studies?

No doubt you’ve heard studies that prove that we spend more with credit than we do with cash. It is very possible that these are myths.

The most popular is the study that Dun & Bradstreet supposedly did where they found that people spend 12-18% more when using credit cards instead of cash. However, no one can seem to find that study. Everyone cites it, but no one cites the source.

There is also a study that McDonald’s reports that the average ticket price is $7 when people pay with credit and $4.50 when they pay with cash. Again, though, no one can find the original source (1).

Mark Wells, CFO of the payment processing company for McDonald’s reports that, “When an establishment accepts credit cards, the average ticket size goes up. We anticipate a 40 percent increase in the average ticket size for those franchises implementing credit card processing for the first time” (2). Again, though, Wells doesn’t provide any supporting data for this statistic.

While those studies might be made up, it is important that you practice responsible spending when using credit cards.

  • If you can’t pay the full balance off each month, don’t use credit cards.
  • If you think you will spend more with cards than cash, use cash.
  • Whenever you use your card you should immediately transfer money from a category in your budget and move it to the credit card category. For example, when I buy gas at Costco I immediately enter the transaction in my budgeting software. It records it as a credit card transaction and moves the amount I spent from the gas category to the Costco credit card category.

You’re better off not using credit cards if you can’t pay them off during the billing cycle. If you’re paying 12.9% interest and getting 1.5% cashback, you’re clearly not coming out ahead.

If, however, you can use them wisely, and you pay them off in full before any interest is charged, why not take advantage of the rewards?

  1. Most websites that talk about these two studies cite this article on NerdWallet as their source: https://www.nerdwallet.com/blog/credit-cards/credit-cards-make-you-spend-more/. Citing a website that didn’t do the original study, and doesn’t cite their source, is not a proper citation and proves nothing.
  2. http://www.businesswire.com/news/home/20031021005628/en/Credit-Cards-Process-Faster-Cash-McDonalds-Franchises

Are You Financially Fragile?

What would happen to you and your family if:

  • your fridge broke down?
  • your car transmission went out?
  • the primary breadwinner in your family dies?
  • the primary breadwinner in your family becomes disabled?
  • the Social Security fund goes bankrupt and you will no longer receive a Social Security check?

As many as 76% of Americans live paycheck-to-paycheck – they have little to no savings and they spend more than they earn each month. These people are the Financially Fragile.

Financially FragileWhen one of the above events happens it can be challenging for anyone, but it is devastating for the Financially Fragile.

If you are living this way, you can take a few steps to become Financially Resilient. Being Financially Resilient means that you are able to withstand or recover quickly from difficult financial conditions, such as your car transmission going out. Again, that can be difficult for anyone, but the Financially Resilient will recover quickly while it can destroy the Financially Fragile.

Here are some things I recommend to start down the path to becoming Financially Resilient:

  • Have an emergency fund – start out with $1,000
  • Use a budget[i]
  • Spend less than you earn
  • Have adequate insurance
  • Pay off debt
  • Use a Revolving Savings account[ii]
  • Have some “fun money” or “mad money”
  • Pay attention to your credit score[iii]

For more information on these topics, see the links below. I encourage you to take steps to become more Financially Resilient.


[i] Guide to Budgeting

[ii] https://ryanhlaw.com/revolving-savings/

[iii] https://ryanhlaw.com/know-your-score/

Budgeting – how I divide my expenses

Understanding Your ExpensesI break expenses into three categories – essential, important and wants.

Essential expenses are those things you need to survive, and would include food, clothing, transportation, shelter and utilities. I would also include giving in here as I find it essential to financial success. The writer of Proverbs teaches us that we need to, “Honour the Lord with thy substance, and with the firstfruits of all thine increase.” For me giving 10% is the top line of the budget.

Important expenses would include insurance, savings, debt payment and revolving (we’ll cover revolving in a moment).

Wants includes everything else – from Netflix and vacations to eating out and entertainment.

There’s a number of other expenses that could fit in either important or wants. A cell phone and internet are important for most people. A bigger vehicle may be important if you are having a baby and your family won’t all fit in your current one. If you want a nicer car just for fun that would be a want.

Go through your budget and break them into one of the three categories – essential, important or wants.

How do you handle things that only happen once a year such as Christmas or car registration? It’s simple – you just make a calendar with all your known, but irregular expenses with a dollar amount attached, divide by 12 and save that much per month. I call this my Revolving Savings account. For more information see this post: https://ryanhlaw.com/revolving-savings/

Budgeting Software

Budgeting software

Budgeting is the foundation of financial wellness and success. Budgeting puts you in control of your money and helps you achieve your goals.

A few years back two professors did the largest research study on millionaires in the United States. They studied how they made their money, what their family structure was, what kind of car they drove, what kind of watch they had and on and on. After they compiled the research they wrote a great book titled “The Millionaire Next Door.” One of the key findings of the book was about budgeting:

“Millionaires became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”

That’s right – they set a goal to become a millionaire then the budget was the tool they used to get them there.

Maybe you have a goal to become a millionaire, maybe you don’t. You have financial goals, though, even if you haven’t attached a dollar amount to it yet. Do you want to retire someday? That’s a financial goal. Do you want to travel? Go on vacation next year? Buy a better car? Buy a house? Those are all financial goals, and you will achieve those through your budget. Once you attach a dollar amount and a deadline to the goal your budget can start to really work for you.

In this day and age there is no reason not to use budgeting software. It is cheap (or free) and does all the hard work for you.

In today’s post I want to do a review of the top three budgeting programs – Mint, You Need a Budget and EveryDollar. All three are online, have great mobile apps and are very secure.

The basic premise of all three programs is that you budget based on what you actually have – it’s not a projection in the future or a record of the past. If you just got paid and you have $2,000 in the bank then you budget $2,000. In all three programs the $2,000 will go at the top of the page and you give every dollar of the $2,000 a job or a name.

If $1,000 of that is allocated to the mortgage category you put $1,000 in the mortgage category and you have $1,000 remaining. Let’s say you take the remaining $1,000 and put $500 in groceries, $250 in utilities, $200 to a car payment and $50 to entertainment.

At this point your mindset needs to shift. You no longer have $2,000 in the bank – you have $1,000 allocated to your mortgage, $500 in the grocery category, $250 in the utility category, $200 for your car payment and $50 for entertainment. Your bank balance is irrelevant – all that matters is having categories that are funded.

Let’s move on now to what some of the differences are, the costs involved and pros and cons.

everydollarEveryDollar

EveryDollar was developed by Dave Ramsey and his team at Ramsey Solutions.

EveryDollar has two versions – a free version and a paid version. The paid version is $99 a year. The paid version gives you the software and app and the paid version connects to your bank account and imports transactions, which is vital in my opinion. The free version also has a lot of ads pushing you to use the paid version.

EveryDollar recommends you:

  1. Budget before the month begins in a team meeting with your spouse if you are married.
  2. Budget to $0 – or give every dollar a name.
  3. Track your transactions – you enter them manually or with the paid version you import them and assign them to a category.

In addition to the ads pushing you toward the paid version, there are ads for Dave’s ELPs, or Endorsed Local Providers. For example, on the sample budget I set up ads came up for auto insurance, home insurance and life insurance.

EveryDollar comes with a good 15-page Guide to Budgeting that teaches you how to use the software.

I found the interface to be clean and very easy to use. Entering transactions was simple. You can set or change the categories any way you want – adding, deleting, or renaming.

The big problems I see with the software are:

  • Neither version tracks your bank account. The paid one pulls transactions in, but it doesn’t track your account. You would have to log in to each one to be sure your balances are the same. Other software acts as a bank register in addition to the budget. Using EveryDollar gives you an extra step.
  • The ads for the paid version and ELPs got annoying.
  • The paid version is expensive for what you are getting.
  • In most of the categories money doesn’t roll over from month-to-month. If you have $10 left in “gas” at the end of the month it is gone on the first of the next month. I think that is a major flaw. When I looked up why they did that it says that there shouldn’t be any extra money at the end of the month. If there is $10 leftover you should apply it towards your goals. I get that, but I still think it should roll over. What if I am putting extra in the gas category to save for the gas for our vacation?

    There is an exception to this – the “goals” categories do roll over. Put $100 in a category labeled “Emergency Fund” and it will roll over. Supposedly you can also turn any category into a “Fund” and it will roll over. When I tried doing that, though, nothing rolled over. It is possible I got frustrated too early and didn’t learn how to fully use it, though.

While it is clean and simple to use, I think the cons outweigh the positive features. I don’t think it fully does what you want a budget to do.

mintlogo_link_presspgMint

Mint was one of the original players in the online budgeting software game. They were acquired by Intuit a few years back who really hasn’t done much with it. My guess is that they bought Mint to market its other products to the users, of which Mint has over 300 million.

Mint is 100% free. It is supported by ads that can get quite intrusive.

When you first sign up the first step is to link it with your bank account. You can’t move past the first screen until you link it. I don’t like that at all. I think they should let people take it for a spin before they commit, but I think we should also read bills before we pass them. I do wonder how many of their 300 million users signed up, then never actually linked an account.

Because I didn’t want to link an account today, my review is based on how the software used to function. However, just last week I tried to help someone with their Mint account, and it looked the same and had the same limitations it used to have, so my review should be fairly accurate.

Mint will allow you to connect all of your accounts, so it can act like a Financial Dashboard for you. As I mentioned, it is also free.

For me that is where the pros stop. I found Mint to be incredibly inflexible and not user-friendly at all, starting from page one where you can’t see what you are getting unless you link your account. Want to rename a category? Nope. Mint fixes the categories and you can’t change them, which means you have to fit your budget around their predetermined account names. Here is their fixed list: https://www.mint.com/mint-categories.

“Honey, which category in Mint is the money we’re saving for a snowblower?” “It’s the laundry category.” It’s about like that.

Returning things and getting credits to your account throws the budget off as well. If you return $50 worth of clothing it sees that as income. I found full blog posts about how to manipulate the software so it isn’t treated as income. It shouldn’t be that hard.

Remember, though, Mint IS free. If you can’t afford a paid version and you want it to link to your accounts (and you do want to), then Mint is a good option.

ynab-logoYou Need a Budget

You Need a Budget, or YNAB for short, was developed by Jesse Mecham while he was a student at BYU. He had taken an Excel class and created a spreadsheet that he used to track their family budget. He decided to try to sell it and to his surprise it sold – a lot. Jesse has a full team working on YNAB now and it has moved far beyond the Excel spreadsheet. It is now a web-based app with an Android and Apple app. YNAB focuses on one thing – budgeting – and they do it extremely well.

YNAB has four rules for making your budget work:

  1. Give every dollar a job. You budget just the money that you have on hand by asking yourself, “What should this money do before I’m paid again?” You follow this rule by connecting your bank and credit card accounts to YNAB, setting up spending categories, putting money in the categories and tracking your expenses.
  2. Embrace your true expenses. Think about your less-frequent expenses such as Christmas and insurance. You set a goal with a deadline and a dollar amount to meet those goals. The software tells you if you are on-track or not. See my blog post at https://ryanhlaw.com/revolving-savings/ for more details.
  3. Roll with the punches. When you need to change your budget, just change it.
  4. Age your money. Work towards spending money that you earned at least 30 days ago – that way you aren’t living paycheck to paycheck anymore. The software displays an “Age of Money” number at the top of your budget.

YNAB is free for 34 days, then you can pay either $5 a month or $50 a year. Students can get a copy for free for a year by emailing student@ynab.com.

YNAB is simple to use, and in my opinion it is the most powerful budgeting software out there. The only downsides I can think of are:

  • The Android and Apple apps need some more developing. I happen to know that this is a feature they are working on right now.
  • It has a bit of a learning curve. While they have user guides, they could benefit from a simple booklet like EveryDollar puts out with their software. However, they have free online classes (over 100 per week) – including some early in the morning and others in the evening. You should be able to find a class time that works for you. There are currently 13 different classes – from Getting Started to Learn From Reports (https://www.youneedabudget.com/classes/).

Conclusion

If you need a free solution I recommend Mint. If you are willing to pay for a far superior product, though, I recommend YNAB. I have been using YNAB for years now and I recommend it all the time. It is the most powerful and versatile option. You will get far more from YNAB than you will from either other software package.

With any budgeting software, though, it only works if you put in the time. EveryDollar recommends a weekly meeting and check-in. This will work for most people. Being the budgeting nerd that I am, though, I actually log in each morning, pull transactions in from the previous day, and make sure everything is up-to-date. It takes just a few minutes, then I can be sure that all of our budget categories reflect correct numbers.

You can learn more about any of these solutions at:

http://www.everydollar.com

http://www.mint.com

http://www.youneedabudget.com (NOTE: If you sign-up for YNAB through this link you will get your free 34-day trial plus another month for free.)

How to save money on shaving

Today is a quick tip on how to save some money on a product many of us use at least a few times a week – razors.

Dorco razor

I don’t like cheap disposable razors, so for years I was using expensive razors such as the Gillette Fusion or similar blades. For the Gillette Fusion razor handle with 1 cartridge you will pay $9.99 on Amazon, and for a pack of 8 blades it is $29.96, or $3.74 per blade.

I was thinking about checking out Dollar Shave Club a while back, then I found out that their razors are Dorco razors. Why not go right to the source?

I have been using Dorco razors for a while now, and they are, by far, the best razors I have ever used.

For their 3 blade system the handle with 2 cartridges it is $6, and a pack of 4 blades is $7.15, or $1.79 per blade.

$3.74 per blade vs. $1.79 per blade – that’s a big difference!

You can regularly find coupons for 20% off that, as well. For example, this link will save 20%:

http://dorcousa.refr.cc/CT7LL7F

Bonus Tip: To make blades last longer, and for the best shave ever with no nicks, cuts or razor burn, I recommend Shave Secret.

I’ve been using it for several years now and it is the best stuff ever.

shave secretYou can find it online, on Amazon and at Wal-mart.

Droids or Tax Time?

Have you started receiving forms with names that sound like droids from Star Wars?

I’m fairly certain that all these droids will be in Star Wars episode 18:

  • W-2
  • 1099
  • 1098
  • W-4P

That can only mean one of two things. Droids are finally making their long awaited arrival on Earth, or it is tax time.

Droids or Tax Time

 

Just in case it is tax time, here are some answers to common questions to help make tax season a little less taxing.

1. How early can I file my taxes?

Wait to file your taxes until you have ALL the tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until January 31 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

  • Form W-2: You should receive one from each of your employers
  • Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098
  • Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox
  • Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form.
  • 1099-MISC: If you did work as an independent contractor you’ll get one of these.
  • If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement.

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

 

2. Should I file my own taxes or have someone do it for me?

There’s a few different ways you can file your taxes:

  • On paper
    • I don’t recommend this – calculations can be complicated
  • Software such as TaxAct, TurboTax or H&R Block at home
    • As long as you use top-rated software you’ll find it’s intuitive and simple. You’ll enter your tax forms in and the software will search for possible errors. I personally use TaxAct.
  • Discount tax preparation services, such as H&R Block or Jackson-Hewitt
    • These companies have their place, but can be expensive. Their tax preparers are trained, but basically use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.
  • Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
    • VITA and TCE volunteers are IRS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.
  • Accountant or CPA
    • Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to move beyond small you should work with the accountant or CPA throughout the year.

3. What is the due date to file my tax return?

It’s normally April 15, but this year it is Tuesday, April 18. Why? The 15th is a Saturday, and anytime tax day falls on a weekend it is pushed to Monday. However on Monday the 17th Washington DC has a holiday (Emancipation Day), therefore tax day gets moved to the next business day.

 

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Almost anyone who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.

What I Learned from my Dishwasher about the Power of Focus

dishwasher-focusWe run our dishwasher each night and one of the kids empties it in the morning. A while back we decided we wanted to leave our dishwasher open a bit during the day to let it air out. Our children decided to make it a game to see how long we could go before someone shut it all the way, which turned off the green “clean” light on the front.

The first day someone shut it shortly after it was emptied. The next few days it was shut before noon. The kids, determined to keep the light on later, were really diligent and would remind anyone by the dishwasher not to shut it. The next few days we made it later and later until one day, when I started the dishwasher around 11 PM, the light was still on.

The next day the same thing happened and since then we’ve only closed it all the way during the day a time or two.

Now clearly this is a minor thing and this post is not about the virtues of leaving your dishwasher open a bit[1]. As the title of the article says, it is about the power of focus. This experience with the dishwasher got me thinking about how we were able to change a habit and achieve a goal by focusing.

How can you use this idea to achieve on your major goals? Focus on them. Here are some ideas:

  • Read and even re-write your goals each morning
  • Look at your goals and think about them during the day
  • Journal about your progress
  • Fall asleep focusing on your goals
  • Create a vision board and screensaver with a picture of your goals

Just as the Proverb says, “As a man thinketh in his heart, so is he” (Prov 23:7), or as Buddha said, “The mind is everything. What you think, you become” or Emerson, “You become what you think about all day long.”

Focus on and think about your goals and you will eventually achieve them.

 

[1] It turns out this is a good practice, though: http://homeguides.sfgate.com/keep-dishwasher-building-up-mold-61036.html

Knowledge is not power. It is the wise application of knowledge that is power.

It’s been said that knowledge is power, but all of us, including me, have knowledge about something we should (or shouldn’t) be doing, but we fail to take action. Knowledge is neither wisdom nor power. It is simply knowledge until it is applied.

Here’s an example. I know I shouldn’t eat refined sugar. It is addicting, fattening, a depressant, it causes inflammation, leads to aggressive behavior, anxiety, fatigue and even cancer. I know all of that, but I continue to eat it.[i] I’ve cut back, but I still eat it.

People know that riding in a car without a seat belt or driving a motorcycle without a helmet leads to an increased chance of dying in an accident. But they still drive without a seat belt or without a helmet.

The Surgeon General has warned us for years that smoking is hazardous to your health, yet millions of people still smoke.

We think the odds are in our favor. I won’t get cancer from sugar. I won’t be in a life-threatening accident. I won’t get lung cancer.

It would probably take a trained psychologist to work out all the issues around these statements and thoughts, but the fact is that we know, deep down, that we should change.

The same is true of our finances. Personal finance is mostly common sense. Use a budget, get out of debt, save for the future, insure for major losses and plan for emergencies. We have the knowledge, it’s the execution that is lacking. If you fail to take action, though, you are going to wind up broke and frustrated.

The challenge today is simple. Turn your knowledge into power through wise application. Pick an area of your personal finances that you need to make a change in. Maybe it’s reigning in your fast food spending. Perhaps it is finally setting up a budget. Maybe you need to take a step to protect your identity. Do it today! Add it to your to-do list and get it done.

power

[i] Sorry if I ruined Halloween, but all of these things are true…