Tips for College Students on School Year Spending

College students are finishing up summer jobs and internships and heading back to school with the money they’ve earned ... that is, if they didn’t blow it all this summer. But for those who budgeted and saved, it is time to look at how to spend.  I sat down with one of The Center’s summer interns, Nick Boguth, a senior statistics major at the University of Michigan. Over the summer, he worked primarily with our investment department but has also been involved in other areas of financial planning. He helped give his perspective as a college student on the flip slide of saving: school year spending. 

Before You Spend, Set Some Goals

Many students take summer jobs/internships to save money for the upcoming school year because they may not have the ability to work while attending class. So the first tip is to think back to that first paycheck. Remember how tempting it was to spend it all? I certainly made this mistake a few times when I was in Nick’s shoes! But hopefully you decided to take a more disciplined approach. Now that you’re heading back to campus, it’s time to dig down for another dose of discipline: Don’t blow it all at once! Nick suggests that you set a realistic goal before you touch a penny of the money you saved over the summer. Ask, “What do I need the money for?”  Simply put, how much can you spend and how much do you need to save to make it last until Christmas or the end of the school year?  Doing this from the onset will give you a much greater chance of reaching your goal as opposed to “winging it”. 

Dinner Out, New Clothes, or a Roth?

As you’re setting those goals, consider putting a chunk of your money into a Roth IRA. It might seem pointless because we’re not talking about a large dollar amount, but the more you save early in life, the more it can add up to later. Sure, it might seem like more fun to spend it going out or shopping and, take it from me, when you do that it will vanish in no time. But if you contribute 5-10% of your summer savings to a Roth, you are starting an excellent habit. By making such a responsible choice, your parents may even offer to throw in a "match" the same way many employers do to incentivize employees to save for retirement.

Let’s be honest, when you’re a college student working in the summer, you typically are not earning a large paycheck. WHO CARES?!  What you’re earning as far as experience, knowledge and interaction with others in your field of study is worth far more.  Best of luck to everyone returning to school this year – we wish you nothing but the best! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Unqualified withdrawals may be subject to ordinary income taxes as well as a penalty tax. C14-026213

Top 5 Factors in College Selection

I’m beginning to feel like a pro when it comes to helping my kids pick a school. In my recent post “Making the Most of your Empty Nest Years”, I explained my son Jack was undecided on his college choice. Albion College? Belmont University in Nashville? Well, in late-breaking news from the Wyman house: Jack picked a school (though it wasn’t televised like some high school athletes these days…really!). Jack decided that Albion College is the best fit for him at this time.  Go BritonsJ!!!

After working with many families over the last 23 years and now seeing my own two kids go through the “college selection” process, I’ve developed a few factors in determining the best college for you/your child.

My top 5 factors in determining the best college for you/your child:

1. School Size: My oldest son, Matt, knew he wanted to be at a large school (20k+) and Jack thought he might like a smaller school (under 10k).

2. Location: Live at home or break free to the opposite coast? Matt wanted to be as far away from his parents (no offense taken Matt) as possible. Matt visited Colorado, West Virginia, and Kansas. Jack was more neutral on location but did visit both campuses (as well as others) to get a "feel" for what the campus environment was like.

3. Majors: Some kids know exactly what they want to study as they leave high school; however, many do not (hey, they are 17-18 years old). I know of a fella that was a political science major and guess what class he dropped first semester freshman year? If your child is a bit unsure about their major, perhaps a college or university with a large ofering is best.

4. Sports/Extracurricular: Both our kids will be playing a varsity sport next year, but neither selected their choice on athletics or other extracurricular activities alone - they are part of the package.

5. Cost: Let's not beat around the bush - there is a financial component to the process. College is expensive! However, it is important not to make a decision based on the published costs of attendance. In Jack's case both Albion and Belmont reduced the "sticker" price and, in the end, the costs were similar.

We found the college “hunting” experience enjoyable.  It provide my wife Jen and me an opportunity to lock the kids in the car (or plane) and force them to talk to us and the boys got to check out their potential four-year home. Enjoy the hunt!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-024133

Paying for College at Your Expense

We all want the best for our children.  In an ideal world, if we could pay for 100% of their college and allow them to graduate with no student debt, most parents would gladly do it. However, anytime you use cash flow to pay for college there is an opportunity cost.  “What else could I have done with that money if I had not used it to pay for my kid’s college?”  The simple answer is that you could be using that money now to put toward your retirement.  You can take loans for college, but you can’t take a loan for retirement.

Opportunity Cost of College Tuition

For some of you reading this, opportunity cost might seem like a foreign idea or an abstract concept that can’t be measured.  However, it is very real and although it can’t be measured to the exact penny, you can make some educated estimates about the potential growth of your savings.

For illustrative purposes, let’s take a look at a hypothetical scenario and measure the potential opportunity cost of paying for college.     

Scenario: John and Jane Smith (both age 35) have 1 son Joe Smith and intend to fully fund 4 years of undergraduate school for Joe.  Their son was born in December of 2013. John and Jane are both U of M graduates and, assuming Joe is as bright as mom and dad, they would like him to go there as well.   In any case they intend to pay for 4 years of U of M starting in 2031. The Smiths consider these costs:

• The cost of U of M for tuition, room, and board is approximately $20,000 in today’s dollars and is estimated to inflate at 6% annually over the next 18 years.

• So the Smith’s estimate the first year of college will cost $57,086, 2nd year $60,511, 3rd year $64,142, and 4th year $67,991. 

• The total estimated cost for 4 years of college is $249,730.

Adding Up the Opportunity Cost

Unfortunately, the cost doesn’t end there.  This is where the concept of opportunity costs comes in. You see, the Smiths didn’t have to set aside these funds for Joe. They could have put them in their retirement accounts instead.  To fully understand the true cost of utilizing those dollars to pay for education, you also have to measure what that money could have potentially grown to at John and Jane’s retirement age of 65.  When Joe starts college John and Jane would be 53.  That means the $249,730 they have set aside could have the opportunity to grow for another 12 years. Assuming a 6% rate of growth the hypothetical account would compound to $502,505.   John and Jane would have the opportunity to add an additional $250,000 to their retirement account.

Having said all of this I’m not advocating kicking the kids out at 18 and changing the locks.  However, I am advocating being informed about the ripple effects of the financial decisions we make.  For people under the age of 40 with no pensions (and social security looking like a shaky proposition) it is imperative that you be efficient with financial decisions.  One of the benefits of working with a professional planner is putting these decisions under a microscope and creating a plan to decide what you can truly afford to do while still maintaining your financial independence.  

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. All illustrations are hypothetical and are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and investors may incur a profit or a loss. C14-017739

Is 40 the “Magic” Age for Financial Planning?

When is Financial Planning, on your own or with the help of a professional, appropriate? The correct answer is you should probably begin saving the first day that you receive your first paycheck.  However, in my 23 years of experience, folks tend to get “serious” about planning near the age of 40.  I do not by any means want to discourage anyone younger than 40 to put off planning until they hit that “magic” 40 milestone. Just about anyone that has achieved financial success will tell you to start as early as possible.

Some questions and issues that the 40+ crowd might consider: 

• How much should I be saving? I have heard rules of thumb such as 10% or 20% but what does that mean for me and my specific goals?

• I’m busy. What are the options to pay bills other than the standard envelope and stamp method?

• Life insurance: Salespeople have been hounding me for years to buy life insurance. I couldn’t afford it in the past and secretly didn’t see the value, but I’m ready now. What type and amount should I get to protect my family so I am not insurance rich and cash poor?

• College: My kids are getting closer to college age. How do I pay the ever-increasing tuition?

• I am ready to invest my wealth. What are best options for me?  Should I max out my 401k or 403b or is a ROTH a better option?

• Estate planning: I’m all grow’d up now and ready (I think) to consider a Will and perhaps a Living Trust. How do I know which one I need?

• My parents are aging and I am not sure if they have the resources for their care. What should I be doing now to prepare or help them prepare?

• I have heard about the “Boomerang kids” phenomenon. Should I move to a one bedroom condo now?

• Employer retirement plans (401k/403b): Whoa, I have real money now! How should it be invested?

• I give to charities that are making a difference in the world. Is there a way to maximize my donations and perhaps even get a tax break?

• Income taxes: I don’t mind paying … I just don’t want to pay a cent more than my share. How can I limit my income tax exposure?

• If I choose to work with a professional financial planner whom should I contact? I have not have worked with a professional advisor yet so I am a bit leery, and maybe even a bit scared to share my financial picture (not sure how I stack up with others).

If you’ve been asking yourself some of these questions, no matter your age, you are ready to get “serious” about your financial life.  Think about some of the issues and questions that you find yourself facing and feel free to give me an email. If my 23 years of working with similar folks can be of help, I’d love to share my insight because you don’t need to wait for some “magic” age.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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A Timely Reminder About 529 College Savings Plans

With school now out for most universities, who would want to talk about college planning?  But I couldn’t pass up 5/29 without discussing 529 plans!  All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.   

A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred.  One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.)  A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions.  Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.    

To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative.  If other family members would like to assist with college expenses, they too can open an account for the child.  The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account.  Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control.  The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college.  This provides flexibility so the money can still be utilized for educational expenses for another child or family member.

As with any financial planning decision, a 529 may or may not make sense for your personal situation.  However, it is a great tool and resource to consider when taking on the challenge of saving for college.  If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839

Holiday Financial Conversations for the Generations: Teenagers

The upcoming holiday break from school gives you the perfect opening to have conversations with your teenage children about their college plans.  Try talking to them about what they are currently interested in studying once they reach college, where they think they might apply, and also your family’s plan for college funding.  This includes what you plan to contribute, as well as your expectations about your child’s contribution. 

Here are several items that should be on your list:

How much is your child’s education likely to cost?  Go online and look up tuition rates for the schools your child might be considering. Then find one of the many online college tuition calculators to determine what your child’s costs might be.

How will you plan to pay for school?

• Discuss what you have saved (529 College Savings Plans, UTMAs, and other savings).

• Discuss opportunities for scholarships and grants.  Here are two sites to visit as early as your child’s freshman year in high school:

  • http://www.studentaid.ed.gov/  -- basic information about college costs, financial aid, etc.

  • www.fastweb.com  -- create a profile to get matched up with scholarship and grant opportunities specific to your child.

Discuss ways for your child to contribute, either now or in the future. This may include part-time work in high school, during summers, or during college.  This also includes strong academic performance and/or extra curricular activities now which can put them in a position for academic or other scholarships in the future.

The high cost of a college education makes these family conversations necessary.  By framing the discussions around the excitement of planning for your child’s future, you can make this an enjoyable and productive use of the holidays.

Talk to your financial planner about the many ways to save for your child’s college education.

In my next blog, I will talk about holiday financial discussions to have with your older adult parents.

Sandra Adams, CFP®is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Links are being provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.  Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

The Early Bird gets the Dough

This post is provided by Zach Gould our former summer intern and current college campus envoy. From his perspective at the University of South Carolina, Zach offers his take on funding the ever-rising cost of a college education.

The time before, during, and after college can be truly hectic. The packing, the dorm room decorating, it can all be mayhem and the financials can easily be forgotten. I should know! I didn’t do a great job of managing the financials when I was applying to college. Sure I spent hundreds of hours finding which school was the best for business, or which schools had the nicest dorms and on-campus restaurant options, but I put the financial aspect on the back-burner. The reality is that there are a ton of resources out there to help pay for college and to help budget money. The biggest thing is taking a look at these resources before the opportunities to utilize them pass you by.

FAFSA: Don’t Miss the Deadline

The first resource is FAFSA, which stands for Free Application for Federal Student Aid. This is a form that I highly recommend filling out before sending in that first tuition check or even choosing a school. FAFSA becomes available every year on Jan 1st. Check with your individual state, as different states have different deadlines for submission. For this past school year, the deadline in the state of Michigan was March 1, 2013. Federal student aid can come in a variety of forms, from work-study programs (where you work part-time and the money goes directly to paying for your tuition), to low or no interest loans, and even to aid that doesn’t require repayment. And don’t think that you don’t qualify because you or your family is well-off. There are a variety of factors that are looked at and it can’t hurt to apply!

Scholarship Scoop

While I failed at getting a FAFSA in on-time/at all, I did take advantage of one amazing resource that is offered by almost every college out there: SCHOLARSHIPS. Scholarships are probably the most important and valuable resource in helping to pay for school. I can say with all certainty that without scholarship money, I would not be attending the University of South Carolina. As a resident of North Carolina, I noticed that the out-of-state tuition for almost everywhere was triple if not quadruple the in-state tuition rates at many universities. In fact, the University of Michigan has one of the highest out-of-state tuition rates, coming in at over $40,000 per year before any fees or room and board. The University of South Carolina has a particularly attractive scholarship program. The university offers scholarships to qualified out-of-state students that not only reduce the tuition to the in-state rate, but also take-off additional money. I am currently attending an out-of-state school, while paying less than the rate I would pay for an in-state school. See if any of your potential schools have a similar scholarship. The best place to look ships is on the school’s website. Make sure you take extra note of deadlines, as many scholarships have early deadlines.

Study Abroad Secrets

In addition to tuition scholarships, there are scholarships or grants to do things while in school. A friend of mine started early in looking at scholarships for her semester of studying abroad in Italy and received a few thousand dollars to help pay for her semester abroad. This gave her more options once abroad to travel and experience the local culture with the money she saved. At the University of South Carolina there are scholarships available through each language department and there are also general study abroad scholarships or grants that could be applied for within or separate from the school. I truly wish I had taken advantage of these scholarships, as I found out very quickly last semester how expensive it is to live for 4 months in Paris. Like the other financial resources, getting scholarship applications submitted early is imperative and many require written recommendations from professors or other references which can often be a lengthy process.

The opinions are those of Zachary Gould and The Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.