by David Bach
Any way you look at it, that’s a lot of money. And it’s getting worse every year. According to the experts, college costs are expected to continue rising at a 5 percent annual rate for the foreseeable future. So advance planning is important.
Fortunately, saving for college does not need to be overly difficult or complicated. There are currently four basic types of college-savings plans.
UGMA AND UTMA ACCOUNTS
The oldest type of college-funding mechanism is not designed specifically for college costs. Established in some states under what’s known as the Uniform Gifts to Minors Act (UGMA) and in others under the Uniform Transfers to Minors Act (UTMA), these are simple trusts that are set up by parents for the benefit of their minor children. Typically, the account name will be something like “Jim Smith as custodian for Jim Smith, Jr.”
What UGMA and UTMA accounts do is allow parents to transfer assets to a child without having to hire an attorney to set up a special trust. Normally, minors are not allowed to own assets like stocks or mutual funds or even bank accounts without a trust being established on their behalf. What makes these accounts popular is that they are easy to set up and manage. (Any bank or brokerage firm will happily take care of it.)
There is no limit on how much you can contribute to an UGMA or UTMA account, though anything over $14,000 a year may subject the child to federal gift taxes. While the assets in the account legally belong to the child, they are managed by whoever was named as the account’s custodian (usually one of the parents).
The bad thing about UGMA and UTMA accounts is that when the child reaches the age of majority (either 18 or 21, depending on what you elect when you fill out the paperwork on the account), control of the account shifts from the custodian to the child. In other words, you can spend the better part of two decades saving for college for your adorable little boy, but if he grows up to be a monster who decides on his eighteenth birthday that he wants to use the money to buy a new Porsche and go to Europe with his girlfriend, there’s nothing you can do about it. (Don’t laugh; I’ve seen this happen.)
529 PLANS
Section 529 plans are how people save for college today. What the 401(k) plan has become to retirement planning, the 529 plan has become for college savings. You should take advantage of these now, before some politician comes along and tries to end them (which has been discussed). Named for the section of the Internal Revenue Code that governs the plans, this program authorizes states to establish two types of college-savings plans. The first type is called a “prepaid tuition program; the second is a college-saving plan. The prepaid tuition program is ideal for a parent who knows way in advance that she wants to send her child to a specific school in a specific state. Not very likely, is it? This is why I prefer the college-saving plan. The proceeds from a college-saving plan can be used to pay for expenses at any accredited institution of higher education (even foreign universities).
Here is what a 529 college-savings plan does for you.
The IRS does not limit how how much you can put in a 529 plan, so check your state’s limits—they average around $300,000. The money you put in grows tax-deferred savings for each of your children’s college educations. As long as the money you put in the plan stays in the plan, you don’t pay taxes on its growth, dividends, or capital gains. There are many other positives. For one thing, you keep control of the money. You also can make withdrawals tax-free provided the money is used for a qualified educational expense. Unlike UGMA and UTMA accounts, 529 plans don’t hand control over to the kids when they turn 18 or 21. If you fund the account and then decide your kids don’t deserve the money, you can take back the cash, no matter how old they are. (You will be hit with a 10 percent penalty on the profits, but that’s it.)
A 529 plan also allows others to help you fund your kids’ college costs. The government allows “third-party” contributions (e.g., by grandparents) of $14,000 per child in a single year—or a lump sum of $70,000 ($140,000 if it is a joint gift, e.g. from two grandparents) and the gift tax is then credited over five years. For kids with wealthy grandparents, this can make great sense from an estate-planning standpoint.
The best place to start your research is www.savingforcollege.com, which offers an incredible library of relevant material. The first thing to do is look at the plans in your state, as there may be a state tax deduction.
Websites for College Planning
www.collegeboard.org
www.collegeresults.org
www.college-insight.org
www.finaid.org
www.petersons.com
www.nasfaa.org
www.unigo.com
MISTAKE NO. 6
Not teaching your kids about money.
According to the National Council on Economic Education, 66 percent of high school students polled on basic economic principles flunked the test. Adults didn’t do much better. Some 57 percent of them failed. Two-thirds of those tested didn’t know that in times of inflation, money does not hold its value. Two-thirds of the kids didn’t know that the stock market brings people who want to buy stocks together with those who want to sell them.
I find these results frightening, and hopefully you do, too. But being concerned isn’t enough. Unless we do something, the situation is not going to change.
When you went to primary and secondary school, how many classes on investing did you have? Did your junior high and high school teachers ever tell you about retirement accounts, how to pay for a mortgage, the ins and outs of stocks and bonds, and the miracle of compound interest? When I ask these questions in my seminars, invariably fewer than 1 person out of 20 answers in the affirmative. Often, the response is so poor that I’ll tap the microphone and ask, “Is this thing working? Can you people hear me?” This usually gets a laugh…but no additional yeses.
How can this be? How is it that our schools, which are supposed to prepare us for the real world, don’t teach us anything about money?
One of the basic purposes of education is to prepare students to be productive adults in our society. By this standard, our educational system is failing us. Education about money should be a mandatory part of our national curriculum. Starting in the first grade, we should begin teaching our kids the basics about finance. This should continue every year, right through the end of high school.
When I was growing up in the 1970s, a big thing in elementary and junior high school was the Presidential Physical Fitness Test. For years, I wanted to win the presidential patch that proved I was physically fit. I remember the first time I took the test. I was in the third grade and I couldn’t do one pull-up. I was totally embarrassed and ashamed, but I was motivated. It took me five years, but finally in the eighth grade (the last year you could take the test) I achieved my goal. I was able to do so many sit-ups and push-ups that the PE instructor stopped counting when I reached 50 and simply said, “Done.”
I’ll never forget what it felt like to cross the finish line having run a mile in less than the six-minute qualifying time. I had done it. I had reached my goal of being a Presidential Physical Fitness “winner.” Some twenty-odd years later, I remember that moment as if it happened yesterday.
Why am I droning on about this? It’s because I have an idea. Just like we had a Presidential Physical Fitness program, we should institute a Presidential Financial Fitness program. We should create a mandatory education program, starting in the first grade, to motivate kids to learn about personal finance by offering them the chance to win symbolic awards. Let’s make learning how to be smart about money something that everyone does, not just the children of the rich (who are generally very good about teaching their kids how to become richer).
Education has always been the great American equalizer. We’ve always preached that anyone can become anything they want if they get a good education. Well, let’s stop tying our kids’ hands behind their backs and pushing them into the real world without an education about money. Let’s teach them now how to live and finish ric
h!
If you agree with me, go to www.gov.com and let your representatives in the House and the Senate know. This site tells you how to reach your representative. If a hundred thousand of us do this, they’ll have to listen!
THE GOVERNMENT AND THE STATES ARE STARTING TO LISTEN…
Believe it or not, progress has been made in the past 15 years since I wrote the first edition of this book. The Council for Economic Education releases a bi-annual study, the latest of which found that 20 states currently mandate that high school students take economics. Additionally, 16 states require standardized testing on economic concepts (this is the real key). According to CNBC, 45 states now include personal finance in their K–12 standards, up from 21 in 1998. Their reporting indicated that the more rigorous the standards, the better the results. The fact is that financial education works if it’s mandatory. Studies show that students’ credit scores are better and they have fewer late payments on credit after they take a course on money. The problem is that this financial education is not mandatory nationally, in all states. There is simply more work to be done.
WHAT YOU CAN DO AT HOME…
You don’t have to wait until your kids’ schools teach them about money. That might not happen. So let’s assume it’s actually up to us. The question is, how do you start?
I was lucky growing up because my grandma Rose Bach and my father, Marty Bach, started teaching me about money when I was just seven years old. Together, they helped me to make my first investment in the stock market (one share in McDonald’s Corp.). My dad, who taught investment classes for almost 30 years, often took me with him to his seminars, and he talked to me about investing, the economy, and managing money just like he would talk to his adult clients.
Equally important, my father always shared with me and my sister, Emily, what was happening to our family financially. When business was good, he would explain why and how he was investing the family’s money. When things went awry financially (and sometimes they did), he shared with Emily and me just what had gone wrong and how it might affect us.
In short, money was something that we all talked about at the dinner table. It was a normal topic of conversation, as it should be. It’s hardly surprising, therefore, that Emily and I both grew up to become investors, and at most only a little surprising that we later both became financial advisors. The point is, we both grew up knowing how to handle money, and as a result we’re both in solid financial shape.
Unfortunately, most parents don’t teach their kids about money the way my grandmother and father taught Emily and me. I say “unfortunately” because the less your kids learn about money, the more likely it is that they will one day fail financially.
You don’t have to be a financial professional to be able to teach your kids about money. You can still talk to them about how you are saving for retirement and why. You can discuss with them how you handle your credit-card debt, what sort of investments you are making, and how you make sure your financial practices reflect your values.
A good way to begin the process is by showing your kids the chart. Explain to them how a little saving every month can go an awfully long way. Kids are interested in being rich. And they love learning about money.
You should also take advantage of all the free information you can find these days online. There are a ton of great websites and new apps where kids and parents can learn about money together. According to a recent survey, the average child spends four and a half hours a day playing video games, surfing aimlessly on the Internet, or watching television. Get your kids to spend just 10 minutes of that time each day at one of the following sites and they’ll be learning, just as you are now, how to live and finish rich.
FIVE GREAT FINANCIAL WEBSITES FOR KIDS
Moneyasyougrow.org This government website links you to a dedicated page on the Consumer Financial Protection Bureau website. This page has a ton of resources to begin teaching your kids about money. It offers lessons based on your children’s ages, from young children to teens. There are downloadable worksheets and tools as well.
FeedThePig.org This website is run by the the American Institute of CPAs. It’s a really nice site with cool tools, articles, resources, and tips to help your kids on the road to financial stability. It has a section to help you create a savings plan. It also links you to its companion site at www.360financialliteracy.org.
SesameStreet.org Seasame Street’s website has a section called “Finance for Kids.” Just search for it on the site and you’ll see the fantastic lessons from Elmo. On this site, Elmo introduces young kids to the world of money. Check out “The Jobs Song,” which uses a catchy song to explain how people earn money. This site is great for young kids.
DreamBigClub.org Started in 2001, Sammy Rabbit makes this site fun for kids to learn about money. This website has a ton of fantastic tools, curriculum, books, coloring books, songs, and videos to inspire young people to save, invest, and dream big. There are over 200 activities for kids, parents, and teachers. The site even features an original song called “S.A.V.E.,” which they say was inspired by my book The Automatic Millionaire and has this fun lyric: “We’re gonna make it habit, we’re gonna make it automatic.” To listen to it, click the Songs icon, then click “S.A.V.E.” It’s catchy. You can join this site for free.
JumpStart.org This nonprofit organization has now been around for more than two decades and is committed to training teachers to teach money curriculums in school. I have personally met with them and volunteered to speak to hundreds of their teachers who have been trained. It’s an amazing organization, and its website is deep with real content, tools, and resources to take on the task of teaching your kids about money at home and in the school systems. I highly recommend that you dig around on this site if you’re interested in this issue.
GET THEM A COPY OF THE AUTOMATIC MILLIONAIRE!
Yes, that is a blatant plug. But seriously, The Automatic Millionaire is the ideal book for young people to read (teens and college students). This is my best, simplest, most accessible book. You can read it in less than 90 minutes and put the plan in place in less than an hour—and be set for life. You can get a 13-year-old to read it—I know because many have written to me. If you read or buy only one more of my books in your lifetime it should be this book. And if you buy it for your kids and they don’t read it now, don’t assume they won’t read it. Many 20-somethings and 30-somethings have told me that The Automatic Millionaire sat around their apartment for years and then one day they picked it up and finally read it. And it changed their life.
The bottom line is that you need to make your kids a part of the family’s financial planning process. Remember, you can’t ultimately protect your kids from the “real world” if you don’t teach them about money.
MISTAKE NO. 7
Neglecting to sign a prenuptial agreement.
Prenuptial agreements are a touchy subject, but that doesn’t mean we should ignore them. Increasingly popular but hardly routine, they can take many forms. Typically, a “prenup,” as it’s usually called, is a legal document drafted by an attorney that you and your partner negotiate and sign before you get married. Basically, it sets out the terms of the marriage and specifies who is to get what in the event the two of you wind up getting divorced. Some prenups simply list all the assets each partner is bringing to the union, while others are filled with detailed clauses setting out exactly what each party’s marital responsibilities are going to be.
WHO DOESN’T NEED A PRENUPTIAL AGREEMENT…AND WHO DOES
If neither you nor your prospective spouse has any assets to speak of, I’ve got great news: you can skip this section. You don’t need a legal document to tell you how to divide what you don’t have. But if one of you owns a lot more stuff or earns a lot more money than the other one, or if both of you have substantial assets (like stock options), then a prenuptial agreement is definitely called for. In fact, if there is anything significantly unequal about your respective stations in life�
��say, one of you has kids from a previous marriage or stands to come into a major inheritance one day—you probably should protect yourself with a prenup.
As I noted earlier, more than half of all marriages end in divorce. It’s sad, but true. What’s more, divorces tend to be messy. They hurt emotionally and they can cost a lot financially. A prenuptial agreement won’t make the process of divorce easy, but because it settles in advance all those arguments over “what’s yours and what’s mine,” it can make it easier.
BUT PRENUPTIAL AGREEMENTS AREN’T ROMANTIC
There’s no sugar-coating it. Asking the love of your life to sign a prenuptial agreement while the two of you are planning your wedding does not make for great romance. Then again, handing over 50 percent of a fortune that you or your parents spent the better part of a lifetime building isn’t much fun either.
Even though it may be a pretty difficult subject to bring up, I suggest you address it early on in your engagement (or even before you become engaged). Don’t wait until the week of the wedding to let your beloved know you’d like him or her to sign a prenup. Each of you needs to have your own attorney review the document and make suggestions. That takes time. And don’t think you can rush the process. If your estranged spouse can later plausibly claim that he or she signed the agreement either under duress or without fully understanding what it meant, the entire thing can be declared null and void.
So start the process early, and make sure both of you are represented by your own attorneys. If you can’t get your attorneys to agree—and it’s true, most lawyers live to argue—there are now specialists called prenuptial arbitrators who will listen to both sides and then recommend a compromise. Lastly, don’t assume that doing a prenuptial agreement says something bad about your relationship. The truth is that a prenuptial agreement can have a very positive impact on your future. It can force you to start dealing with your financial values and goals right at the beginning of the marriage. Many couples have found that this process actually brought them closer and made them more serious about their financial future.