Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the '529' Category

02.10.2009
Piggy Bank

Creative Commons License photo figure credit: ken +

Reader Jenn asks:

Are you planning to open a second 529 Plan for the new baby or maintain one account for both kids? We opened a 529 when we had kid #1 but when kid #2 came the financial planner we consult with said we can use the same plan for both kids?

Hi, Jenn, thanks for the great question.  Prior to your question I had not ever considered this and had plans to set up separate 529 accounts for each of our little dears.  I did some research on this and found a number of pluses, minuses, and rules that have swayed my ultimate decision:

Rules that seem to apply to this question:

  • “Each beneficiary must have his/her own account. Siblings or cousins can’t share an account. You can, however, roll any remaining portion of an account over to another child once the account’s beneficiary has completed college.” (source)
  • “If the child doesn’t want to go to college, you can roll the account over to another family member.” (source) You can also split the account into multiple beneficiaries.
  • “There are no restrictions on who can open an account for whom. You can open an account for your child, a friend’s child, a relative, the paper boy, or even yourself.” (source)

Advantages of saving separately for each child:

  • In our case, all of the money contributed to the plans, at least for the foreseeable future, will be money that has been given to the kids as birthday, Christmas, and other presents, so it’s more equitable to keep the accounts separate.
  • Individual accounts can be better tailored to the time horizon for each child — different investment choices can be made depending on age.
  • If it applies, you can contribute more in total before incurring the federal gift tax.
  • If you should die, the childrens’ guardian will know exactly what you intended.
  • Some states allow you to take a bigger tax deduction if you save in multiple accounts.

Advantages of saving jointly for more than one child:

  • You can start saving before you ever have kids, reducing the overall amount of saving that you have to do. (See The Beneficiary Loophole.)
  • Some plans charge a maintenance fee for each account.  A $25 annual fee per child would really ding our child’s account.
  • It’s simpler to deal with a single account than many.

One thing that doesn’t seem to matter at all is the amount of interest and compounding.  For the same investment choices, it does not matter whether you have a certain amount of money in one account or 100 accounts. J.D. at Get Rich Slowly demonstrated this recently.

For me, the only genuinely compelling reason to have just one account seems to be the idea that you can save before you have kids, but since we missed that boat already, it doesn’t apply.  So the bottom line is that I will be opening a new account for our new daughter.

I’d like to hear our readers’ thought and comments on this topic!

Little Feet

photo figure credit: MITBeta

As I exclaimed here, Daughter #2 was born at home last weekend.  This was a joyous experience for everyone involved, from ScrapperMom herself, to the doting midwives, to ScrapperMom’s parents, to me.  We’ve learned a number of lessons that we will take to heart the next time we have a baby.  Some of these involve the homebirth itself, some relate to parenting in general, some are financial and others aren’t. With that, this post will have its off topic points, but should contain enough finance related bits to keep everyone else interested.

ScrapperMom and I decided early in the pregnancy of Daughter #2 that she would try to give birth at home.  (Please let me know in the comments if you would like to know why we made this decision, and if there’s enough interest I will try to put together a concise, coherent post on the topic.)  Daughter #2 arrived about 9 days earlier than she was expected. Which leads me to lesson 1:

  •  Babies can come at any time. So be prepared.

A number of the problems that we have encountered in the first week of our daughter’s life can be directly attributed to lack of preparedness.

Example 1: ScrapperMom has been cooking extra food at nearly every meal she has prepared in the last month and freezing the extra.  This has left us with a freezer full of food that will help us eat well, frugally, and without much preparation time in the coming weeks.  The problem is that it takes several hours or days to thaw something out to eat.  So during her labor and following the birth, we kept running to the take-out menus to figure out where our next meal was going to come from.  Over $70 was spent, to feed all of the people here, on take-out food on the day our daughter was born.   (Thanks to my parents and in-laws for covering much of this cost.)  My mother-in-law hit upon a great idea the next day when she went out and bought a couple of pounds of cold cuts, rolls, chips, etc. — enough to last a few days and satisfy a number of mouths that came through the house during that time

Example 2: The car seat was not in the car yet.  In my scramble to put the seat in the car before we had to take the baby to the pediatrician’s office, I could not find a metal bracket that was required for the installation.  We have two bases for the car seat, and each has a place to store the missing bracket.  We need the bracket for only one of our cars, yet both of them were missing.  I considered running to Toys R Us to buy a new base for $25.  I figured that I could take the bracket out of the new base until I found one of ours and then return the base for a refund.  This is, perhaps, not the most ethical way to do things, but it was pragmatic.  Eventually I found one of the brackets on the floor of the car that didn’t need it and I was able to install the seat.

Example 3: When giving our daughter her first bath, we could not find the scrubby brush that we used on Daughter #1 at that age.  Nor could we find an infant sized towel.  All of these things were in a closest that ScrapperMom had planned to go through and clean this week, before the baby was due.  Since baby came early, I found myself standing there holding a reasonably clean, wet, crying newborn who I eventually wrapped in a couple of receiving blankets to dry her.

This lesson can be extrapolated to many areas of our lives, especially personal finance. Are you prepared? Do you have an emergency fund? Life insurance? Disability insurance?

Lesson #2:

  • You have to look out for yourself first.

Over the days immediately following the birth, I found myself playing host to everyone from the midwives to family and friends. Because the birth was in our house, I went into host mode. I realized only after the fact that they were all there for us, not the other way around. When people were in our house, I neglected many of the things that I should have been doing: laundry, dishes, toddler naps, doggie care, etc. I should have been more careful about not letting guests interrupt what needed to get done, because this just bunched all of these chores into a shorter period of time later (and left us with a surly 2 year old). Better yet, I should have asked these people to help me get these things done so that I could make sure that we all got enough rest after a busy few days.

We must also look out for ourselves when it comes to personal finance. No one cares more about your money than you do. We must manage our own retirement accounts, we must fund retirement accounts before college funds, we must be responsible for our own finances because no one else is going to do it for us.

I have several more lessons that we have learned that I will share in another post soon. Do you have any experience with home births or comments or questions about ours? We’d like to hear about it in the Comments section below.

Holiday

Creative Commons License photo figure credit: muha…

Happy New Year to all!  As we close the chapter on one year and move on to a new one, I find this to be an excellent time to reflect on the state of life in general, and for the purposes of this blog, Personal Finance.  If you’re a regular reader of this blog you will know that I am a big fan of automating personal finance:

  • Our cash back credit cards get billed directly to our bill-pay account at our bank and the bank automatically pays the full balance every month.
  • ING and Vanguard both automatically withdraw pre-set amounts from our checking account monthly to cover various savings goals like increasing the size of our emergency fund, Roth IRA contributions, savings to cover annual payment to insurance, etc.
  • Bill-pay automatically pays all of our fixed monthly expenses like our mortgage, student loans, car loans, etc.

The only things that we ever have to really worry about paying on time are utility bills, gas and electric.

Given this level of automation, it’s easy to neglect our finances.  They’re not really neglected, but they’re not always getting the attention that they may deserve.  Sometimes we’re saving too much or too little.  Sometimes we’re spending more than we should and don’t realize it.  Sometimes we need to shift saving priorities because goals have been met or circumstances have changed.

I’m apparently such a work-a-holic that I had to take the last several days of the year off in order to burn, rather than lose, vacation time.  I spent the better part of one day and small parts of others catching up on our finances — a Personal Finance Holiday of sorts.  I’m not by far the first person to propose such a concept, and I’ve thought about taking a Personal Finance Holiday for a long time, but didn’t think that I had enough personal finance “stuff” to do to fill up a whole day.  Well, after neglecting to even open Quicken since mid-October, it turns out I did have a whole day of catching up to do.

Usually a Personal Finance Holiday is used to get going on all of the little things that you’ve been meaning to do, but haven’t found the time for (you have been meaning to do these things, haven’t you?):

  • creating a Spending Plan
  • opening a new Savings Account
  • starting an IRA savings account
  • buying life and disability insurance
  • opening a 529 account for your child(ren)
  • writing down or benchmarking your Personal Finance goals

Reading any of the myriad of Personal Finance books available can leave one overwhelmed by the number of things that you realize that you should be doing with your finances.  Taking a PF Holiday gives you the perfect opportunity to sit down and bang all of these items out in one shot.  It also gives you time when you would otherwise be unavailable to do all of the little things that might distract you from actually getting this stuff done, without feeling guilty about it: Can’t do it on Saturday because you have to spend time with the kids; Can’t do it on a holiday because you have to spend time with grandma; Can’t do it on a vacation day because you have to run all those other errands that you’ve been neglecting; Can’t do it on a sick day because, well, you’re sick (right?).

Maybe you’re thinking that you can’t possibly take a PF Holiday because you don’t have any vacation time.  Well, take it unpaid.  That’s right, it might not sound very frugal or financially prudent to do so, but let’s look at what a PF Holiday is worth:

  • If you use your PF Holiday to open an IRA and put just $100 per month into it, you’ll have $1,227 in one year at a modest 5% average return, and $15,528 in 10 years.
  • If you setup a disability insurance policy, you and your family will likely be able to maintain your standard of living should you become disabled.  If you can’t work for 10 years, this might be worth a quarter of a million dollars
  • If you set up an emergency fund, and use this fund instead of a credit card when a true emergency rolls around, you might save $1,400 in interest on that credit card.

If the average person makes $40,000/year or about $20/hour, then the cost of a PF Holiday on unpaid time is just $320.  It’s actually even lower than that since you won’t have to pay taxes on money that you don’t make (or conversely, if you had worked the 8 hours you would have brought home closer to $250).  So a small $250 investment could be worth tens or even hundreds of thousands of dollars over the next decade, and even more beyond that — perhaps even enough to vacation at the beautiful looking spot in the photo above!

In our case, we already have most of our Personal Finance stuff under control, or so we’d like to think, so the PF Holiday was used to catch up on what’s been going on, make sure that everything is going the way it should be.  It was also used to tweak and steer the various Personal Finance vehicles toward their respective goals.

Have you ever taken a Personal Finance Holiday?  Do you need to take a Personal Finance Holiday?  Do you have any new or redoubled goals for 2009?  Let’s hear about your experience in the Comments Section below!

If you liked this article, you may be interested in seeing some related articles:


Zero Pressure

Creative Commons License photo figure credit: Brooke Novak

My credit card balance is $41,654.02.

I charge everything that I can to it.

I make the minimum monthly payments.

This behavior has resulted in at least $600 in profit to me over the last year — just in interest payments alone.

Confused?  Let me start over.  Last year, ScrapperMom and I decided to open a 529 plan for our daughter.  We knew that we would not be able to contribute much to the plan from our monthly spending plan, so we went looking for a rewards credit card that would allow us to earn cash to fund this account.  We decided on the Chase Freedom card which gives us at least 1% cash back for everything that we buy. In addition to the interest earnings, we have earned $750 dollars (and we’re closing in on $1000) from the cash bank bonus on the card.

I applied for the card, and it arrived with a fantastic offer: 0% interest on balance transfers and purchases for one full year.  Perfect, I thought, what better way to make even more money.  We started using the card to buy everything that we could: groceries, fuel for the cars, dog food, insurance payments, DirecTV, Netflix, and anything else that was in our spending plan and accepted credit.  Each month when the bill came due, I would make the minimum payment, and transfer the difference in the balance to our high interest earning money market account with Everbank.

Little by little the balance rose and as it did, the interest payment at the end of the month got larger and larger.  The unfortunate part is that interest rates fell pretty steadily all year, so the larger and larger balance each month ended up netting about the same amount in interest every month.

When we started this arbitrage experiment, I felt that we were ready to get our feet wet on the right side of the Credit Card Continuum.  We had been through the other phases already: in debt up to our eyeballs, swearing off credit cards as evil and unnecessary, slow digging out and becoming disciplined, and now it was time to get a little back from the credit card companies.  So for the past year, each month we have simply borrowed a little more money from the credit card company at no cost, and put that money to work for us collecting interest.

Interestingly, about halfway through the year we were pushing up against our credit limit on the card.  So after having made nothing but minimum payments for 6 months and approaching our credit limit, I simply asked through the webpage for an increase in our credit limit and got one large enough to cover us for the rest of the year.  Aren’t credit card companies great?  On top of that, I got a letter a few weeks ago indicating that Chase is switching our account to one that has no pre-set spending limit.  I’ll talk more about that in a future article…

Next month the free ride comes to an end and we will have to set up the largest online billpay total we have made.  It’s a little disappointing to have to see this balance get wiped out all at once.  I have investigated the possibility of rolling the balance to another 0% offer somewhere to keep the arbitrage going, but I have been unable to cobble together enough credit to do so.  So we’ll reset the counter, and possibly even apply for another Freedom card in ScrapperMom’s name.  We’re rookies at credit card arbitrage, so maybe by next year we’ll be in a better position.

What do you think?  Do you practice credit card arbitrage?  Do you think it’s risky, smart, or does it simply depend on the person?

Credit Cards Accepted

Creative Commons License photo figure credit: TheTruthAboutMortgage.com

Just about a year ago, ScrapperMom and I decided that we had reached the right end of the Credit Card Contiuum and that it was time to start earning some rewards for buying all of the things that we buy or pay for on a monthly or yearly basis anyway.  We went in search of a rewards credit card.

Rewards credit cards come in many different flavors.  There are air miles cards, new car purchase cards, free gas cards, free coffee cards, cash back cards, and even dedicated 529 earnings cards.  ScrapperMom and I decided that since we could not afford to contribute anything specifically to our daughter’s 529 plan that we would look for a card that would allow us to earn money for her account.

One might think that since we wanted rewards to fund a 529 account, that we would choose one of the 529 rewards credit cards that are available.  Unfortunately, the few 529 rewards cards out there have terms that are worse than those available from some other cards.  For example, one card we looked at has a limit of $300 in earnings per year.  Our goal was to put as many of our purchases as possible on the card, and knew that we would easily exceed the $300 limit.  Another card we looked at was linked to a specific 529 plan that did not fit our criteria for such a plan.

Instead, it made more sense for us to apply for a cash back credit card.  There are a lot of cash back cards on the market, and they all have different terms.  Using the credit card finder at Bankrate.com, we looked through many different cards.  Some, like the American Express Blue card have different rates for different spending amounts.  You have to spend a lot of money before the rates rise to a level on par with many of the other cards.  Most of these cards offer around 1% cash back on all purchases and 3%-5% on certain types of purchases, like fuel, groceries, and fast food.

Ultimately, we chose the Chase Freedom Card.  This card offers 1% cash back on all purchases as well as 3% cash back on things like groceries, fast food, and fuel purchases. You can redeem your cash whenever you accumulate $50 worth, but if you are patient then you can collect $200 and trade that for a $250 return (which brings the cash back bonus to about 1.25%). We can’t use this card for most of our big bills like our mortgage, car, and student loans, unfortunately, but we can use it on a lot of the small stuff like cell phones, satellite TV, Netflix, periodic insurance payments, etc.

In the past year, we have earned over $750 in rewards that we have applied to our daughter’s college savings.  In a typical month, we earn about 75% of our points at the 1% level and the remainder at the 3% level.  Since it only takes about 4 months to accumulate $200 worth of rewards, it’s worth our while to wait until that point to cash out the extra $50, since that’s a much better return than putting $50 per month into almost any investment.

Obviously the key to this whole plan hinges on spending within our spending plan.  We pay this card off every month with money from our checking account.  Again, we don’t use the card to spend on things that we would not otherwise have purchased.  One splurge purchase can wipe out a year’s worth of rewards in no time at all.

Many people have difficulty handling credit cards, and I understand that.  However, many others have aquired the self-discipline to be able to handle credit cards without breaking the budget.  I believe that not using a rewards credit card for things that we are going to buy anyway is just leaving free money on the table.  I have spent years giving the credit card companies my hard earned money, and now it’s time to redeem some of it.

Do you use a rewards credit card?  What kind of rewards do you get?  Do you find it worth it?