Reader call: Money stuff

From the "heck if l know" file:

Shay's Mamala writes:

"I have 2 questions related to money:

1. What do you and the readers think about saving for college? Is it a good idea to have an account set up? What are your opinions about a 529 versus an Education IRA? Is it better for us to concentrate on our own retirement savings? College was not something that people in my family did, let alone saved for. I maxed out grants and loans and worked several part time jobs to pay my way. I don't want my DD to have to juggle work and school and I certainly don't want her to leave college in debt like I did. However, I don't know if saving separately for her college makes sense. We could just use our own savings at that time if she does not get funding from other sources.

2. Related to the above question and thoughts stemming from the posts on digital organization. I wondering if other families use financial software packages and if they are helpful in actually spending less and saving more. Are they time consuming to use or can most information be automatically imported into them from financial institutions. Do they make tax time easier? Not that we have wads of dough to manage, but somehow I think we might do a better job with our money if we were actually tracking it. What's a good system?"

I know there's an answer to both of these questions, and my suspicion is that a separate account is definitely the better choice for tax purposes (here in the US, at least, but I'd love to hear what Canadians, Aussies, people in the UK and other countries say). It sounds like some of this question is cultural, too, though, and that's another interesting discussion.

And, yeah, question 2 is something I have no opinion on, but probably should.

I know you know, though, so please share.

Comments

[attiton]

I am an avid Quicken user and have been since I was 18 (I'm almost twice that age now). I must say, though, that I completely miss the days gone by when I could just enter my transactions, categorize them and then run reports on them. All of the other stuff they've added since then is just padding and scares people off.

And, if you will all permit me, I'd also like to add the following reminder:

Money management programs like Microsoft Money and Quicken are just *tools.* If you don't like the tools, you won't use them, and if you don't use the tools, they can't help you. Putting all of your finances into Quicken will not miraculously help you save money. You have to want to use and interpret the information that you enter in...and that is real work.

[hedra]

We have a financial adviser, which has been a huge help for us (yay Costco Executive Membership - reduced cost first year, which helped us get started).

For some people as noted, 529 is great, others it's better to put it into the IRA and borrow against it later. We're currently (due to our exact situation) doing the latter - put it into the IRA, track the amount of gain (over the long haul, current market notwithstanding), earmark that mentally for their college 'support'.

Also, we decided early on that we were up for paying for high school, but not college. That might sound weird, but DH went to a really amazing school (nearby), and tuition can be steep (though they have good aid packages). Anyway, in college, you can tweak your education a lot on your own - you can choose the school (to some degree), choose the program, research the profs, change direction, transfer to a different school, do special programs, etc. In high school, not so much choice. Your math teacher is your math teacher, and you can pick and choose a little, but *way* less control.

We figured to 'front-load' the education by being willing to pay through the nose (or to our level of ability, anyway) for a top-flight high school education. From there, they will have more options for other schools for college, as well - graduates tend to get offered a lot of scholarships, etc. And they're well-prepared for college, from there, as well (I'm still not sure I'm as well read/well-rounded as my DH was coming out of HS!).

That said, we're also not forcing it. There's a wonderful public school available nearby, and each child will be allowed to choose - even split it up, do two years in one, and then jump to the other (presuming they get in, which as a legacy family they have some good odds on). Whatever works at the time. But the goal is that they have a really ROCK solid high school program, and that they then pay their own way (with help from us if needed but no 'we pay your tuition' guarantees) through college. Having done the scholarship/grant/loans/work-program route myself, I think it really sets you up to focus on what you're doing, as well as teaching you a lot about how institutions function, about finding loopholes and creative solutions, about seeking answers to problems, and about forming relationships outside the expected (I still have a huge soft spot for my old aid advisor...).

Certainly some kids working their way through blew it off, and others being paid for by parents busted their butts, but... well, I'm reasonably a fan of putting the responsibility on the parties for whom the results have the most value. Which would be the student. If they blow it, it is their dime that's being wasted. If they succeed, I hope they feel the well-earned pride fully, too.

The 'we pay for hs, they pay for college' thing tends to set people back on their heels a bit, but our FA is behind it - and it still allows us to focus on the number one goal, and that is not having to rely on our kids in retirement in any financial ways. Retirement comes first, as our greatest gift to our kids. I know how much of a relief it is to know that my mom's retirement is well funded (with enough to become the 'international bank of mom' when needed), and it is a huge huge huge source of stress to know that my dad's retirement is iffy at best, and that he's still working in order to pay bills at well over 70. Aging parents is hard enough, aging and not financially sound is worse.

We use financial software, but it's just technology. I can do it on paper, but we like reports, and budget analysis, and the other things that the tools provide (like entering bills on the PDA rather than having to do it at the computer, or carry files around). It does make some things easier at tax time, too - sorting out the childcare and healthcare expenses, for example... great help, there.

[O]

Not to say you shouldn't plan, but:
1) Most of these rules will change by the time these kids are old enough to be going to college, so figure out how you are comfortable taking the plunge, and do it. I think plans that "travel" are best, but that's just my HO. (Some are only useful in the state where you take it out.)
2) Do not get so attached to the money that you are unwilling to spend it on college!
Don't laugh. I was a college admissions officer for over a decade, and at least a dozen families a year would complain that the financial aid office "wanted to take all the money from the college fund." Well...yes. It was a college fund, and this was, in fact, the college.
But it is instructive: if it is in your child's name, as the laws and financial aid rules are written now, the college will want it. If it is in your name, the college will want slightly less of it.
And I get it. Eighteen years of savings wiped out in a freshman year can be depressing. As my mother used to say, the biggest raise of her life came the day she sent my last tuition bill.
But: some is better than none; and even a smallish account (which yours shouldn't be in 18 years) will be a buffer against staggering loans.
Good luck, all. Deep breaths.

[hedra]

@Robin, I don't think our adviser is fee only, but he's sane and doesn't at all require us (or do more than provide comparison reports) to buy his company's stuff. Some will. He'd just go *cough*use-someone-else's-product*cough* for the stuff that wasn't suitable for our needs. But fee-only is rather a lot less stressful than hoping you get a sane/not-drinking-the-koolaid FA from a firm.

My advice is to date a few before you decide. First visit is free for anyone worth bothering with anyway. Find a few independent ones, and maybe a few company-affiliated ones, ask around about who is good, and see how it goes with each. Younger/newer ones will be more interested in people with no money (we had way negative net worth when we started, too much debt by far, and our guy was new back then), more established ones will be more likely to pass you on to their direct reports (who are themselves younger and less tested). Newer ones are more likely to try to sell you a standard protocol (either company line or 'generally advised approach' kind of programs), but a good one will explain exactly where your situation fits or does not fit with the program. And they'll also be willing to explain what they're saying, and do so again and again until things start to make sense. Oh, and new guys are more likely to crap out and have your account passed to someone else, as well. It's a tough business, and 1 in 10 make it a year, and 1 in 10 of those make it five. Someone two years in is a better bet than 1. Don't be afraid to ask.

Be willing to date a few, really. Try them out, see what they have to offer, see what advise they give. You'll get a gut feel, which is a start, but comparing what a few different ones have to say will also give you perspective, and a plan. We did NOT go that route, but I also had my mom to talk to about the advice, and my mom is so good that she does better than most advisers anyway (she's been offered countless jobs at different firms). I still bring her our account info each time, and we go over it, so we're all on the same page (she does the same with hers, as I'm involved with her estate planning as well). At first it was absolutely mortifying to say 'um, okay, we're up to zero net worth instead of negative.' But now, we're at 'hey, look how the portfolio is doing! yeah, we're not where we'd like to be yet, nowhere near, but we're GOING, and we have a plan, and we know what to do next.' And that feels *great*.

My mom also started out absolutely zero (no savings, recently divorced, mid-40's, very low income), with no financial education. She just subscribed to every blessed money/finance magazine she could for a year, and read everything until the words started to make sense. Meanwhile, she cut her spending to bare bones, and saved everything she could, and then turned around and started investing it herself. You don't have to do that, but the self-education process was a big part of the program my mom recommends - it starts to be less stressful if you're reading about it three times a day. Even if that's just in the bathroom. ;)

Best of luck! Go for it now. You'll probably be really surprised at how much of a relief it is to have a professional on your side. I expected it to be still a bit stressful, but ... well, huge relief.

[brianna]

Haven't plowed through all of the comments yet, but just wanted to add that Mint (www.mint.com) has worked wonders for our financial management. Can't recommend it enough--easy, free, and fabulous.

[hedra]

And O has a great point on the 'rules change' thing - something flexible is grand. Just in the last four years, things have changed a great deal. Imagine 18...

[Julie]

@Elizabeth...Dave Ramsey has a bunch of books, so I'm not sure which one you would recommend for our situation of drastically fluctuating income. The Financial Peace Planner, or one of his books? Thanks, I'm definitely going to look into it.

[Julie]

@Brianna, can you tell me more about mint.com? I've had some problems with people stealing my ss# and identity, so I'm super-paranoid about putting anything out there on the net re: my financials. More info please!!! Sounds great.

[Robin]

I just want to hug this site and all the commenters. Thanks to all who offered advice for a financial neophyte seeking my first advisor.

[Amy]

I used to track everything we spent and everything we saved in Quickbooks. It was hugely helpful. However, I no longer have the time for it because it was also very time consuming. You can import stuff in from your bank, but that won't categorize it for you - you have to do that manually, which takes a lot of time. And categorizing your expenses is the only way to really see how much you're spending on what and to develop a plan.

[Rita]

Not sure if this has been address yet, but there ARE differences between 529 plans and Educational IRAs. Educational IRAs are limited to $2000 in contributions per year. 529 plans do not have that limit. Another difference is that 529s are intended for "higher learning" expenses - i.e. College, etc. Educational IRAs can be used for elementary school, middle school, high school, whatever.. as long as it is an educational expense.

We personally have both a 529 and an Educational IRA. We plan on using the 529 for college expenses and the educational IRA in case we want to send our kid (21months old) to any kind of special school (k-12) program in the future.

Hope that helps.

[pnuts mama]

@hedra- i am totally 100% with you on the investing in high school to lay the foundations for college- we have been coordinating this for my eldest nephew for the past year or so and i am so proud to say (tears in my eyes!!) that he just got notified he was accepted into his hs of choice- we're now coordinating how it will all be funded. i just know that the opportunity to go to this school will give him so much more than his local public school- and i agree that as parents we will do what we can financially to do the same for our kids.

[J]

I wanted to add my two cents to this discussion only because I think it's important to remember (as some other commenters already pointed out) that there are many options for college. My parents had no money and no knowledge of how college admissions worked in this country (we are immigrants) so when it was time for me to go to college, I did what made most sense which was to go to a wonderful 2 year college nearby, live at home and work part-time during those years. I paid for my college tuition and books which were peanuts, got a kick ass education because I was busting my butt and transferred to a top state school after two years. I received a Pell grant, a couple of scholarships and additional subsidized loans and ended up with ony $10,000 in student loans. Never once have I looked back and thought that I had a substandard education because I didn't go to a 4 year university right off the bat.
My husband and I talk about the college of the future for our daughter and we wonder if college in 17 years will even look anything like it does now?? In fact, we almost feel that our daughter may be better off with a non-traditional education where she may take a year off to travel first and then go to college. Or she may go to some specialized college that isn't 4 years...or do all her college work online while working somewhere. Who knows what the future holds for our kids in terms of their education.
We just believe- just as it was already echoed here in many comments- that if we can be financially secure in retirement it will be a gift for our child(ren).

[Shandra]

Canadian, so RESP here and I like that the gov't kicks in money up to a cap. We also use the child tax benefit to fund it, along with gifts.

Canadian tuition is going up but is not yet at the level of US tuition for most programmes. But it is very different here with fewer scholarships and bursaries, because historically it hasn't been needed so much. (My tuition in 1989: $595.00. That is not missing a zero. Now it's up about ten times that.)

This is however how I plan to fund my child's university education - out of our savings, dollar for dollar what he earns (and potentially paying things off at the end if he has to take loans; if tuition is really high maybe we'll kick in two dollars per dollar). I think earning some of one's way is a good thing.

[Kristin]

O -- I certainly get what you're saying about people not wanting to give up the college fund when they get to (wait for it) college...but I can also understand the reluctance. When, as you say, you save for 18 years, and then the school takes all of it during the FIRST YEAR... how do you fund the next three, let alone the second or third child?

We're just starting to look into 529s. I hear people say "do your research" because different states have different plans...and that baffles me. Must read back through the comments to see what people suggest for how to research, and where. (Or is there one good URL somebody knows??) I have no qualms about asking the Boy to do some work for his education, but I do have serious qualms about allowing him to be saddled with a pile of debt if we can help him avoid it. I also think, honestly, that part of how he'll earn his education is by pulling good grades: that's his "job" while he's in school. He can work his two jobs over the summer, like I did. (snort)

[Aaron]

In Canada the Federal Gvt contributes 20% to the monies you put into an RESP to a max of 2500% i.e. you can contribute as much as you'd like but the feds will give you 20% on a max of $2500.
My FI suggested a straight GIC as opposed to a Mutual fund. If you can afford to put $ away why risk it being lost in the market? GIC are guaranteed $ and earn approx 4.5% on a 5 year term. Do the math and your kid is looking at a good sum of money for post secondary education.
Also, RESP's can be used for transportation and accomodations on top of tuition. When you set up a plan you can set up a family plan so if child A doesn't go to post sec. it can all be used for child B. You can also cash in all the money in year 1 so if they don't go back to school after the first year your money is not locked in anymore.
Needless to say it sounded like a good idea to us. We signed up yesterday in fact.

[Aaron]

SOrry, I should clarify that it's $2500 a year.

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[Inki]

We live in Norway, where college is practically free (about USD50 a semester, plus books), so saving for college is practically unheard of. Most students here work and/or get state-sponsored student grants and loans. I went to an American college (to be with my DH, who is American) and still have a lot of student loans from the high out-of-state tuition, but I agree with PPs that you tend to value the education more if you pay for it yourself. And I learned a lot from the Teaching Assistant jobs I did on the side, too!
We are saving up some money for kiddo, but it will be up to her when she is 18 or 20 (depending on her maturity level) what she wants to use it for - if she wants to spend it on a down payment for a home or some time traveling, that will be perfectly OK. I received some money from my grandfather which came in very handy for my year spent traveling before college, and I learned a lot from the trip that I wouldn't have gotten in school - I have no regrets on spending it there instead of reducing my student loan burden now.

On the second question, we use Quicken, and the thing I most appreciate about it is that it forces us to look at what we're spending and it motivates us to do better. And there's a huge thrill in seeing the Net Worth graph go up - makes you want to make sure it keeps going that way!

[Penny-wise and Pound-Foolish]

As the original question asker, I want to thank everyone for your thoughtful responses (except that last one?!). I plan to read and link through them over the weekend and make a plan.

[Tamar]

We are looking at this also, and the snag I keep hitting is that savings must be used for post-secondary educational purposes only. Well, coming as I am from within academia, my personal view is that by the time my son is of college age, private colleges will either be exclusively the purview of the wealthy, or will be rendered less expensive by government intervention. The inflation of tuition simply cannot keep rising without connection to take-home pay and cost of living. So I am hesitant about designating educational savings exclusively for post-secondary degrees.

In addition, neither my husband nor I had particularly happy experiences in public education (as much as I am a believer in public education, at least in theory). I'd rather have the choice of spending the savings on whatever educational setting my son may really enjoy, be it as an adult or as a child. So, we are still searching for the right account. We may end up using two types, I'm not sure.

[Heather]

We discussed this with a financial planner and were advised to open a Roth IRA instead of a 529, primarily because the Roth IRA can be used for education as well as retirement (after a certain age) without penalty. The only catch is that you have to make under a certain income amount to do this. I can't remember what the amount is, but it was fairly generous. We had no problem qualifying and we're a two-income professional household.

[Fahmi]

1. We started a 529 for our son, it helps that NY has a decent one. We also joined UPromise, which is a great way to get money in to the account other than the money you put in. It also gets my parents on board to help out, too. However, everything I've read, and the commentators echo this above, fund your retirement first. Even if you are putting money in the 529, you should be maxing out your retirement contributions first.

2. I use Quicken for my financials, and it helps to see where the money is going. I don't think it's helping us spend less, per se, but it's nice to know that we are not spending as much on frivolous things as we thought. However! Most banks charge a fee for importing their information automatically into Quicken. They don't tell you this upfront. When you look at the bank web site, they will tell you that they export in MS Money and Quicken formats, and you can even see the option in the export. Great, right? NO! You see, Quicken recently changed its file format. Banks charge for the newer one, but they don't have this listed ANYWHERE on their site, but the old one is kept up to show they are compatible. It took me two weeks of solid head-banging to figure this out. ARGH. So I just make the extra time and effort - about 30 minutes each month, to manually enter everything instead of paying extra. (This applies to Chase, WaMu, BoA, and Citibank as of now. I am sure other banks are hiding like this, too)

[kates]

1. We have opted for a personal account in my and my husband's names, which in our heads we have designated as belonging to our son. The problem with 529s is that you *can't* use them for anything other than college. What if my son would rather travel a lot, or buy a really great violin, or start his own company? I like the idea of having a large chunk of change set aside to help him achieve his dreams, whatever they turn out to be. But if his dream turns out to be becoming a big pothead, the money is in my name, not his!

2. Turbo Tax saved my life.

[epeepunk]

Jumping in quick to clarify one piece of advice that hedra relayed. Our financial adviser recommends using a Roth IRA first for educational expenses, and then the 529 after you've maxed your contributions to the Roth. The Roth contributions are after-tax, so there are no taxes when the money is withdrawn, as opposed to your standard 401k IRA whose contributions are pre-tax and whose withdrawals are taxed, with the assumption that you will be in a lower tax bracket at the time of retirement. The advantage of the Roth is also that (check me on this) it doesn't count towards your financial aid calculation, and it can be used for any purpose, not just education.

For tracking our money I'm using MS Money mostly because it was free with a MS suite of software. I bought a second program so that my Palm can be synchronized with it - which allows me to update the checkbook anywhere and upload it later. We had used Quicken before, and I don't recall that there is much benefit. The budgeting in MSMoney sucks for our use though, so I do that with Excel. Money does give you reports, like cash flow, that you can export to Excel.

[hush]

For U.S. folks -- I know the standard advice on 529 plans is to use your in-state plan, because you can generally get a break on your state taxes, and avoid possible penalties for going out of state.

Not all plans are created equal though, so for those of us who live in states without state income taxes (AK, FL, NV, SD, TX, WA, WY) what is the best 529 plan out there? Someone said Utah -- why?

[Slim]

Utah because lots of choices, low expenses.

[Patti]

I am late on this but I wanted to add my thumbs up for a 529. My father in law is a financial advisor and this is what we have for my daughter.

Also, I LOVE Microsoft Money. I don't use it for taxes but it is so easy to import info from all our investments and our day to day accounts, and it tracks purchases and can give you reports based on monthly spending, which has been so wonderful. Thats all!

[Nut Mommy]

My husband is a portfolio manager and, even before our son was born, built a spreadsheet that looks at today's college tuition and fees (for a 4 year private college) and factors in assumptions about inflation in college costs, overall inflation, annual returns, etc. He figured out that by the time the Nut is ready to go to college, it will cost upwards of $400,000 in today's dollars. But, if you could somehow contribute $100,000 over the next few years, that would grow enough to cover it. I realize this isn't particularly useful info for most people, but it certainly is eye-opening about how both fees and money invested can grow over time.

As some other PP have mentioned, many states give tax breaks for contributions up to a certain amount and you don't necessarily have to use your state's plan (check the rules to be sure). Where we live, the maximum contribution per family is $24,000 annually AND you don't have to participate in the state plan. Like others have mentioned, we use Utah, since my husband the finance geek determined that this has the lowest fees and best investment options.

[Joy]

I'm way down the list, so not sure anyone's really going to read this far, but here's my opinion.
My husband and I graduated college owing about $10,000 between us (most of it on credit cards). Our parents helped as they could, but we're both from big families, so there was only so much money to go around. We both worked all through school, and I think the experience of having to pay our own way, and manage debt for a while was invaluable. It took five years of scraping to get by and pay off the debt, but we did it in 5 years and learned invaluable lessons on treacherous high interest debt and other financial pitfalls. Trial by fire, yes, but having to work in college and not having everything handed to us was a lesson many of our fellow students did not learn, and paid dearly for in the long run.

[Dan]

check out: www.collegesavings.org - it's the best place to compare the state plans.

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