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College Savings Accounts for a Bad Economy

Many parents and students see college as the bridge between this life and a better one. While more and more kids are heading off to college, many are struggling with how they’re going to pay for it. While a recent study conducted by Fidelity Investments in California indicates that more parents have started some type of a college savings or investment account, many have experienced a decline in the value of the account because of the declining economy. The results reveal that this loss is in the neighborhood of 27%.

Many parents are wondering what types of accounts are available to save for college and which one may the best one for them. Some financial and college aid experts chimed in on a few of the popular ways that parents have paid for or plan to pay for college—even in a faltering economy.

Types of Savings

529 Plans. Many parents have invested in the 529 plan, which is an account specifically earmarked for paying for college. Many parents and grandparents have come to depend on these accounts to cover college expenses because withdrawals made from 529 accounts to pay for college expenses happen tax-free.

There are two types of 529 plans, prep-paid and savings. Thirteen states offer pre-paid tuition 529 plans. Most states, however, offer a savings 529 plan, which is similar to investing in an investment portfolio, so there can be a fluctuation in the account value.

Financial experts seem to have opposing feelings about these types of accounts. Gene H. Harrison, VP and Director of Financial Planning for D.A. Davidson & Co. says, “Most 529 plans offer a variety of age-based options that provide for a shift in the asset allocation from more aggressive to more conservative as the child nears college age. In other words, if you used one of the age-based approaches offered and your child was within a couple of years of entering college, the account should theoretically be in a conservative asset allocation.”

Stan Ezekiel of College Planning Group Inc. has a slightly different view, “Unfortunately, the only benefit of a 529 plan is that the gain is not taxable if it is used for qualified higher education expenses. If a family has an opportunity to put money away on a monthly basis, they would be better served investing in a whole life insurance policy.”

UGMA/UTMA accounts. Michael Lopata of College Plan 101 suggests UGMA/UTMA accounts, which are another popular type of account with parents and grandparents. The UGMA/UTMA college savings options can also provide tax-free savings without the higher expenses associated with maintaining a 529 plan.

Account holders have a significant amount of control over the types of investments made during the savings phase and on how the distributions are made. It’s one more financial management tool for earning tax-free income. There is also some flexibility built into these accounts because the money doesn’t have to be used for college expenses, so if your child decides not to go to college, your savings can be applied elsewhere.

Real estate. Real estate investments, especially as a long-term investment strategy, are another way parents have invested money and turned it into a college savings account. Take, for example, a small business owner in Florida bought an investment home for each of his three children when they were first born.

He rented out the single-family homes over the 17 to 18 years of each child’s life. The rental amounts typically more than covered the home’s expenses, so not only did he enjoy the increasing value of the properties over the years, but he was also able to turn a profit from the rent. A few years out from each child reaching college age, he sold the home and used the profit from the sale and the money he had saved over the years from the rent to pay for college tuition, room and board for the child.

If you have a young child, now may be the time to consider this type of investment. Real estate prices are affordable and expected to increase again over time. Now may be the time to buy a home or piece of real estate at a deep discount, rent it out and sell it later for more than you paid for it. With somewhat of an unstable real estate market, this is probably not the right investment for parents with older children that have less time before the kids reach college age.

Tough Times Mean Alternative Methods

In previous times, parents may have carried the burden of paying for college alone. In modern times, students expect to pay for at least some of their college education expenses—be it from a part-time job or using gift money saved over the years. This, however, may not be enough to make up the shortfall, and with some families worrying about how they’re going to pay for necessities, college savings is something they’ve had to push aside.

According to Upromise, more families do not have to sacrifice saving for college to pay the bills. By registering with Upromise.com, parents earn one to 25% in rewards when they shop online, dine out or buy groceries and gas. The rewards can be allocated to a 529 college savings plan. To date, Upromise has more than ten million members and has contributed more than $500 million in member rewards.

High school and college aged kids are also approaching paying for their college education with their eyes wide open. This means some kids are attending nearby community colleges or universities rather than going away to school. It’s saving parents on having to pay additional money for room and board and only requires covering tuition and book expenses.

Times have changed and money set aside for college may fluctuate. Recent economic hard times are not stopping parents and students from using old tried and true ways along with innovative ways to pay expenses and save money for future college expenses simultaneously.

No matter what type of investment or account you choose as your college savings account, there is some risk involved. The key is to create a plan and start saving for college as soon as possible. Second, find an account that matches the amount of risk you’re willing and able to make. Once you have a college savings plan in place, all that’s left to worry about is getting your child into and sending them off to the college of their dreams.

Written by Kristie · Filed Under College, College Money Guide >Comments (6) 

Investing and College Savings – October Review

Investing was the main topic covered here on Money Smart Life in October with an emphasis on bonds.  We haven’t talked all that much about how bonds fit into an investment portfolio so I decided to take spend a few days covering bonds.

Investing Topics

Victor started out the the basics of investing in bonds and followed it up with a look at some of the common bond market terms.  Then we talked about a few different bond investing strategies and then wrapped it up with a post on bond funds.

The next investing topic was that of annuities and what types of investors are putting money into them.  They’re not for everyone, we look at how fixed annuities and variable annuities work and point you to some resources debating their usefulness in a portfolio.

College Savings

Since many college students were heading off to school last month we took a look at the Coverdell ESA and the 529 college savings plan.  We’re still moving on this one with another post on college savings in a rough economy later this week.

Money Topics

Some of the other personal finance areas we wrote about last month were setting goals to get what you want, paying medical bills, and some job hunting tips.

As I mentiond earlier, in the weeks to come we’re going to cover more in the college savings account arena.  We’re also going to take a look at something not covered much previously, real estate investing.  Hopefully you found something useful here last month, if you want to keep up with the new articles coming out in November you can get free updates.  Thanks for reading!

Written by Ben · Filed Under Personal Finance >Comments (1) 

TradeKing Promotion Extended

The TradeKing promotion has been extended through the end of this month. For some reason, TradeKing likes to run thier promotions in the fall of each year.  Last October Tradeking ran a $50 bonus promotion and despite the turmoil of the stock market had a lot of people sign up to try out their online brokerage.

This year the market has a lot more positive momentum than it did last fall and some of the people that were sitting on the sidelines are getting back in.  TradeKing is offering a $50 bonus if you open a new account and try out their stock trading platform.  You can read more about pros and cons of the online brokerage in this TradeKing review.

I had forgotten that they extended the promotion by a month last year until I recently got an email from TradeKing announcing they were pushing the deadline out a month.  They didn’t push it any further last year so if that’s any indication then this month will likely be the last chance for the bonus in 2009.

There is no TradeKing promo code necessary simply signup here and you get your $50 bonus after you fund your account with at least $2,500 and make your first trade.

Written by Ben · Filed Under Investing, Stocks, tradeking >Comments (0) 

Mobile Money Guide – Banking, Shopping, & Coupons

Mobile banking and shopping are becoming more and more popular thanks to smart phones like the iPhone and Palm Pre.  A year ago we ran a series of articles on what the mobile web could do for your money.

Today, I’m revisiting the mobile money guide because the options for banking, shopping, and managing your money with your phone keep getting better and growing in number, Quicken Online mobile is just one example.

We did research on your mobile options and I interviewed an expert on using mobile technology to connect consumers with merchants and deals, Kim Dushinski.  Here’s a list of the mobile money articles, check them out and let us know what new and exciting developments have come up since then. I’m sure there are a slew of iPhone apps that have popped up for managing your money from your phone.

 

Written by Ben · Filed Under Mobile Money, Mobile Money Guide >Comments (0) 

Angies List Promotion

Angies List promo codes are good for saving money when you sign up for the service but now Angies List is running a promotion for existing customers.  As I covered in my Angies List review earlier this year, I’ve used the service to find contractors for work on our house.

Apparently now there are more than one million members using the service and Angies List is running a promotion to thank existing customers.  If you like the service and tell your friends about it, they’ll give you a month’s free extension on your membership for each person you refer to Angies List.  Each referral also enters you into a contest to win a $1,000 cash prize.

The bad news is that the promotion has been going on for a while and is almost over.  The good news is that you still have a few more days left to participate.  Anyone you refer before the end of the month will get you an extra free month of service and put your name in the hat for the $1,000.

If you invite your friends, be sure to let them know about the Angies List coupon codes so that they can save some money if they sign up for the service.

Written by Ben · Filed Under Angies List >Comments (1) 

Variable Annuities Overview

Variable annuities are probably something you’ve never even considered investing in if you’re under 50 years young.  However, I’ve had people write me whose parents are getting pitched fixed annuitites and variable annuities as they are getting closer to retirement. To give an idea of how variable annuities work, Victor wrote up the following overview. [Editor’s Note].

What is a Variable Annuity?

Like a fixed annuity, a variable annuity is an insurance product. The difference between the two is the opportunity for more growth and risk. In a variable annuity, an investor’s funds can be invested in mutual fund-like products wrapped inside the annuity. The value of the annuity fluctuates daily based on the performance of the chosen portfolio.

Many annuities now offer certain guarantees. An investor can purchase principal protection where they are guaranteed every penny they put in. Some also offer guaranteed growth. They will have an offer that states the investor will receive 5% or the market performance of the portfolio, whichever is higher. Both of these options are nice to have, but an investor must realize that they pay for this. These are “riders” that are added to the annuity contract and have fees associated with them.

Liked fixed annuities, variable annuities have the same type of surrender schedules. A portion may be taken out without being charged a fee, but be aware that if you have not reached 59 ½, you may be subject to an IRS penalty of 10%. All growth is tax deferred in a variable annuity.

In a variable annuity, the funds are passed directly to the beneficiaries without going through probate. In the case of a spousal beneficiary, if the option is chosen, the spouse can continue the contract as if it were theirs. These annuities, again like their fixed counterparts, can be funded with a lump some or through periodic payments.

Typical Investor

In most cases, the typical investor of a variable annuity is retiree or a person with retirement on the horizon. Some annuities don’t even allow you to purchase them unless you are 45-50 years old. For some people, these newer annuities that include so many guarantees seem too good to be true.

Make sure you know how much it will cost to get all of these “guarantees” in an annuity. You will also want to know what kinds of investments are available inside the annuity and the health of the insurance company that is selling the annuity.

An annuity can be a very confusing thing. Annuity contracts are long and filled with “legalese.” Make sure you understand everything or speak to a financial professional and have them explain it to you before you put any money into it.

Here is a Smart Money article that takes a look at the downsides of variable annuities such as the average annual fees & commissions they charge, surrender fees, taxes on gains, and estate planning concerns.

Resources

Written by Victor · Filed Under Investing >Comments (3) 

Bond Fund Investing

Bond funds probably aren’t the investments that you spend hours investigating and researching when building your portfolio or 401k.  Typically individual stocks or equity mutual funds are the primary investing focus and bond funds are an afterthought if they’re included at all.

However, bond mutual funds and their fixed income can be just as important a piece of any portfolio as equities. Although you can get more bang for your buck with stocks, bonds can help you level off the volatility of the stock market. If invested wisely, an investor can use bond funds to not only increase the cash flow of their portfolio, but also see some growth.

Bond Mutual Funds

So how do bond mutual funds work? Similar to stock funds; portfolio managers buy an assortment of bonds based on the objective of the fund and what is available in the market.

Most bond mutual funds pay off a monthly dividend. That dividend can be paid out to your brokerage account in cash or re-invested by buying more shares of that particular fund. Please be aware the even if you re-invest the dividends, they are taxable in non-IRA accounts.

Bond Fund Categories

Like stock funds, there are many different types of bond funds, and investors have the same ability to diversify. There are bond index funds, government bond funds, state specific bond funds, corporate, international, etc.

Bond funds can be based on the average length of maturity of the bonds in the portfolio (short-term, long-term, etc.), the average bond rating (AAA rated, junk bonds), or other specific objectives of the fund (strategic income, diversified portfolio, emerging market).

Bond Fund Analysis

When it comes to picking a bond mutual fund, an investor must go through the same type of due diligence they would for a stock fund.

  • Does this fund fit my objective?
  • Is it to aggressive or conservative for my liking?
  • Does it invest in the types of bonds I want to own?
  • What is the history of the fund, the manager and the company?

Rather than give you specific bond funds as a suggestion, I’m going to finish this article by discussing the two best bond managers in the business (in my opinion). Between the two of them, they have over 90 years experience in the bond market and have been successful year after year.

Bond Investor – Bill Gross

You may not know the name Bill Gross, but if you have a 401k or ever watch CNBC, you may be using his funds and have seen him on TV. Mr. Gross is the founder and managing director of PIMCO. He manages over $800 billion (yes, that’s a B) in fixed income assets.

His PIMCO Total Return Bond Fund is one of the most popular bond funds in 401k programs across the country. He has been named the Morningstar Fixed Income Manager of the Year three times and is a “go to” person for many different news publications and media outlets for his opinion on the bond markets.

Bond Investor – Dan Fuss

Dan Fuss is the Vice Chairman of Loomis Sayles & Company. He was named to the Fixed Income Analyst’s Hall of Fame in 2000 and is one of the most brilliant minds in the business today.

The equity side has Warren Buffett and the fixed income side has Dan Fuss. He has made a habit over the last 20 years of creating stock-like returns in his fixed income portfolios. In a previous life, when I was a financial advisor, every single portfolio I ever developed had his Loomis Sayles Strategic Income Fund in it.

Mr. Fuss is a much more aggressive investor than Bill Gross. I often used the two of them together almost as a yin and yang for bond portfolios. These men will bring a tremendous amount of knowledge and experience and proven to success to any portfolio. As always though, make sure the investments you choose fit your objectives, time tables and risk tolerance.     

Hopefully this look at bond investing will give some good food for thought as you plan out your portfolio.  For more on bonds, you can also read up on bond investing terms and some bond investing strategies.

Written by Victor · Filed Under Bonds, Investing >Comments (1) 

Bible Money Matters

Last week, we highlighted Jeff Rose over at Good Financial Cents.  This week, we’re highlighting Bible Money Matters written by Pete.  He doesn’t believe that faith and finances should be separate, and so his blog chronicles his thoughts about how his Christian faith affects his finances.

I like Pete’s site not only because the posts are usually informative and educational, but I also like how he relates religion and money.  There are many issues that revolve around money and beliefs, like greed and giving, that I struggle with sometimes so his site is good food for thought on those topics.

About Pete

Pete and his wife Maria have been debt-free (except for their mortgage) for about two years. They vow never to be servant to the lender again by maintaining that debt-free existence.

Recent Links

Here are some other posts from around the personal finance web:

Software and Giveaways

10 Free Online Budgeting Applications @ Lazy Man & Money
2010 Quicken Deluxe Giveaway @ Suns Financial Diary

Budgeting

Saving Money

Taxes

Financial Education

Business Finance

Kids

Written by Debbie · Filed Under Personal Finance >Comments (4) 

Outsourcing Your Investing Decisions

Would you pay someone to make your investment decisions for you?  Sure, most of us have some money invested for us by mutual fund managers but would you outsource your investing choices to someone that simply had a good track record of earning in the stock market?

A company called kaChing that runs a virtual stock trading website has added the capability to allow you to automatically invest your money in the exact stocks that the best investors on the site have in their virtual portfolio.

Site members that have maintained a virtual stock portfolio for at least a year with positive returns are eligble to become what the site calls an investing “genius”.  To qualify they have to get a certain score on an InvestmentIQ test and sign regulatory documents regarding securities laws.

Investing Your Money

KaChing’s philosophy is transparency you can see the holdings, trading history, and research of everyone on the site.  You can also see what stocks they’re watching and a peformance analysis of their investing.

If you find an investor whom kaChing has qualified as having an acceptable track record & sufficient investing knowledge and you want to mirror the stock trades they make then you can sign up to do that with kaChing.

kaChing opens an brokerage account for you at Interactive Brokers and will use your money to perform the same buying and selling of stocks as the investor that you chose to follow. The investor you’re following will charge an management fee that ranges from 0.25 percent to 3 percent of each trade. KaChing keeps a quarter of the fee, and the investors get the rest.

A Different Investing System

The thought behind the kaChing system is that mutual funds charge fees that are too high and they are not transparent enough with how they’re investing your money.  The founder, Dan Carroll, felt he could offer a better system and started kaChing to address some these concerns.

kaChing is attempting to let past performance help you find investors that you would feel comfortable “managing your money” for you.  Of course they don’t directly manage it, they simply buy and sell their virtual holdings and you mimic them in the real world.

kaChing Investing

One thing that’s good to see is that at the top of each investor profile they indicate whether the investor has some of their own money invested in the funds so at least you can see if they have skin in the game.  They also display how much money in customer assets is actually mirroring the trading moves of the investor.

Of course neither of these things will tell you if the person’s stock choosing ability will be successful and consistent. The way I see it, the big question is whether the qualifications kaChing requires are enough to make you feel comfotable investing your money with these investors.

I hate it that they call the qualified investors “geniuses”.  It seems dangerous to me, both for the investor and the people matching their trading moves.  You certainly don’t want the investor thinking they are a genius and feeling as though they can’t go wrong. You also don’t want people to put their faith in an investor simply because they’ve been labeled as an investing “genius”.

Something else to consider is that even if you did invest money through kaChing you’d have to watch the investing strategy of each investor and how it fit into your overall investment portfolio. For example, the investor with the top returns at the moment invests only in the healthcare industy. The intro to his nvestment strategy on the site is:

“My portfolio aims to produce returns from small to mid-cap companies in the biotechnology and pharmaceutical sector. I focus on discovering significantly undervalued companies with encouraging drugs and opportunities for significant gains.”

Would You Use kaChing to Invest Your Money?

I don’t think I’d setup my investments to be automatically made to mirror kaChing investors. It certainly wouldn’t hurt to open a virtual account and start following the moves of the top investors; picking their brains to see what moves they make and why. I’m sure you could learn a lot about the market and try out what you learn with your virtual account.

It is interesting how technology is being used to enable individuals to perform some of the functions that we’re used to depending on big financial businesses for.  Companies like Prosper and Lending Club have created a whole new marketplace for peer to peer lending where individuals can lend money to others, cutting out the banks and the fees they charge.

Now kaChing is offering an alternative to having mutual fund companies manage investments for you. Instead you can choose to follow the investments of skilled individual investors. Who knows, maybe it’s the investment model of the future but right now it’s not for me.

Written by Ben · Filed Under Investing >Comments (1) 

Our Furnance Repair Bill

Heating & cooling your home isn’t cheap, especially when you add in furnance repair bills like the one we had last weekend.  We came home last Sunday afternoon and found that although our thermostat was turned to 65 and we could hear the furnace blower kick on, there was no hot air coming out of the vents.

Heating System

Our central heat system uses a heat pump to warm the house when the temperature is above a certain level and then a gas furnace kicks in as auxilary heat when the temperature outside gets too cold for the heat pump to keep up.

I opened up the furnace and could see that the gas burners weren’t lighting but didn’t see a pilot light anywhere.  Reading through the owners manual I discovered that some of the newer gas furnaces like ours have an igniter instead of a pilot light and they recommended having a professional diagnose it.

Furnance Repair

I knew it would be more expensive for a weekend call but it was pretty cold so I called up the evening and weekend number and scheduled an emergency repair visit.  It turned out our furnance igniter had gone bad but luckily for us he had a van full of furnace parts and had the one we needed.

The total furnace repair bill was $180. The service call was $120 since it was on a weekend, and the part was $60.

Furnance Maintenance

I questioned the furnace technician as he worked to see what I could do to prevent future $120 weekend service calls.  He said that other than regularly changing our furnance filter there wasn’t much else simple that I could do myself.  He did show me how he cleaned the burner and sensor with some steel wool and just cleaned the dust and dirt out of the furnace cabinet.

He said that although our Carrier furnance was pretty easy to disassemble compared to other brands like Trane, where you need special tools just to take apart the furnace, if I wasn’t familiar with the inner workings of our furnace that my best bet was to get it serviced once a year.

He gave me a sheet with a breakdown of all the things they do in their furnace annual service.  Apparently they take apart the furnace and lubricate all the moving parts and go over the following components:

  • Burner
  • Heat Anticipator
  • Heat Exchanger
  • Safety Controls
  • Air Filter

As part of the maintenance, they also check:

  • Flue for proper drawing
  • Temperature rise through furnace
  • Fan and limit control
  • Proper combustion
  • Gas line & manifold pressure
  • Pressure regulator
  • Blower components

Since I don’t have much spare time, I’ll probably take advantage of their annual tune-up either this winter or next.  Hopefully that will ward off any future emergecy weekend repairs.

Written by Ben · Filed Under Home Owner, Personal Finance >Comments (1) 


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