How to Plan for Your Kids College: Baby Step 5

For many, it is not a cut and dry decision on whether or not parents should contribute toward paying for their children’s college. This is an interesting topic to consider. Many parents will pay hundreds of dollars to put their children into dance, soccer, go on expensive vacations, but fail to contribute ANYTHING toward their children’s college fund. In many ways, this is doing a large disservice to your kids, under the guise of making children independent by paying for college on their own. In reality, this just leads the next generation to take out large student loans that could take them many years to pay back). As many financial goals tend to be, college is one of those things that is a long-term goal that is not realized until many years after you begin saving for it. It is the opposite of the instant gratification mindset that is so prevalent in our society today.

As you can see, I am very bias in this area, and strongly believe that parents should consider contributing something, anything, toward their kids college if they are able. I don’t believe in being an enabler or giving handouts… but I also don’t believe in being a disabler. By investing early for your children’s college, the investment has plenty of time to mature and benefit from compound interest. But choosing to delay or not invest in a college fund, there is no opportunity for the investment to grow over time, and it leaves little options left to the student, other than to get a loan, or hope for a scholarship.

Assuming that the goal is to contribute to your children’s college fund… how much should you contribute? What if you have more than one kid? How much should you contribute to each child’s fund? Where should you put the money?

Fortunately, most states offer a very nice option for putting money toward college. It is the 529 plan. This plan allows family members (parents, grandparents, etc.) to contribute tax-free money toward college. As long as the beneficiary uses the money toward college-related expenses, it is never taxed. But what if my child gets a scholarship? Then the money equal to the scholarship amount can be withdrawn tax-free from the account and used for anything. What if my child doesn’t go to college? You can re-assign the money to another beneficiary (another child, etc.) without any penalty. Of course, money contributed toward a 529 will also be invested and given the opportunity to grow with the market.

Recently, we decided to re-focus our efforts on saving for college. We have 5 children, the oldest just having turned 11. Currently, each child has ~4,100 in their college 529 plan. How much should I disproportionally contribute toward an older child, since their fund has less time to compound? I put together a simple formula to determine how much each child should get, based on how far behind they are.

College Savings Percentages

The goal of the formula is to contribute more toward the college fund of children that are further behind than they should be. First, I determined how much I have saved already for each child and put that in the “Actual” column next to the child’s name. Second, I determined how much the child “should” have for their age, according to known calculations (see table below). Third, I subtracted how much they should have minus how much they actually have, to determine how much each child is behind by. Totaling how much each child was behind by gave a total of $31,935 for all children! Hard to believe that we are THAT far behind in paying for our children’s college. But don’t forget the numbers are all relative, and the actual amount we are behind by is not that important, since we will be dealing with fractions from here on out. Fourth, I divided the amount each child was behind by, by the total of all children, to give a fraction for each child. For example, the 11-year-old in this example is behind by ~14k, which is 43% of the total deficit of all children combined (~32k). Fifth, I multiplied the fraction each child was behind by the total amount I choose to budget for college in a given month. Here, I am choosing to budget $750 total per month for all children toward college. This means that the eldest would get 0.43 * $750 = $323.55 / month for college. Doing this across the board for all children, gives a total monthly college contribution fo $750, which is exactly what we were targeting. It is really not too complicated once you enter in your own numbers. But the overall outcome, is that eventually, all children will be behind by the same amount for their age, and can get caught up, if desired, by continuing to increase the total contribution amount. For reference, here is a nice chart of how much you should have in a college fund, depending on the type of school you are looking to send your child to:

Again, keep in mind, that the exact amounts above are not the important part. These are only used to help you disproportionally contribute the right amount to each of your child by considering: a) how far behind is your child’s fund, and b) how much per month are you willing and able to contribute toward college.

Using the above strategy, we now have a plan to take care of kids’ college, and can begin to focus on knocking out that mortgage as part of baby step 6!

June 2018 Net Worth Update

Depreciating Assets… or in other words, your car!  This month I adjusted the value of both of our cars to match what Kelly Blue Book indicates we could sell the cars for (private party).  I was a little scared to see how much my wife’s 2014 Honda Pilot might have depreciated since we bought in last November.  It has depreciated down from $27,169 to $24,135, a total drop of just over $3k.  My car on the other hand, a 2005 Honda CRV, has gone down from $5,412 to $4,723, a drop of only $700.  This is exactly why I don’t mind driving an older car, despite what others may think or say about it.  Although, I did have to replace the knock sensor in my car to get it to pass emissions!

As a side note, I have been looking into the possibility of leading one of Dave Ramsey’s Financial Peace University classes.  The only problem is, to lead one of these classes, you have to find a venue, and ideally someone to sponsor the class so you don’t have to pay for the coaching materials, which are $279.  It was a bit surprising to learn that you had to pay that much just to lead a class, as a volunteer!  Shouldn’t it be free to volunteer to coach?  If anything, shouldn’t they be paying me something?  I think they charge for it since there are a lot of banks, and other institutions that benefit directly from hosting the class.  I have been in contact with Zion’s bank to find a location to host the class, but they have not been very good in working with me.  They seem to want one of their own employees to be the coach and to open/close the bank after hours.  It just seems like a really low priority for them.  I may try to contact an HOA or something in the area to see if I can get them to sponsor the class.

Apart from these goals, we are trying to finish building up our emergency savings fund.  If you remember, we had completed this step of the Dave Ramsey baby steps a while back.  But then, when we bought my wife’s car with cash and used a lot of our emergency fund, that put us back at baby step #3.  At the beginning of July (in a month) we will be done with baby step #3 (for the second time) and be back on track in putting extra into retirement, college, and paying off the house.  The hefty tax bill that hit us definitely slowed this down.  But we are getting close and will soon be making substantial extra payments toward paying off the house.

Without further adieu, our new net worth is: $423,025.73.

May 2018 Net Worth Update

As you can see from my lack of posts, things have definitely been busy the past few months.  Perhaps I have not been very motivated to post any updates either, due to recent setbacks.  We were a little surprised this year to find out how hefty our tax bill was $8,661 for federal and $1,912 for state ($10,573 total).  The increase was all due to the sale of our town home!  We did not realize that the depreciation we declared on our taxes every year ended up increasing the overall taxable increase upon sale of the asset.  I am glad we were able to cover the cost of that pretty easily, and have this behind us.

Without further adieu, our new net worth is: $414,814.68.

February 2018 Net Worth Update

It is really nice to see the investments starting to pay off.  Granted a large part of that is due to how well the stock market has been doing.  Although… I the Dow did have the LARGEST drop in a single day of trading EVER today.  So the numbers I am posting below are from February 1st.  But still, even now, the investments are only down to $107,060 (a drop of $5,500 or so).  So I’m not really that worried about it.  And besides, that is why you try and diversify with cash, etc., to even things out.  I am glad that we have ~10k in an emergency fund now, which should help if things get too crazy.

We were hoping to boost that emergency fund up to $20k soon with my bonus coming in.  But it looks like that may not happen now that we have to pay capital gains tax on the sale of our townhome this year.

Overall, our net worth increased by $9,634 month-over-month, and is now: $405,102.

December 2017 Net Worth Update

We survived round #1 of the Holidays.  But as you will see below, there were some casualties.  In November, we went on a family vacation to Montana.  We managed to keep the expenses on that trip quite low, around $350 or so, which was almost entirely to cover the gas in getting up there.

The main casualty was our emergency fund!  My wife has been looking at a replacement car for her 2005 Toyota Sienna for quite some time.  She finally found the replacement!  … Only a little earlier than we were expecting.  We bought a 2014 Honda Pilot this past Saturday.  You will see below a 20k dip in our cash, and a 21k increase our cars.  This is the net result of selling the van via private party, and purchasing the replacement car from a dealer.  Thankfully, we were able to sell the old car in under a week, for higher than Kelly Blue Book.  A word to the wise, do NOT trade in a $5100 vehicle for $2800 to a dealer.  By selling it ourselves we saved more than $2000, and it only took us a few days to sell it.  Not too shabby.

With out further adieu, our Net Worth is now: $390,778.86.  

November 2017 Net Worth Update

During the month of October, our net worth increased by $21,091.16 to a new net worth of $379,457.  About $4k of that was from an increase in the value of our investments.  Our investments just hit the $100,000 mark!  That is a big day for us, considering our investments were half that value a year ago.  This means that we need to finally start paying some real attention to where our investments are placed.

Here is the breakdown of our investments, as they stand today:

When looking at the above breakdown, the first obvious thing is that I need to roll over my 401k from my previous employer.  Why haven’t I done that yet?  My only excuse is that I have been focused on other parts of my finances.  But even without me doing anything special with it, my previous 401k has grown from 33k to 40k in the last year, an increase of 20%.  The worst part about the above investments is that the Roth IRAs are not invested in anything.  With all this in mind, my plan of action is:

  • Invest the Roth IRAs into SOMETHING, ANYTHING.  I’ll do another post about how I decide what to invest in.
  • Roll over the 401k and 403b from my previous employers
  • Begin to analyze the performance and placement of my other investments

With out further adieu, here is my detailed Net Worth update for the month of October:

2017-10-01 2017-11-01 $ Increase % Change
Assets
Cash $34,108.14 $35,271.25 $1,163.11 3.41%
Investments $96,835.90 $100,703.30 $3,867.40 3.99%
Primary Property $473,766.00 $489,286.00 $15,520.00 3.28%
Investment Property $0.00 $0.00 $0.00 0.00%
Cars $11,617.00 $11,617.00 $0.00 0.00%
Total $616,327.04 $636,877.55 $20,550.51 3.33%
Liabilities
Primary Mortgage $257,960.78 $257,420.13 -$540.65 -0.21%
Investment Mortgage $0.00 $0.00 $0.00 0.00%
Credit $0.00 $0.00 $0.00 0.00%
Total $257,960.78 $257,420.13 -$540.65 -0.21%
Net Worth $358,366.26 $379,457.42 $21,091.16 5.89%
Debt Ratio 0.42 0.40 -0.01 -3.43%

 

October 2017 Net Worth Update

Debt Ratio = Liabilities / Assets

I had never included this calculation as part of my net worth updates in the past.  The reason I find it intriguing, is because it really represents “How much of your lifestyle is financed by debt”?  As Warren Buffet nicely put it:

Only when the tide goes out do you discover who’s been swimming naked.

Those who are “swimming naked” have a high debt ratio.  Obviously if your debt ratio is lower, then you are going to be more financially stable if the markets (housing, stocks, etc.) crash.  I’ll continue to include the debt ratio.  Another nice thing about the debt ratio, is that once it is zero, you are completely debt free!

In September, overall, our Net Worth increased by $8979.06.  But most of this increase is simply from the increase in the value of our home.  Our investments made up for another large chunk of this, at about a 3k increase.  Normally our cash is mostly flat, but this month it went down since we had to replace our water heater, that is about 10 years old.

I’ll continue to post Net Worth updates now as Blog posts, rather than on the Net Worth page.

2017-09-01 2017-10-01 $ Increase % Change
Assets
Cash $35,744.02 $34,108.14 -$1,635.88 -4.58%
Investments $93,682.09 $96,835.90 $3,153.81 3.37%
Primary Property $466,844.00 $473,766.00 $6,922.00 1.48%
Investment Property $0.00 $0.00 $0.00 0.00%
Cars $11,617.00 $11,617.00 $0.00 0.00%
Total $607,887.11 $616,327.04 $8,439.93 1.39%
Liabilities
Primary Mortgage $258,499.91 $257,960.78 -$539.13 -0.21%
Investment Mortgage $0.00 $0.00 $0.00 0.00%
Credit $0.00 $0.00 $0.00 0.00%
Total $258,499.91 $257,960.78 -$539.13 -0.21%
Net Worth $349,387.20 $358,366.26 $8,979.06 2.57%
Debt Ratio 0.43 0.42 -0.01 -0.02

I decided it might be interesting to graph out both Net Worth and Debt Ratio over time:

Interestingly, there is a pretty constant trend upward in Net Worth.  However, the debt ratio shows a stark decrease (which is good), in June of 2017.  That is exactly when we sold our townhome.  Since our townhome had very little equity, it was mostly just a liability on our balance sheet.  That reinforces in my mind, that it really was a good idea to get sell it when we did.  Yet another reason why it is good to analyze many financial metrics, and NOT just your Net Worth.  You could have a Net Worth of 1 million, but still have 10 million in debt.  Looking at Net Worth, along side Debt Ratio is very informative.