Saving for College for Kids You Don't Have Yet: Yes You Can

Did a video on YouTube on this subject here but also wanted to address it on the blog as well.  I was wondering after reading an interesting book on financial planning (to remain nameless-no plugs here) if there was any way to save for college for children before you even have them.  My thought was basically that the longer the time horizon the money has to grow before you use it to pay your kid's college tuition, books, etc. the better off both you and your kid will be once it comes time for them to start college, particularly with how expensive college has become in this country.  Let's face it, college tuition, although increasing slightly less rapidly in the past several years, has increased by more than 300% over the past 30 years.  Then there's all the random fees, many of which strike me as ridiculous, but that is a topic for a different rant.

As a personal example, I was accepted to the law school I eventually chose in February 2007 and was very happy to receive a $7,000 yearly scholarship (tuition was $35,000).  Well, you had to write a check for several thousand dollars to reserve your seat in the class by I think it was April 30 and then the next week they announced what tuition would be the next year.  Well, after I had already submitted my deposit, they announced tuition would rise to $39,500.  I was very pissed because basically most of my scholarship was eaten up.  The following year there was a similar rise, meaning I may as well not have gotten the scholarship for all the good it did me.

Anyhoo, to get back to the topic at hand, the tax code permits parents (or anyone for that matter, which is what helps out here) to establish an account with a 529 savings plan.  A 529 is an investment account you can establish with any number of investment management companies that can be used for qualified education expenses.  (I will discuss what those qualified educational expenses are in a subsequent post).  I opened one with T. Rowe Price because I use them for my retirement accounts.  Also note that you can open an account with any state's 529 plan, whether you live there or not.  This topic was recently discussed on a radio program I enjoy on SiriusXM called Your Money hosted by Professor Kent Smethers and he recommended the Utah plan, which is run by Vanguard.  Also note that some states with state income taxes allow deductions for any contributions to a 529 plan, so there is an added tax benefit as well.

Anyone can open an account and name yourself as a beneficiary.  I don't have kids yet but we are planning to have them in the next couple years.  So what I did was open a 529 account with T. Rowe Price and named myself as the beneficiary.  Once our first kid is born, I will switch the beneficiary to him or her and continue saving.

Now you may have other investment goals, like saving for retirement, down payment on a house, etc. I have a sizable amount of student loans and we are working on paying those down as quickly as possible while also saving as aggressively as possible for retirement, so I am only doing $50 per month in the 529 account for the time being.  I will probably ratchet that up over time but figured it made sense to at least start saving a nominal account in order to take advantage of a couple extra couple years of growth on that money.  This is particularly true given that any contributions to 529 plans are like Roths in that the money you contribute is after tax and there is no tax on the earnings once you begin withdrawing them to pay for college.

I thought this was a really neat trick and wanted to share it.  I figure if we have start having children in a couple years then I will be ahead of the game in helping them save for college even though I am investing such a nominal amount.

Sources for Free Financial Advice

Out of curiosity, where do you go for free financial advice?  Blogs, websites, newsletters, news/magazines, etc.?  Was going to do a post on this and wanted to get some ideas as to what resources people typically use.

Credit Unions v. Banks: My Positive Credit Union Experience

We are moving soon, as I mentioned before, and this means switching financial institutions.  That means figuring out where to go next because our current credit union, despite being one of the largest in the region and second largest in the state, has no branches within 200 miles of where we are moving to. I know some might say we don't even need to switch in an age where you can do pretty much any financial transaction over the Internet and I might agree, but I am extremely cheap and the thought of having to pay ATM fees in the very rare circumstances  when I need cash is anathema to me.  

Anyway, I digress. I am a big fan of credit unions.  I was a Bank of America customer for years when, in 2010,  they assessed me one of those ridiculous $5 monthly charges they were implementing if you didn't meet a certain arbitrary threshold as far as account minimum balances, having direct deposited paychecks or some other thing I can't remember that ultimately seemed silly to me.  (This was about five years ago).

As I am wont to do, I called to complain about the fee and ask for a refund (I do this all the time and it works with everything, whether the cable company, a crappy experience with a hotel or a number of other things and think it is always worth trying-the worst they can say is no).  Even though I got my money back, the whole experience disgusted me so much I decided to make the switch to a credit union.

We chose the biggest credit union in our area, which extends halfway across the state, except where we are moving, of course.  It has been a really good experience.  Everyone at the credit union has been extreme helpful and pleasant whether we needed to speak with them in person or over the phone.  We applied for a mortgage with them but I was shocked when we got a lower rate with someone else.  (We got the best deal the credit union was offering but it still did not beat the rate we were getting through a regional lender.)  Strangely enough, that regional lender turned around and sold the loan to Wells Fargo, who we have not had any problems with.  My parents have had all sorts of problems with Wells, however, ncluding when a guy with the same name as my dad was given information regarding my dad’s accounts when he walked in to ask about a new loan.  

The biggest problem I see with credit unions can be their relative lack of sophistication.  The websites can also be a bit janky depending on how big the credit union is, which has been the case with ours, but besides that I have been a very big fan.

I asked about people's general thoughts on credit unions v. Banks on Google + and the response, literally every single person, was credit unions.  Wanted to see what other thoughts were out there on the issue as well-what do you see as far as the costs and benefits associated with big banks v. credit unions?

Access to a Financial Advisor as Part of a Workplace Retirement Plan

Does your 401(k) or other retirement plan also offer the chance to speak with a financial advisor as part of the plan?

I was listening to NPR this weekend and they mentioned that virtually no employers include the option to periodically consult with financial planners free of charge as part of their retirement plans; the commentator's opinion was that virtually no employers offer this benefit because of the liability this would open the employer up to if the recommended investment does not pan out as well as the investor would have hoped for.

I could see his point, as it is quite common to see class action litigation by a disappointed investor (supposedly on behalf of all investors) when a stock drops or someone makes a recommendation and it doesn't pan out (financial advisers have gotten sued over this and some banks have based similarly been sued based upon the ratings their analysts give stocks that end up under performing those ratings.).  I am not aware of cases where a disappointed investor or group of investors has sued a mutual fund based on bad stock picks but I am sure it has happened.  And just from a legal perspective an employer in this scenario might have an even harder time defending itself because most retirement plans offer a limited variety of mutual funds, etc. to choose from, so the investor might have an even easier time arguing the options are all improper, including whichever one the financial advisor recommended.

It saddens me that this (in my view) unnecessary litigation means people don't get the benefit of professional assistance with probably the most important financial challenge we will all face in our lifetimes-saving for retirement.  

My wife works for the state government and does have access to consult with a financial advisor for free as part of the state retirement plan (although we have yet to use that service).  That made me want to do so, even if only to make sure we are on the right track.

Progress with My Neurosis in Checking My Bank Account? Maybe?

Might be having some success.  Only checked my bank account balance once a day each of the last two......although I wasn't in front of a computer either day.  That might change when I am back at work in front of a computer.  Will keep you posted.

Payday and other short term loans: avoid at all costs. Please please please.

This will probably get me in trouble judging by some of the posts/advertisements that I see in Google + but I felt compelled to say something.

Short term loans like payday or Internet loans are absolutely ruinous.  They come with ridiculously high fees and the interest rates, when annualized, are typically over 200% and sometimes run over 1000%.  (Was listening to Marketplace Weekend once and they said the industry racks in more than $8,000,000 in fees per year).  Pretty much every state has laws that cap the amount of interest that can be charged on a loan, which are known as usury laws, but typically the payday lenders will find a way around the laws.  (15 states have banned payday loans outright).  The payday loan industry lobbies are very strong and will typically be able to block entirely or at least water down any proposed regulations and/or laws passed designed to regulate them.

In addition, they have clever lawyers who find a way for them to reincorporate and open with a new name and corporate structure the day after they are forced to shut down or change some aspect of their business model slightly so they are in compliance with the law.  (And yes, I am a lawyer and am throwing my profession under the bus.  Everyone else does it, so why not me as well?).

A lot of the lenders have even reincorporated offshore to avoid regulators.

Some examples.  For instance, there are laws, like the Military Lending Act, that regulate what interest rates a military service member can be charged (36%), but there are a number of loopholes that the industry constantly uses to continue to exploit our mean and women in uniform.  For example, a number of loans are not covered under the interest rate cap, including loans for more that $2,000 or loans that last more than 91 days.  The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000 or with a term of more than 91 days.  So guess what products the industry pushes? You've got it, the ones exempt from the law.

The New York Times has done a number of articles on this, including this one.

In addition, a number of banks have, depending on your viewpoint, conspired/cooperated with payday lenders.  J.P Morgan several years ago settled a class action lawsuits that accused it of making auto drafts of people's bank accounts to repay payday lenders even after the account holder told the bank to stop doing it.  The lenders will often require you to give them your bank account information so they can automatically deduct the payments from your account.  The thing is, allowing them to do that means they can withdraw the money even if it's not your account-causing you to incur overdraft fees from the bank.  Every time they try to ding your account and the money is not there, then the bank makes money in the form of an overdraft fee.  So they continue to process the payments, in many cases even though the customers have told them to stop.

Some states, like Virginia, even ban these automatic payments altogether.

Again, the New York Times had done some articles on this as well, including an interesting one available here.

I probably seem like I am getting on a soapbox but I have seen first hand what some of these lenders will do to people through my work volunteering with legal aid clinics that help consumers struggling with financial problems.  They can absolutely ruin you.

Please, in the name of all that is holy, don't take out a payday loan or give these people your bank account number.  I know sometimes you just need money right away, but there are alternatives.

If you have any questions, feel free to email me here.  I'm not trying to drum up legal business for myself here, I just want people to stop being exploited.

In a future post I will discuss what some of your options are if you're in a bind with one of these lenders.

How many times a day do you check your bank balance?

I caught myself realizing today how neurotic I really am about my finances. Despite it being a really busy day at work, I checked Mint in the morning, and then again checked my bank account through the bank's website once at noon and and again in the late afternoon.

What could possibly have changed from that morning or five hours earlier? Maybe I am being a bit too hard on myself but the thing is that I check it at least once a day every day of the week.  Maybe it's just a bored habit to take a short breather before diving back into work, who knows.  

The thing is that I don't need to be checking it really more than once a week.  I keep way more money in my checking account than I probably should.  (I am not implying I am rich at all, indeed far from it.).  I just like to keep a couple months living expenses in there so I never have to worry about accidentally over drafting or bouncing a check. (I once bounced a check for no reason other than that I was hoarding all my money in my savings account because of the greater interest rate). 

Yet I still feel compelled to check it every eight hours.  

Are you like me?  Do you constantly track what's going on with your accounts all the time?  Is every day too much?

Think you can't save for college for children you don't even have yet? You can!

Video explaining how to do so here

YouTube Channel

I'm starting a YouTube channel.  Guaranteed to be horrendous, but feel free to laugh at my atrocious videos in addition to my horrendous blog posts.

The first video is here.

Channel is called Inside Consumer Finance and I'd welcome any feedback as to ways to improve!

What are your biggest money worries?

I went to Baltimore to visit a friend in 2008 and while we were there we went to a museum that had an exhibit on Post Secret. For those of you who may never have heard of it, this guy came up with this idea to invite people to submit an anonymous post card to him describing their greatest secret.  Absolutely fascinating concept and I really enjoyed the exhibit.  If you want to see some, he posts them online at postsecret.com.  Take some time to read through them, they are absolutely fascinating.

Among the many other series of posts I want to do is one on financial worries.  Specifically, what do you worry about the most in your financial life.  I envision this being a series of anonymous posts by different people about what the biggest financial worry in your life.  There's a real power in community and realizing you are not alone in wondering if you are saving enough for retirement or your children's college or your job seems shaky or you're underwater on your mortgage or in over you head on student loans.

Please feel free to email me whatever your biggest worry is and I will post them, anonymously of course, without mentioning your name or any identifying information.

I will kick it off by saying that my biggest worry is that taking on student loans will mean my family and my children won't have the opportunity to have the kind of life that my wife and I want for them.  I discussed this a bit here

I am going to go through the numbers in greater detail in a future post and, based on those numbers, there is a good argument to be made that taking on a boatload of student debt to go to law school was actually a great move, but that doesn't mean it doesn't bother the hell out of me.  I wake up at night sometimes wonder what happens if I lose my job because I can't declare bankruptcy and get rid of them, they're with me until repayment or death do us part.  I can't pretend they don't stress my wife out either; they figure in every conversation we have about what kind and how much house we can afford (which will become an even more important issue because we're on the verge of selling our house and moving to a city with a much higher cost of living), when we're going to have kids, how many kids we're going to have, etc.  It's a worry that never leaves me.

What financial worry never leaves you?  Share it and you'll feel better.  You know you will......

Mulling Credit Union v. Bank for New Financial Insttitution

As I previous said, we're moving soon, which means switching banks.  We are currently with a credit union that we have been happy with.  However, they have no branches where we are moving to, which is a drawback whenever you need cash.  So we're mulling over whether to go credit union again or to go with either a national or local bank.

I posed the question of credit union v. bank on several communities in Google + and will report on my thoughts and those of others on the issue in my next post.

Consumer Law Issues

One of my hopes in starting this blog was that I might be able to fill a void that I perceive as existing as existing out there in the personal finance blog community: discussions of consumer law and finance issues, particularly regarding consumer protection laws.  I practice law for a living but am not looking to sign up a bunch of clients or promote my services.  Instead, I was hoping to offer a resource for those who might have questions of any issues related to consumer law without you needing to file a lawsuit or pay a bunch of money for a lawyer to tell you what your options are.

That being said, please let me know if there are any issues you would like discussed via email at insideconsumerfinance@gmail.com and I will do my best to answer any questions you might have in future blog posts.

Financial Regrets

An issue constantly on my mind is the issue of financial regrets.  We all have them of course, but I imagine those of us interested in personal finance enough to write or read a blog on the topic either have more of those financial requests or else think about them more than the average person.  

That being the case, I wanted to devote a couple posts to that issue.  I will start with undoubtedly my biggest financial regret but also one that actually may have worked out if you look at the ROI from a long term perspective.  That issue is my choice of law school. I chose to go to the best law school I got into, a top 15 school. My rationale for doing so was that I thought it would maximize my chances of getting a good job coming out of law school and it really helped.

However, and even though I was lucky enough to be the recipient of a scholarship from a generous benefactor of the university, I did come out of law school with significant student loans-$137,000 in total on the day I graduated. I will go through the specific numbers as to whether the choice has been worth it in my next post, but I would say that my decision (and the resulting student loans) has taken a significant toll on me in the sense of having caused a considerable amount of anxiety about the financial future.

But that is tomorrow's topics. Just wanted to get you thinking about what some of your financial regrets may be to perhaps stimulate a conversation on the topic.