Why Nobody Should Have a 529 Plan

Once your child is born, there is a strong sense of responsibility that kicks in and most parents want to immediately start saving for college.  By far the most popular college savings vehicle is the 529 Plan, which was created by the IRS in 1996.  There are over 70 plans from which to choose and the growth is tax-free! It sounds great, right?  Not quite.  Let’s look at each of the “advantages” of using a 529 Plan to save for college and why you should NOT open one (or at least rely solely on it).

Claimed Advantage #1: Your investment grows tax free as long as it is used for qualified higher education (college, grad school). This is a heavily
marketed benefit of these plans; however, according to Gary Sipos, the founder of College Cash Solutions, “There is a lot of sizzle, but no steak.” Mr. Sipos has looked at thousands of 529 plans that are maturing (i.e. the kids are going to college now), and there is little to no growth in any of the plans. He says that most parents are thrilled to just get out their contributions and not lose money! A rate of return around 3% for a 529 plan is considered amazing.  In addition, there are management fees and other hidden costs that erode any gain you might have.

Claimed Advantage #2: Donor maintains control of the money. While the account is for the benefit of your child, you write the checks to the school and your child doesn’t have access to the money. If you had a regular brokerage account, you maintain control as well, so this does not appear to provide much benefit.

Claimed Advantage #3: Low maintenance option. When you invest in a 529 plan, the plan professionals handle your investments and you do not have to worry about how to invest your money. This benefit assumes that the plan professionals are looking out for your best interest and maximizing your return on investment. While plans now offer more investment selections, the selection is still very limited and comprised of a lot of “dogs” when it comes to mutual funds.

For example, Savingforcollege.com ranks New York’s Vanguard 529 Plan #1 right now. They offer 3 age based investment options and 13 other investment options. Let’s say you have a child under 5 and pick the Aggressive Growth option. This option has underperformed its  benchmark in every year, plus you pay 0.25% management fee each year. The underlying investment of this option is Vanguard’s Institutional Total Stock Market Index Fund.

A better option, do it yourself!  Open a brokerage account in your name and earmark it for your child’s college savings. Buy Vanguard Total Stock Market Index Fund (Ticker VTSMX), pay a one-time commission to buy the fund (~$7) and no ongoing account fee.  If you did this instead of the New York 529 plan, your investment would outperform the Aggressive Growth option and the benchmark.

Investment

1 Year Return

3 Year Return

5 Year Return

Ongoing Fee
Aggressive Growth option

0.85%

14.78%

0.06%

0.25%
DIY Alternative (Ticker: VTSMX)

4.63%

20.35%

0.97%

None
Benchmark

1.08%

15.14%

0.29%

The benefits of the DIY approach: Almost unlimited investment selection, no ongoing management fee, ultimate flexibility and control over the money, and a chance to actually grow your money!

Another great way to save for college is a Roth IRA. If you own a business there is another more tax beneficial way to save for college. Hire your kids (1099 vendors), given them work experience, pay them up to $5,000 per year, open a Roth IRA for them and invest their earned $5,000. They won’t pay any income tax and the contributions can be withdrawn (tax-free) and used for anything once the account has been open for five years. This is also an expense for your business and lowers its taxable income. This is a win, win situation! In addition, financial Aid does not take any retirement assets into consideration, so this money will not count against your child. But, remember to fire your kids in their junior year of high school. You do not want them earning any income in their junior or senior year because it will be counted against them for financial aid.

The future costs of college are staggering, and it is important to start saving as early as possible to take advantage of the power of compounding. However, a 529 plan is not the best or only solution.  I am a strong  proponent of diversification. I have 529 plans for both of my kids, as well as Roth IRAs for them and a brokerage account earmarked for their college.  I use the 529 plans for money given to them by their grandparents, which makes grandma happy. Fingers crossed there will be some tax free growth to take advantage of but I am not relying on it.

Posted on February 19, 2012 by admin
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Look Out! Year of the Dragon

For most of my clients, 2011 proved to be a year of getting on more solid ground (paying down debts, getting out of underwater homes, building up an Emergency Fund, and even taking a vacation). This was predicted for the Year of the Rabbit (2011), in which you were able to rest and have a little peace. Well, I hope you took the time to get prepared for the Year of the Dragon (2012)!

The Dragon is said to create excitement, unpredictability and intensity. This can bring out some wonderful behaviors like enthusiasm, but throwing caution to the wind can lead to unnecessary risks. Personally, I am ready for some excitement but want to steer clear of drama. So, what does this Year of the Water Dragon mean for your financial future over the next year?  Here is some advice based on Chinese interpretations of the year to come:

  1. This is a great year for innovative businesses and ideas. Technology (Fire element) will be robust, and new trends are predicted to help this sector do well. Some astrologers warn that a few of the old school technology companies (e.g. HP) will not fare well. What does this mean for you? If you have a new usiness venture idea, now is the time to act on it. Make sure you have planned ahead, know what you need to pay your bills and invest in the business, as well as a timeline for evaluating your success. Also, if you have not looked at your retirement and brokerage accounts recently, take a look and make sure you have some     exposure to the tech sector and growth segment of the stock market. You do not need to directly own Apple stock to do this (it’s in most mutual funds). Check out low cost ETFs like iShares S&P Growth Index (IVW) or tech sector specific ETFs like Vanguard Information Technology ETF (VGT).
  2. The economic crisis will not end during 2012 and markets will remain volatile. However, you can still make money this year, and Metal and Earth elements are predicted to do well.  What does this mean for you? The Metal and Earth elements indicate that gold and silver, the energy sector and real estate will do well. Again, look at your portfolio and evaluate your holdings. In addition, I do not see the U.S. housing market improving any time soon, but it could be a great investment opportunity if you have cash burning a hole in your pocket.
  3. The energy of the Dragon might cause you to spend more than normal, so be careful!  What does this mean for you? If you STILL do not have a pro-active spending plan and way to track your expense, stop making excuses and do it. Free online services make family money management easy and a little fun. Check     out mint.com or learnvest.com (geared towards women).

In my article last year “Three Cheers for the Year of the Rabbit”, I wrote that you needed to get prepared for 2012’s Year of the Dragon when caution is said to be thrown to the four winds and all kinds of overly
ambitious and daring projects are undertaken.  I am excited and ready for new opportunities but am taking the next month to assess my current position and set boundaries for the unpredictable year to come.

Posted on January 2, 2012 by admin
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Three Cheers for Year of the Rabbit

For most clients that I worked with over the past year, 2010 has been a turbulent year full of both highs (new babies, new jobs) and lows (home value declines, pay cuts). And if you follow the Chinese Zodiac calendar, this is not surprising since it was the Year of the Tiger. The Year of the Tiger brings extremes (both good and bad) and can be marked with spur of the moment decision-making and the end of trusted relationships that depend on cooperation (e.g. divorce).  However, sometimes the Tiger can bring out the best in people with its fiery heat. Hopefully, the latter is what you experienced over the past year.

In 2011, the Year of the Rabbit takes over and is said to bring a placid year for us to lick our wounds from the Year of the Tiger and get some much needed rest.  Personally, I will have a newborn baby in the New Year, and I am hoping for peace and serenity (wishful thinking I’m sure since he will be a Tiger). So, what does this earthly Rabbit zodiac sign mean for your financial future over the next year?  According to some interpretations of the Chinese sign, here is some advice:

  1. Money can be made without too much labor. Life should be leisurely as we allow ourselves the luxuries which we have been craving. A temperate year with unhurried pace. For once, it may seem possible to be carefree and happy without too many obstacles. What does this mean for you? Do you want to take a real vacation or buy some new clothes? Make a list of the things you would like to experience or treat yourself to in 2011 and      prioritize. Pick the one thing that means the most to you and is     financially feasible, and commit to doing it in 2011.
  2. However, do not become too indulgent. The influence of the
    Rabbit tends to spoil those who like too much comfort, and thus impair their effectiveness and sense of duty.     What does this mean for you? When you make your list of things you want/want to do in 2011, reflect on what will make you and your family happy. Is it an experience together or a new gadget? If you try to do everything on your list, you may end up lessening the value of each individual item.
  3. Use diplomacy to get what you want, not force. By using     persuasion, acting with discretion and making reasonable concessions, you will get your desired outcome without too much difficulty. What does this mean for you? Are you thinking of buying a home or negotiating a raise this year? Use reason and persuasion instead of issuing ultimatums to get what you want.
  4. Law and order will be lax; rules and regulations will not be
    rigidly enforced. No one seems very inclined to bother with these
    unpleasant realities. They are busy enjoying themselves, entertaining others or simply taking it easy. The scene is quiet and calm, even deteriorating to the point of sleepiness. We will all have a tendency to put off disagreeable tasks as long as possible.     What does this mean for you? Are there things on your “Financial To Do List” that have been there for years waiting for you to tackle? For example, rebalancing your 401(k), setting a Spending Plan, or getting life insurance or an estate plan in place. Do not let the calmness of the Rabbit cause another year to go by. Enlist the help of friends, other moms or professionals to get one or all of these goals accomplished in 2011.

As a Rabbit (born in April 1975), the guidance provided by the Chinese zodiac calendar puts me in my comfort zone for the next year. What is not to like about a year of rest and leisure? By heeding the advice above, you can be better prepared for 2012’s Year of the Dragon when caution is said to be thrown to the four winds and all kinds of overly ambitious and daring projects are undertaken.

Posted on January 2, 2012 by admin
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Crawl Before You Run- Strategies for Keeping Your New Year’s Resolutions

How To Keep Your New Year's Resolutions

As a financial planner, I do a lot of “planning” for my clients all year long. Over the years I have learned what works and doesn’t work for making meaningful changes that stick.  For example, cutting things out cold turkey doesn’t work.  Long lasting meaningful change needs to be progressive, which means you first need to learn to crawl, then walk, then run.  

Whether your resolutions are financial or not, to ensure success in keeping these resolutions you need to plan ahead (before January 1st is optimal) and create steps that progress so that you build on your success over time to accomplish a larger goal. It is positive momentum from these successes that is going to help you stick with your resolutions throughout the year.

Here are some easy steps to get your progressive resolution plan in place:

Identify the “big” goal and be specific.  Is it losing 30 pounds?  Saving $10,000 for a vacation? Paying down your Home Equity Loan by $5,000? The more specific you are with the goal, the more likely you are to accomplish it.

Determine interim steps or smaller goals that are also measurable and more easily attainted. Using the examples in Step #1, your “crawling phase” could be:  lose 5 pounds, save $1,000 by March 1st in a high yield savings account, and transfer $417 a month to repay the HELOC.
Set-up infrastructure to ensure progress. If you want to know if you lost 5 pounds, you need a scale.  If your goal is saving for a big trip, you need a high yield savings account dedicated to travel. If you want to repay your HELOC, create an electronic bill pay for it through your online banking account.

Pre-set progress reviews so that you are accountable to yourself.  For example, at the end of each month or quarter pick a date that you will take the time to assess your progress against your goal, acknowledge what is working and any obstacles you face.  Give yourself 30 minutes. Put all of these appointments with yourself in your calendar now and stick to them.  Through this review process, you are learning
to “walk”.

Reward progress made towards your goal. With each milestone and progressive step you successfully take, build in a small reward to help you stay the course.  Perhaps it is a new article of clothing for every 10 pounds you lose, or travel magazines for every $1,000 saved towards your trip or something to spruce up your house as you pay down your debt.  These rewards will refuel you so that you are ready to “run”.

By making progressive New Year’s resolutions and following these easy steps, you are giving yourself the structure you need to ensure success. Take the time now to plan at least one resolution for the next year. If you wait, the year will be gone before you know it.

Posted on December 15, 2011 by admin
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Extend Thanksgiving & Save Money

Are you one of the 152 million people expecting to shop this weekend? This number is up 10% over last year and sales are expected to rise 2%. Everything I read about the economy revolves around high unemployment and low consumer confidence. So, how is this possible?

Is it habit, boredom, or not wanting to miss a “great” deal?

My advice: Extend Thanksgiving for the entire weekend and do not get caught in the spending frenzy. Thanksgiving seems to be the one day where we are content to socialize, watch some football and enjoy a good meal together. Notice there is no shopping mentioned. Extend this through the rest of the weekend.

Step 1: Agree to put your credit cards away, including no online shopping, until next week. I am highly confident that you will not regret it.

Step 2: Set your Holiday Spending plan, including budgets for gifts, holiday parties and meals, hostess gifts, etc. Be as specific as possible.

Step 3: Pay cash for holiday spending. If you just can’t pass up the cash back rewards or points on your credit cards, check in at the end of each week until the holidays are over to see how much you are spending versus your plan. Holiday spending can easily spin out of control. You need to stay one step ahead.

Step 4: Reflect on what you want the holidays to mean for you and your family. Do not feel obligated to give gifts. Most people tell me they want the holidays to be about creating family memories, giving thanks and cherishing their loved ones. No gift can convey these sentiments.

It is so very easy to get swept up into the spending frenzy. Marketing campaigns are everywhere! Take control and just say no… at least until Monday.

Posted on November 23, 2011 by admin
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Affording Childcare

For most dual income families,  childcare is often the second largest monthly expense for families (#1 is housing).  If you have two children under the age of five, you may be spending thousands each month on childcare if you both are working. Even if you have a stay at home parent, I find that budgeting for some babysitting and childcare is an important part of maintaining a healthy relationship and providing a mental break for the primary caregiver.

Since every family likely needs some form of childcare, what are the options and how do you pay for it? Below is a summary of childcare options (Pros/Cons) and estimated costs.

Options and Costs

Nanny- A nanny is a single caregiver that takes care of one or more children in your home. Most families say they pay between $15-22 per hour for the care of one child. If you need a full-time nanny, it will cost you around $2,400-$3,500 per month for 40 hours per week.

Pros:

Flexibility- You can set a schedule that works best for your family.
Location- A nanny comes to your home, so no drop off required. They can help with the morning routine and with the household when kids are napping.
Health- Since your baby is at home and not exposed to other kids and their germs, he/she is less likely to be sick. Plus, even if your baby is sick your nanny is there to take care of them so you can go to work.

Cons:
Cost- This is the most expensive childcare option, unless you do a nanny share (which can cut the cost in half!).
Finding the Right Fit- Finding the right person for the job is a challenge. As the boss, it is your job to make all the hiring and firing decisions, and this can be too much for some parents.

Reliability- Nannies are human too. They get sick and might not be able to come to work. That might mean you need to stay home from work or spend a fortune for a last minute sitter.

In-Home Daycare- This is usually the least expensive option because In-home daycares can keep costs low by spreading them among more kids. Most parents report paying between $60-70 per day for this option, which equates to $1,200-1,400 for full-time care.  Licensed small home daycares can have up to six children and no more than half can be infants.

Pros:

Affordability- A less expensive option than a nanny. Most In-home daycares often offer less than full-time schedules or half-days that can be a great fit for a parent working part-time.
Socialization- One big bonus of this type of childcare is that your little one gets to make friends, learn from other children and get used to other adults caring for them.

Reliability- In-home daycares always show up to work since they have multiple caregivers.

Cons:
Defined Schedules- Most daycares have very defined pick up times, which can be difficult if you need to work late.
More Sickness- More kids, more germs. Eventually your child will get exposed to these things, but with daycare they will be exposed sooner rather than later. Also, when your child gets sick you’ll have to stay home from work to care for him/her.

Daycare Centers-  These centers have several caregivers watching
larger groups of children in a bigger classroom-like setting. California Law states that the child to caregiver ratio be 6:1 for children under 18 months old.  The costs of daycare centers can be very high for infant care (almost as much as a nanny) but go down as your children get old and the ratio of caregivers gets higher. Average reported costs range from $1600-1900 for full-time care.

Pros:
Proximity to Work- If you work in the city and want your children close to you, daycare centers are centrally located and provide early drop-offs and late pick-ups. This gives you time together in the morning and after work to reconnect.
Socialization- Just like In-home care, your children get automatic friends and most centers have enrichment programs at no extra cost (music, language, etc.).
Reliability- Again, they are always open.
Well Trained Staff- Caregivers must fulfill training requirements in education or early childhood development.

Cons:
Cost- Despite having more children, many daycare centers employ more caregivers than required by law and have relatively high overhead costs. This leads to higher costs to pass onto parents.
More Sickness- Again, more kids, more germs. If your child gets sick, they cannot go to daycare and you will need to stay home or find a last minute sitter.

Now that you know your options, you need to figure out what will work best for your family and what you can afford. With my first born, I stayed home for a year and then used a wonderful In-home daycare part-time until my daughter started pre-school at 2 ½. With my son, I do a nanny share, which is not only the most convenient for me (I work at  ome) but also more affordable. Bottom line… you may need to try a few different options before you find the right fit for you.

I spend about $2,000 per month on childcare right now. It is a lot of money! But, remember it is only temporary. Eventually your children will be in a fine public school system and you can put all those childcare costs to saving for college!

Posted on October 26, 2011 by admin
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How Strong is Your Money Relationship?

Money touches almost every decision a couple makes. Whether you ask “What’s for dinner?”, or “Which movie do you want to rent?” money is involved. And within every couple’s relationship, there is a relationship with money. Since people see money through different lenses there can be conflict in this money relationship.

Opposite money types tend to attract each other, but after a few years and adding children to the equation, those endearing differences tend to wear thin.  It is ironic that the differences that drew couples together are now the reason for tension and disagreement. The reality is that 70% of all divorces are due to some sort of money conflict. So, how does a couple get on the same page and create a strong money relationship together?

The answer: It takes hard work! But the hard work pays off with a lifetime of commitment and partnership, along with greater intimacy and trust. If you have a strong money relationship, you have a strong relationship.

Step 1: Understand yourself and your relationship with money. Instead of pointing fingers and blaming your partner, take the time to look at yourself.  How do you look at money? Is it a resource or necessary evil? Do you like to spend or save? Do you like to take risks or want security?  Or, do you just not want to think about it?

Step 2: Understand your partner’s relationship with money. How do they see money? What makes them sleep well at night?

Now that you understand each other, you need to make the money  relationship work.  Step 3: Create transparency.  According to “First Comes Love, Then Comes Money” by Bethany and Scott Palmer, 65% of women have a secret credit card or bank account. This indicates a need for control and represents what they call “financial infidelity.”  Financial infidelity inevitably spills over into other parts of the relationship and overpowers it. If you want to create a strong money relationship, you need to come clean and move forward! Remember, you are on the same team.

Part of this transparency is also agreeing on your family values and getting your priorities and committing to spend 60 minutes every month (I recommend two 30-minute meetings every two weeks) together to talk about your progress against your plan.

Like I said, it takes hard work but there is help to make it easier. Life coach Laura Riordan, Ph.D., and I are running a Financial Coaching for Couples workshop on Saturday, November 3rd from 3-5 pm at the Town Center Community Room. During this action-oriented workshop, you will discover your passions and those of your partner, learn how to create your shared vision for the life you want and put in place a road map to get you there and stay on track.

Register at http://conta.cc/qL4RHn. Space is limited.

Posted on October 19, 2011 by admin
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Don’t Forget your Financial Check Up This Year!

Check ou my guest blog on Bump Life (everything babies and beyond).

Posted on October 5, 2011 by admin
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Driving Costs Driving You Crazy?

When you think of how you want to spend your hard earned money, rarely do you think “I want to overpay for car insurance and spend $70 to fill up my tank!” Car related expenses are a necessity for most families, but there are easy ways to reduce these costs and make sure you are not overspending.

The “rule of thumb” for transportation related expenses is that they should not account for more than 10% of your gross income. Depending on your salary, this could be a really big number! For example, if you make $150,000 per year the “rule of thumb” says that you can spend $1,250 per month on your cars. This could easily cover gas ($350), insurance ($115), commuting ($50) and a VERY nice car payment.  While this rule might make sense in other parts of the U.S., I believe it overstates what a family in the Bay Area should spend given our significantly higher home related expenses.

So how much do most people in our area spend?  Here are some facts on the biggest drivers of spending in this category and tips to save a few bucks.

Car Insurance

Most people do not know if they are paying too much for car insurance. I have seen families paying up to $3,000 per year for the same coverage as a family paying $1,400 per year because they failed to update their policies for critical information.

The average annual premium for car insurance in California is between $1,200 and $1,300. There are a number of factors that “drive” your premium:

  1. Driving Profile: Number of miles driven annually, driving record
  2. Type of Car: Repairs on a Ferrari are more expense than on a Toyota Sienna
  3. Personal Profile: Age, where you live, occupation
  4. Coverage: Amount of coverage and deductible
  5. Credit Score: The better the score, the lower your premium

TIPS TO SAVE:  Update the number of miles you drive annually. If you no longer commute to work or are a Stay At Home Parent, you need to significantly reduce this number from the default number of 12,000 per year.  Increase your deductible. If you have a sufficient Emergency Fund, you can retain more risk. See if increasing your deductible to  $1,000 has an impact on your premium (the savings varies greatly depending on your insurance provider). Clean up your credit and make sure your insurance provider has the right score. You can get a free credit report each year from annualcreditreport.com. Review your report and make sure your credit is 740 or higher. If not, fix any errors and get it cleaned up.

Gas

The average spending on gas in the San Francisco Bay Area according to mint.com is $150 per month, which is very low compared to what I see for families. Most families that I work with spend an average of $250-400 per month on gas. You may not have any control over the price at the pump, but you can go further on each tank of gas.

TIPS TO SAVE:  Get regular tune-ups and check brakes/alignment. A car that runs well does not have to work as hard and gets better mileage. Park in the shade and fuel up in the morning. Since gas evaporates in heat, this is an easy way to conserve fuel.  Eliminate excess weight.  Get rid of the junk in your car. By lightening your load, you will improve fuel efficiency.

Car Payments

Sometimes financing a car makes financial sense but if you are struggling to make ends meet each month or find yourself on a single income, a car payment can be a huge burden.  So when does it make sense?

Financing a car makes financial sense if you: 1) want to improve your credit score, 2)have sufficient monthly cash flow for the payment, and 3)have your cash invested earning more than the interest rate on the car. With incredibly low rates and great deals out there, it is tempting to overspend on a car. Don’t fool yourself. If you don’t meet the three criteria above, do not buy a car that is above your means.  If it makes financial
sense, here are some tips to get the best deal.

TIPS TO SAVE:  Buy a used car. Cars depreciate the minute your drive them off the lot. A car that is a year-old will be a much better value than next year’s model. Buy at the end of a month, quarter or year.  Dealerships and salespersons feel the pressure to meet quotas and are more likely to negotiate on the price. Put down the largest amount possible and shorten the term of the loan. This will reduce your overall loan costs.

Personally, I love my car but do not like to drive. I am also in biking and walking distance to almost everything I need. So I have implemented a “two mile rule” that means I walk or ride my bike (with two kids in  it) if the destination is within two miles.  I love not fumbling for my keys after the grocery store and buckling/unbuckling car seats ten times a day. I filled up my tank once last month, called my insurance company and reduced the miles I drive to 3,000 per year, and calculated that I am saving about $1,200 a year now.

Posted on October 4, 2011 by admin
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Top 20 ESSENTIAL Financial Tips for Couples

I created the Top 20 ESSENTIAL Financial Tips for Couples that is available for download at Katysong.com . Clink on the link to receive your FREE copy.

By following these financial tips, you will create a solid financial foundation as a couple and family. Laying the ground work NOW ensures financial security and stability for years to come.

Posted on September 15, 2011 by admin
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