Archive for the '529' Category
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!
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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?
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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?
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Our daughter was born in early 2007. Knowing what I know about the power of compounding interest, I knew it was important to start a college savings fund early with something, even if it wasn’t much. We definitely subscribe to the belief that saving for retirement and debt reduction come first in the savings plan and that college savings has to take a back seat to these higher priority expenses. Still, it’s difficult to be a parent and not try to put something away for your kids.
With that in mind, we opened a 529 savings account for our daughter when she was almost a year old. A 529 plan is very much like a Roth IRA — except it’s for kids and their family and friends who are saving for their future college expenses. Money put into a 529 plan grows tax free, and withdrawals are tax free as well. 529 plans are administered by individual states, and some states also offer an income tax exemption on contributions made to your home state’s 529 plan. It’s interesting to note that many states now offer more than one plan.
With so many plans available, opening a 529 plan can be a daunting task. Luckily the folks over at SavingforCollege.com have made the task a bit more manageable with a search function to find the characteristics of a 529 plan that you want. We started with this list of wants:
- low fees — no point in having high fees eat up a large portion of the gains
- a variety of investment options — age based, index funds, etc.
- low startup costs — we wanted to be able to contribute small amounts at irregular intervals
- state tax exemption — your gains only get better if you can deduct the contributions on your state taxes
Another great resource at the time we set up the account was Nickel who did a lot of the homework for us. My search did seem to concur with his assessment. We got 3 out of 4 of our wishes in this search. Unfortunately our state does not have any kind of income tax exemption for contributions made to 529 plans.
We decided on the Ohio College Advantage Plan to get started. This plan offers very low contribution amounts at $15 per contribution. It offers a range of investment options including portfolio blends, index funds, CDs, age based funds, etc. Most of the fees for these options are low. The Vanguard options, for example, start with an expense ratio of 0.23%, and there are no other management fees of any kind.
One nice feature of 529 plans, however, is that you can generally switch from one plan to another with little trouble (the one great exception being after you just got a state tax exemption…). So it’s not only possible, but probably quite likely, that you may pick a plan today but change to a different plan at sometime in the future.
It took until nearly her first birthday, but we finally managed to open an account with $1,100 that we had saved over the course of her first year. Most of this was her money in the form of gifts that she had received. We have since made a couple of additional contributions. Our plan for the near term is to use the cash back from our Chase Freedom Card, as well as any additional birthday, Christmas, or any other kinds of gifts she receives (at least until she’s old enough to understand money…) to fund this account. We don’t expect it to grow like gangbusters, but we expect that every little bit that we are able to save will help. If we get to a point where we are saving 20% or more of our income for our retirement, then we will consider contributing more towards this 529 plan as a savings plan item.
For Part II of this article, we’ll look at Pre-Paid Tuition plans.
The cost of education is already scary, and it feels good to be contributing something to help our daughter’s future, even if it eventually amounts to just a drop in the bucket. Are you saving for your kids’ education(s)? How are you doing with it?
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