529 College Savings Plan with Match

If you’re an avid follower of my personal finance blog for Millennials, then you know that I wrote almost exactly one year ago about how I opened a 529 college savings plan for my daughter when she was only 6-days old. A bit extreme for some, but for me it was right on schedule.

I had actually read about some Millennials opening 529 plans for children they didn’t even have (or “expect” to have even in the next 9-months). That scenario was a bit too aggressive for me, as we had been trying for some time to have a baby with no such luck. I was convinced opening a 529 college savings plan for a pre-conceived child wasn’t right. With all that said, I am glad I opened a state-sponsored 529 plan for my daughter when she was only 6-days old.

529 Savings with a Match?

Now, let’s get back to the title of my article on a 529 college savings plan with a match. Does such a 529 plan exist you ask? Well, no, not exactly. The premise of this blog post is to encourage Millennial parents to not only contribute whatever they can on a regular (monthly via dollar cost average) basis to their child’s 529 savings plan, but to also match any gifted contributions you receive from family members and friends.

For example, this week my parents gave my baby girl a Valentine’s Day outfit and a $20 bill. My parents have done this, albeit in very small amounts thus far, but they have gifted us some money for our daughter’s college fund.

This was at our request…otherwise I think they would just give us more and more gifts and presents. But I would strongly prefer money for her college fund. I struggled with student debt because my parents didn’t save. I don’t want to struggle to put my daughter through college, nor did I want her to take on the burden of huge student loans like so many of us Millennials are these days.

The day after my parents gave my daughter $20 for Valentine’s Day I immediately wired that amount from my checking account to her 529 savings plan. I then matched 100% of the contribution, so I actually wired $40 to my daughter’s 529 plan. We received a couple contributions from family members at her birth but I didn’t match those. To be honest, I just thought of the idea in the last couple of months. Now I am ready to act on the idea of a 529 savings plan with a match (by me!).

So moving forward I am going to try and match 100% of any family members’ 529 contributions that my daughter receives. Granted these are small amounts, but if a family member gives my daughter $100 for her college savings plan, I am going to show my appreciation to both by matching 100% of that. My daughter should begin college in 2035, and from my calculations it is going to be very expensive.

Personal Finance 101: Save for College

In this personal finance 101 series I want to focus on college savings for our children. I am a Millennial and our generation is drowning in student loan debt. The average college graduate is finishing school with nearly $38,000 in student loans. That is crazy and its taking most of us Millennials one to two decades to repay that.

Open a 529 for Your Child

I was lucky enough to become a dad for the first time this year in 2017, and I knew I wanted to get a 529 account up and running ASAP. I don’t use this personal finance blog to brag, but I would like to say that I am thrilled to state that I made my daughter’s first 529 account contribution when she was just 6 days old.

My goal for this post is to encourage all other Millennial parents out there to begin saving now for their child’s college education. Don’t let your child be in the same debt the rest of us Millennials are in. This is your chance to create a better future for your child…a future with way less student loan debt!

Cost of College in 2035?

College is expensive and that is not news to anyone. The problem is most college tuition rates have been increasing between 6-10% each year…way more than inflation. The cost of college is soaring out of control! I anticipate my baby girl to attend college around the year 2035 and the calculations I received off a few future college estimator calculators is utterly shocking.

I calculated the cost of attending two different in-state schools in my state; the first is my alma mater, which unfortunately is the most expensive state university in my state. And the second is a quality in-state university, a much smaller university, but one that is far cheaper, while still providing a quality education. I love my alma mater, but I am absolutely leaning towards the latter (cheaper) in-state university.

In-State Public College #1 (Alma Mater)

Tuition and fees alone I expect to cost approximately $170,000 in the year 2035, if I want my daughter to attend my alma mater. This cost is for four years of schooling.

If I want to cover all expenses, tuition, fees, room and board, I expect that to cost roughly $310,000 in the year 2035.

In-State Public College #2 (Smaller and Much Cheaper)

Tuition and fees alone I expect to cost approximately $92,000 in the year 2035, for my daughter to attend a smaller, in-state university (which I am 100% on board with…and I am encouraging this school actually). This cost is for four years of schooling.

If I want to cover all expenses, tuition, fees, room and board, I expect that to cost roughly $111,000 in the year 2035.

How Much to Save for Future College Expenses?

I don’t know if I can afford to pay for all of my daughter’s college education, but I am certainly going to save early and often so that I can help her (and my wife and I) to avoid as much student loan debt as possible.

If we simply save $50/month for the next 18 years, I estimate that we’ll have roughly $23,000 to put towards my daughters education. It’s not a lot, but that is 25% of school #2…which is better than nothing!

If we can increase that to $100/month, we could expect $45,000 by the year 2035.

And if I can double that to $200/month, we could expect $90,000, which would pay all tuition and fees for school #2.

Cost of College Calculator

Previously I wrote about my newborn daughters projected college costs in the year 2035. If any of my fellow Millennial parents out there have done this, I assume there was sticker shock for you as well. The future college costs numbers are truly staggering. Now that I know what my daughter’s costs ranges are 18 years from now, I now have to figure out how exactly I go about hitting those numbers.

529 College Savings

Luckily I opened a 529 savings plan for my daughter when she was 6-days old, and I now have 18 years of compounding interest on my side. So let’s start crunching some numbers to see what exactly I need to contribute each month to my daughters 529 college savings plan.

In-State School #1

$170,000 (Tuition and Fees Only)

The first in-state public university I would like to send my daughter to costs $170,000 for four years’ worth of tuition and fees (no room and board).

$420 per month contribution x 18 years @ 7% annual return = $170,000

$310,000 (All Expenses – Tuition, Fees, Room and Board)

If I want to pay for all college expenses for my daughter at my first choice of colleges, that price tag would be $310,000. And that costs would include tuition, fees, room and board.

$760 per month contribution x 18 years @ 7% annual return = $310,000

In-State School #2

$92,000 (Tuition and Fees Only)

The second in-state public university I would like to send my daughter to costs $92,000 for four years’ worth of tuition and fees (no room and board).

$225 per month contribution x 18 years @ 7% annual return = $92,000

$111,000 (All Expenses – Tuition, Fees, Room and Board)

If I want to pay for all college expenses for my daughter at my second (much cheaper) choice of colleges, that price tag would be $111,000. And that costs would include tuition, fees, room and board.

$275 per month contribution x 18 years @ 7% annual return = $111,000

I Opened a 529 for My Baby at 6 Days Old!

I don’t use this Millennial personal finance blog to brag about anything I do financially, whether it be via investing or my professional career and my salary. However, I do want to take a minute to pat myself (and my wife) on the back because we just opened a 529 college savings account for our newly born daughter, who is less than one week old. To be exact, she wasn’t even six days old actually!

529 college savings plan

I know there may be some naysayers out there, considering you can technically open a 529 college savings plan prior to your child’s physical birth. You can open an account long before you even have a child or the minute you find out you’re expecting. I was fully aware of this option but I just couldn’t bring myself to opening an account for a baby we hadn’t had yet. I know the risks are ultra-low of complications with the baby, but I just felt like it was a possible jinx if I opened a 529 before my baby was born. But I was determined to open a 529 nearly immediately after she blessed us with her presence.

Oddly enough, I actually opened my account for my 6-day old the same way you would if you opened a 529 college savings plan for a child 6 months before birth. I didn’t yet have a social security number for my daughter, which along with a name and birthday is all you need to open a 529 college savings plan. So instead I opened the 529 and assigned myself as the “student”, aka the beneficiary of the plan. Once I have a social security number for her I can then transfer the account over into her name. Any transfer within your family is free of charge. It is no different than the transfer policy from one child to another due to one child receiving a scholarship and deciding not to attend college.

The process for opening my daughters 529 college savings plan could not have been easier. I was able to quickly setup the account and connect it to my bank account via a routing and account number. I easily setup an automatic monthly transfer that begins this April. And then I setup an auto increase on her birthday each year. So beginning in March 2018 I will contribute $25 more each month, and then again in 2019, 2020, etc. I was then able to make a one-time contribution to kick start my daughters 529 college savings plan.

Automate Your 529 Savings Plan

I love automating my savings goals and this 529 plan allowed me to do this effortlessly. I will now be contributing to my daughters 529 at least monthly and that amount will go up each year to ensure I save as much as possible. We hope to receive some “college money” as gifts for her birthdays over the years from grandparents and other family members as well. We can then easily log in and make a contribution to her account when that happens. Its great.

Future Cost of College Calculator

And I am going to need all the help I can get to afford college in 18 years (year 2035). I played with a future cost of college calculator and the projected costs are unreal. Seriously, unreal what the anticipated costs of college would be in 18 years. For an in-state public university in my state, college tuition is expected to range from $92,000-$170,000, depending on the university, in the year 2035. Again, these ranges are only for in-state public school, nothing private, and these costs are only for tuition and fees, no room and board. If I want to pay for all college expenses (tuition, fees, room and board), that will run me anywhere from $111,000-$310,000 for four years of college. Wish me luck…at least I opened her account when she was 6-days old so I now have compound interest on my side.

Public School vs Private School?

Recently I was getting together with some buddies of mine to catch up over a few beers. Funny how much our conversations have changed over the years, considering I am expecting my first child, my other friend is expecting his second daughter, and another already has two kids. So now family and kids dominant the conversation these days, which is great actually, because previously is was more trivial issues like sports, weekend events, golf, and boys’ trips. Boy has life changed for us over the last few years!

I previously wrote about saving for college and deciding between a 529 plan or a Coverdell Education Savings Account (ESA). Well, my friends and I spoke about this a bit as well and the 529 won out across the board, solely because of the contribution limits, which was my conclusion as well.

Public School or Private School?

The talk of saving for college brought up a more philosophical education question for your child; public school or private school? And now that conversation includes not just college but high school and even earlier “private” education. When I looked up the cost of private schooling the results just floored me.

To give you some background and my group of friends and me, we’re all obviously Millennials and we all grew up together in middle to slightly upper-middle class city. We all went to public high school and a state university. The one caveat is one of my really good friends did go out of state for college and went to an Ivy League school, which is a phenomenal feat and probably most parents’ dream. So good for him and his family on accomplishing that. He is the one outlier in the group though as we’re all “public school” educated and doing fairly well in life, both personally and professionally for now being out of college for 10+ years. All of our careers are moving in the right direction.

Now back to our philosophical question of public versus private schooling. My one friend said they are 100% planning on sending their two daughters to private school, and by private school I mean early childhood education. Not just private high school. The yearly tuition rates at the school he will send his two daughters to is astounding. See for yourself.

2016-2017 TUITION

Pre-Kindergarten (full day): $18,820
Kindergarten (full day)-grade 5: $23,510
Grades 6-12: $25,430

I fully understand tuition is different for every child because of grants, financial aid, etc. But either way, those numbers are jaw dropping in my eyes when you consider public schooling, kindergarten throughout high school is free (except for a few minimal annual schooling fees).

Is Private School Really Better Than Public?

I have three “sibling” in-laws, two sisters and one brother, all of which are public educators. My two sister in-laws teach young elementary aged children, while my brother in law teaches high school students. All of them are very passionate and one has a master degree in childhood education. I’ve talked to each of them multiple times about the difference in public versus private and a lot of the variance is purely on curriculum (and funding, obviously). A public school has a set teaching curriculum to follow, whereas a private school can change to emphasize some subjects over others (like science and math).

I think the main misnomer about private school is that the teachers aren’t exactly “more qualified” thank teachers at public schools. In reality, there are actually more requirements and standards for public schools then there are for private. I think people think most teachers at a private high school are equivalent to a professor at a university and their background in the field (formal education and research). That is simply not the case.

Public School is Just Fine

I will get off my soapbox now as being very anti-private schools, because it’s obviously ever families own personal decision to do this. If you have the funds to send your child to private school, by all means go for it. But don’t profess that your child is getting a substantially better education than those of us sending our kids to public school. Your child can still get into a great college when going to public high school (see my great friend who made it to an elite Ivy League school). And they can still be successfully when going to public school all the way through college. Me and my friends are all doing fine and I know tons of people who were “publicly” educated.

I just urge all Millennial parents to really research and think twice about private school. It feels way more of a status symbol than an educational play, in my opinion. At the end of the day, your child is as successful as you want them to be, regardless of public or private. If you are highly involved in your child’s schooling, homework, and lives in general, I think they will be just fine.

Being Involved As a Parent is What Matters Most

That is my humble advice from a soon-to-be parent. I will be sending my child to public school, but I will be as involved as humanly possible with their schooling. I want to push my child to work as hard as possible in their schooling and studying. I know that will guarantee more success in life than which particular school they attend.

529 vs ESA for College Savings Plans?

I am lucky enough to be a newly expecting parent this coming year. My wife and I are thrilled about the joy a baby will bring to us (and the challenges too, of course). We’re less than two months away from the anticipated birth of our child, and it feels like its going to be here any minute now the way time is flying by!

This past summer once we found out we were finally expecting, my first thought was, “wow, a baby is going to be expensive…how are we going to afford this?” We’ve been avid savers and budgeters for some time now so I had to figure out how I’m now fitting two more huge expenses in my month budget; diapers and college savings.

Like most new parents, the thought of college comes to mind fairly quickly, despite it truly being 18+ years away! But I know I want to address the issues ASAP versus delaying our savings plan. My parents did not save any money for me for college. They took on the brunt of student loans (and are still paying on them to this day).

I actually feel like they are miserable because of it too. My parents were never really open about college when I first began applying 15+ years ago. We didn’t really discuss anything about who was paying. I just applied, got accepted and they took control of the rest. Turns out I paid for most of my tuition and they paid for my room and board, as well as some other expenses.

I vow not to do this with my kid when this time rolls around. I was naive and had no idea just how much college cost and who was paying for it. My parents and I never really had those discussions. So here I am now trying to figure out how I can set money aside early and often to hopefully pay for as much college as possible for my soon-to-be child.

What is the best way to save for college?

529 College Savings Plan

529 plans are tax-advantaged savings vehicles that let you save money for the college expenses of a named beneficiary, such as a child or grandchild.

529 Contribution Limits

One of the primary benefits of 529 plans is its large contribution limits. Each state operates its own 529 plan and makes its own rules for the plan, so maximum contribution levels vary across plans. Generally speaking, contribution limits are high enough that most investors will never have to worry about hitting the ceiling.

Coverdell Education Savings Account

A Coverdell ESA is a tax-advantaged savings vehicle that lets you save money for the qualified education expenses of a named beneficiary, such as a child or grandchild. Qualified education expenses include college expenses and certain elementary and secondary school expenses.

ESA Contribution Limits

The annual contribution limit for Coverdell ESAs is $2,000 per beneficiary until age 18.

529 Plan vs Coverdell ESA

After doing my research on the two college saving vehicles, I lean much more heavily on the 529 plan. My main reason for choosing the 529 plan is because it has significantly more potential for future savings. If you maxed out an ESA account, which is $2,000/annually or $166/month, and earned an annual return of 7% annually, your savings would reach $67,726 after 18 years. That is still a nice chunk of change for college.

However, don’t you think during that 18 year span you can challenge yourself to save more than $167/month? Maybe not in the first few yeas but certainly shortly after you can find a way to scrape together $200-300 each month for your child’s college fund. With the same assumptions as above (7% annual return), your investment could be worth $122,396 after 18 years if you managed to save $300/month. That makes expensive college look a lot more affordable.

Pay off debt or invest for retirement?

This is one of the biggest financial questions not just Millennials, but all American’s ask themselves. Should I pay off my debts (student loan, car loan, credit card) or invest for retirement?

Nationally renowned “financial coach” Dave Ramsey has his baby steps, which clearly state to pause ALL retirement contributions until your debts are paid off (everything except for the house).

I agree with most of what Dave Ramsey lays out. Although, I vehemently disagree with passing up any possible 401(k) company match. If your company offers a match, you should 100% take advantage of that first and foremost. Invest the minimum percentage to get the employer retirement match, which is usually dollar for dollar up to 6%, and nothing more after that.

Below are the steps I layout that work best for a Millennial prioritizing their debt payoff versus their retirement investments.

1) Invest in your employers 401(k) plan IF they offer a company match. Invest the minimum amount needed to receive the maximum match (nothing more, nothing less). If your company doesn’t offer a match. Skip to #2.

2) Payoff your debts in order from lowest to highest balance. Ignore the common advice of taking your highest APR and paying that off first. No. You want to see results versus tackling the highest rate (which could be the highest amount as well). Throw as much as you possible can, like an uncomfortable amount of your monthly income, at the lowest debt/loan you have. Pay the minimum on all other debts until the smallest balance is paid in full. Then move on to your second debt and repeat the same process.

3) Once you are debt free, except for your house, contribute to your retirement plan or a Roth IRA. If you have the company match and you’ve already completed step #1, your next task is to now open up a Roth IRA. A Roth IRA is a retirement account where you contribute after-tax dollars so that your investment grows tax free. So at age 59.5 you may withdraw from this Roth IRA and pay zero taxes on your distributions. A huge benefit! You’re allowed to contribute $5,500 into a Roth IRA as of 2016. I would strongly advise to contribute 20% of your gross income towards retirement, including your company match. So if you contribute 6% to your employers 401(k) and receive a 6% company match, you need to place another 8% into a Roth IRA.

4) Once your retirement plan is on cruise control at 20% of your income, invest your remaining available funds into a 529 college savings for plan for your children. Anyone who has had student loans knows that potentially removing that burden from your children is a powerful thing. Your retirement absolutely comes first though because there are no loans to live on in retirement, but you may take advantage of student loans to get your child through college if your savings is lack luster or non existent. If you don’t have children (yet or don’t plan on it) skip to #5.

5) Now is the time to throw all remaining funds you possibly can at your house and get that mortgage paid for. Your debts are paid off. Your retirement is in great shape. Your kids college appears to be virtually paid for. Now is the time to achieve the ultimate financial goal…a paid for house! Work diligently to get that home free and clear so you can finally be financially independent.

6) Invest. Invest. Invest. Now that you are completely debt free and have a paid for house, its time to max out all retirement savings accounts and some. You know officially have no more payments to make to anyone, other than yourself. Continue to make payments…to yourself and invest that money like crazy. The maximum contribution one can put towards their 401(k) annually is $18,000 ($24,000 if you’re over 50). The max for a Roth IRA is $5,500 ($6,500 if you’re over 50). If you’ve maxed both of those out and still have money leftover, open up a brokerage account and invest in a low cost index fund (which you should be doing anyways!).

Follow this plan and you will be more wealthy than you even thought possible.

Most Millennials Say They Won’t Ever Accumulate $1 Million

Below is a list of some of my favorite money/personal finance articles from this past week. I’ve sifted through boat loads of articles on money, retirement, personal fiance, budgeting, paying off debt, and buying a home.

All of the below articles are highly relevant to the Millennial generation (Gen Y) and their money. Knowledge is power, and you are your single greatest investment, so continue to educate yourself on money and personal finances right here on this very blog so you can one day become financially independent.

This week’s best articles on money and personal finances, specifically for Millennials

Majority of Millennials Say They Won’t Ever Accumulate $1 Million

Despite an impressive head start, millennials overwhelmingly say they will not be able to put away as much as $1 million in their lifetime, new research shows. Yet with three or four decades to save, that mark should actually be fairly easy to hit. (Wells Fargo)

The 50/20/30 Rule for Minimalist Budgeting

Budgets are more than just paying your bills on time—a budget is also about determining how much you should be spending, and on what. The 50/20/30 rule, also called the 50/30/20 budget, is a proportional guideline that can help you keep your spending in alignment with your savings goals. (Mint.com)

The index fund: A monster of efficiency

When the first index mutual fund began operations on August 31, 1976, Jack Bogle’s brainchild was a curiosity, a provocation in a largely academic debate about whether professionals could consistently outperform the market. It wasn’t even all that cheap, with a sales load and expenses equal to 0.43% of assets at the end of its first fiscal year. (Vanguard Blog)

3 ways to more than double your retirement savings

The majority of the investments I own I’ve had for over 40 years. When I look back, they have had incredible performance — largely as a consequence of three principles that my financial advisor taught me in a number of early consultations. All three principles were the enemies of compounding’s power. The average long-term investor got only a fraction of the growth I have achieved. (MarketWatch)

20 Signs You’re Destined to Become a Millionaire

Becoming a millionaire may seem like an unobtainable dream. I’ve been there and felt like it was unattainable and something that would never happen to me. Then I started reading, studying and mimicking countless different successful millionaires. Here are 20 signs based on observations from several millionaire friends of mine, that you’re destined to become successful. (Entrepreneur)

The Worst ETFs You Can Own

Bloomberg’s resident ETF expert, Eric Balchunas, shared some interesting stats today on the habits of millennial investors. Their use of ETFs has exploded in recent years, up nearly 60% over the last year. Also, a greater percentage of millennials use ETFs than older generations: Millennials=41%, Gen X=25%, Baby Boomers=17%. (A Wealth of Common Sense)

Tax-Free Savings for College

The two most popular college savings programs are the Qualified Tuition Programs (QTPs, aka 529 plans) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, the less money you will have to put away each year. (Warrior Accounting)

How to Grow Your 401(k) in a Flat Market

The average 401(k) account balance stood at $88,900 at the end of June, according to an analysis of Fidelity accounts. That was up from $87,300 at the end of March but down from $91,100 a year earlier, Fidelity says. IRA accounts showed a similar pattern: The average balance stood at $89,700 on June 30, up from $89,300 at the end of March but down from $96,300 a year earlier. (Money)

Happy reading, my fellow Millennials.