FinanceBlog

How to Save for a College Education – 529 Plan Basics

College costs keep rising.  Even amid our current economic crisis the cost of a college education is expected to grow.  So what’s a parent to do?   Clearly, establishing savings early and adding to it often are the keys.  The government has created a program, called a 529 Plan, to allow your savings to grow tax free, and to allow for tax-free withdrawals for “qualified higher education purposes.”  These benefits can help you reach your goals much quicker than with a traditional savings account.

So what is a 529?  It is named after Section 529 of the IRS code (clever, huh?) which defines the tax treatment.  529 plans allow anyone (parent, grandparent, aunt, uncle, friend) to invest for a child’s college education, and provided the money is used for higher education expenses, the investment earnings are tax-free.

529 plans are established by states, and each of the 50 states sponsors at least one plan.  Most states allow for some income tax deductions of the contributions made into a 529 if you also live in the state.  For example, if you live in Illinois and make contributions to the Illinois 529 plan, those contributions are deductible on your Illinois income tax return – but not your federal return.  If you live in Illinois and contribute to an Indiana sponsored 529, you cannot deduct your contributions on your Illinois return.   Deductible amounts vary by state, so it’s important to check with the state where you reside.   Currently California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota and New Jersey do not offer state tax deductions.  Alabama, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax and thus offer no deductions.

So what can you use the money for?  The rules are actually quite broad:  distributions from a 529 plan can be used for tuition, fees, books, supplies and equipment required for study, and in many cases for room and board.  If your 529 is sponsored by one state, it does not necessarily mean your child must attend higher education in that state.   Funds can be used at any accredited college, university or vocational school in the United States and at some foreign universities.

529 Plans are simple to establish and most will allow small monthly contributions.  The first step is to investigate the plan your own state sponsors, to take full advantage of any tax deductions.  If you live in a state that does not allow deductions, you are free to choose any state’s plan.  Most accounts can be opened online and have age-based allocations.   You’ll want to be more aggressive with your investments for a 2 year old than you would for a 16 year old.

Finally, it’s important to remember that it is not your obligation to pay for your childrens’ educations.   Creating a savings plan and helping them where possible is great – but it shouldn’t be done at the cost of your own retirement.  There are low-interest government-sponsored loans available to students, and a college-educated child will have the earnings potential to pay these back over time.  Don’t neglect your own future.

5 More Ways to Pay Off Credit Card Debt Faster

You all know the drill:  pay off your credit card debt!  This current financial crisis is going to result in tighter lending standards, higher interest rates, and golden opportunities to invest the cash you’re currently using to pay off debt.  So now is the perfect time to get serious about eliminating your credit card debt.

By now everyone should have heard the basics: stop using the card(s); take it out of your wallet; pay off the highest interest rate first; and pay more than the minimums.  This is, of course, great advice, but here are five more ways to pay off your debt even faster.

1.  Make weekly payments

The credit card companies will accept your money any day of the week.  Instead of trying to save up (or not spend) the money you need to pay down your debt each month, make payments weekly.  This is easy to do online, and as credit cards typically assess their interest daily, you’ll be saving more in interest every week.  Just make sure that you’ve paid more than the minimum before the due date.

2.  Give “found money” a purpose

Found money refers to funds that were misplaced or forgotten and then rediscovered. A great example is that $20 you found crumpled in your jeans pocket when doing the laundry. Put that $20 in your wallet, and immediately go online and send $20 from your checking account to the credit card company.  Get $50 from grandma?  Send it to Visa.  Are you paid bi-weekly?  In those wonderful two months when you get three paychecks, send as much of that “extra” income as you can to the credit cards.

3.  Use savings

In this case, “savings” does not mean an interest bearing money market account.  Did you go out to buy a new winter coat with $100 budgeted and spend only $80?  Send that extra $20 to the credit cards.  Did you clip coupons and save $10 at the grocery store?  Send it along.  No amount is too little.

4.  Sell your junk

You know you have things that can go.  Get onto ebay and sell your stuff, and then send your profits to the credit cards.  Take advantage of good weather and have a yard sale, and then pack up the profits for the debt companies.

5.  Pat yourself on the back

Stop being down on yourself about the debt.  Instead, focus on the progress you make.  Celebrate any extra payment – not by spending more money – by feeling good about the progress you are making.  Constantly harboring negative thoughts about your debt will only cause more harm.  Focus on the good and be proud each time you make even a small dent in the debt.

The primary concept is simple:  make extra payments beyond your usual monthly payment.  Do this, and the balance will go down much faster and you’ll be out of debt before you know it.

The 10% Rule

When I started my very first summer job – lifeguarding – my father simply laid down the law. He told me that I had to save 10% of every paycheck, and we opened both a checking and savings account at the local bank. I never even thought to question this practice. My dad was the resident expert: a former CPA and manager of the family’s finances. I just assumed this was how everyone handled their paychecks. By the end of that summer, through socking aside 10% of my little paychecks, I had saved up enough money to last me through the a good part of the school year. I was completely surprised when my friends were either living broke or had to keep their jobs going into the school year. What happened to their 10%? I was even more shocked to hear that none of them had saved any of their summer money – or even thought to do so. That one lesson has been invaluable to me over the years, and I’m here to spread the word!

Start small – but start! Even 10% of a summer of 1991 lifeguard’s paycheck adds up. If all you can manage now is $10 a week – do it! As an advisor, I like to recommend to my clients to start with a number just beyond their reach because it is easy to pull back, but really difficult to increase. If you think you can do $10 a week, try $15.

Make it habit. If you don’t trust yourself to sock money into savings at regular intervals, set up an auto-deposit from your checking account to your savings account.

Save even if you have debt. Debt should be a priority – but it should not stop you from saving a few dollars every week.

Online banking is your friend. There are so many benefits to online banking. You get a higher interest rate than is offered at most “offline” banks; transferring money back and forth between your checking account couldn’t be easier; establishing a separate savings account apart from your checking will keep the funds even more separate in your mind – which cuts down on the potential to use the money; and you typically won’t receive an ATM card with an online account. This last benefit eliminates the 2AM cash run you know you’ll regret later.

Open your savings account now – and strive to save that 10%.

3 Ways a Calendar Can Save You Money

One of the most under-used financial tools is also one the cheapest and easiest: a plain old calendar. Free and easy to use, good calendar can help you master your personal finances. Here’s how:

Choose a calendar that you will look at all the time. If you carry a day planner, that’s perfect. If you don’t, get a paper calendar and put it on your fridge, or your desk at work. Just be sure it’s somewhere you will see it every day, and ideally is close to where you keep your checkbook or where you pay your bills.

1. Avoid Late Fees by recording the date when you are supposed to pay those pesky monthly bills.
When bills arrive (this means e-bills and those you still get via snail mail) mark your calendar with the amount you will pay, on the day you will pay. Include all your bills, even ones that are debited automatically and those that don’t get a paper invoice, like rent or a car payment. If you mail a check, record the amount on the day you need to put it in the mail – ideally one week prior to the bill’s due date. If you use online bill pay that automatically deducts the amount on a pre-assigned date, enter that date on your calendar. For example, your $347 Visa bill arrives and the payment is due on the 20th. If you’re mailing a check, or your online service needs time to process, write $347 on the 13th (one week prior.) If you’re paying online and can have it automatically debited on the 19th, write $347 on the 19th. Easy! Now, when either the 13th or the 19th rolls around, you know it’s time to pay that bill.

2. Stop being overdrawn; write down when you get paid.
Use the calendar to mark when your paychecks will be deposited into your account. If you’re paid bi-weekly, this will help identify ahead of time those two fantastic months where you get paid three times. It also helps with budget planning if you are paid on the 1st and the 15th (or the 15th and last) to know if you will have your money before the big trip, or after. Another common problem arises when you get a paycheck many days before bills are due – you have a week where you feel (and spend like) you’re rich! Then when bills arrive you struggle to make all the payments on time. With the calendar, you can plainly see the entire month and anticipate paychecks and bills.

3. So that’s why I’m always broke the last week of the month!
After one or two months of recording that information, you should have a pretty good idea of where your money is coming from, and where it’s going. Do your bills pile up at the end (or the beginning) of the month? If so, a simple phone call to the credit cards or the utilities can solve this problem and spread out the pain. Most companies are willing to change the date your bills are due at least once. Spread out your bills and make life easier on your wallet.

The more data you record, such as when you take cash out of the ATM, the more accurate your financial picture will be. A calendar helps you create a simple, easy to follow budget, and will give you a greater control over your spending.

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FinanceGrrl is a Chicago based network of select Financial Service Professionals. Through our network individuals, families and businesses are matched up with professionals suited to their specific needs.

Our advisors specialize in providing comprehensive financial planning services with a focus on individuals, small businesses, entertainment clients and unique situations.

Please email for an appointment today.

Meet Michele Steinberg, Co-Founder of FinanceGrrl

Michele joined the financial services industry in 1996 and has worked in various venues from Abbey National Bank in London, England to BUYandHOLD.com, an online brokerage located on Wall Street in New York City.

In 2001 she moved to California and chose to focus her career on Financial Planning. In early 2002, Michele became a founding member of FinanceGrrl, a network of financial advisors focused on the financial education needs of Generations X and Y.

Michele has been quoted in the LA Daily News, Forbes.com, and wrote a weekly column for Geezeo.com.

Michele’s licenses include NASD/FINRA Series 7 and 66. She holds a Bachelor of Business Administration from the University of Wisconsin at Madison, having double majored in Marketing and Management.

Michele currently lives in Chicago with her husband Jason.

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