By Guest Blogger Katrina Capistrano
How can I afford college tuition for two, and how do I make sure my children are well taken care of when I’m no long around? These weren’t questions I thought of until recently, and when I did, I was utterly lost. The world of finance has changed so much, I didn’t know where to start.
Growing up with parents that were both in the financial industry, I found financial jargon boring and much too complicated to even try to understand. I was fortunate enough to have parents that did all the thinking for me when it came to money. It was never a popular topic in any conversations with my friends, so rarely did I pay any attention to it. After college, I spent most of my young adulthood depending on other people, especially our HR person at work, to tell me what I should do with my money. I realize now that that was not a wise decision. I have learned a lot since those early days.
The first cell phone was invented in 1978, and so was the first type of 401K to help people invest for retirement. Since my first cell phone at the age of 18, I have upgraded my phone countless times from my simple Nokia then to my IPhone 8 Plus now. Little did I know that saving up or investing has been upgraded countless times as well. Money itself has changed. Take college savings, for example. Young parents used to just put money in the banks. Unfortunately, regular saving accounts only give you half a percent return on your money. Even CD’s only give you 1-3% annually. Meanwhile, the value of money is decreasing, being affected by an average 3% inflation per year in the U.S. Tuition for an in-state public 4-yr college back in 1988 was about $3,300 per year. Today, it’s about $10,500 per year. That’s a whopping 350% increase.
I’d heard of the 529 program, where I could invest my children’s college savings into the stock market and have the earnings grow tax-deferred. I could even use the whole thing without having to pay taxes at all if it was used for higher education purposes. It sounded awesome! However, I found some flaws to this also. There are a few things to consider. What if my children qualify for free money through scholarships and grants? After some research, I was told I would have to exhaust our 529 savings before I could even get to access that free money. That sounded like a disqualification to me. Even more concerning, especially now, that I learned that each student can have access to free money every year for college, to the tune of about $35,000 per student per year! On top of that, there are penalties for using the money for purposes other than education. To be exact, a 10% fee on top of all the taxes that have to be paid as well. I had another big question, “What if the market tanked again like it did back in 2008?” Does that mean my children won’t have tuition money since those college savings where riding on the fluctuations of the stock market? These are questions I had to find a resolution for. Then I learned about the Index Funds.
One of the world’s leading investment billionaires, Warren Buffet, CEO of Goldman Sachs, and other big financial gurus have been talking about the Index Funds. It allows us to invest in the market and enjoy the compounding interest growth it provides, but not be put at risk to lose any of our principal and earned income on our money. So, when the market is up, we make money, and when the market is down, we stay leveled. This was the solution I was looking for. What’s best is that we can use the money for whatever we want. There are a few ways to take advantage of this new way of investing, including tax deferred and “tax-advantaged” programs. My go to financial professional is teaching me how to be smart with my money; allowing my money to work for me not the other way around. He’s also taught me about includable assets vs non-includable assets when it comes to applying for free money for my children.
It’s never too late to learn about investments. It’s not boring anymore now that I understand it! It’s like shopping and finding awesome sales! I don’t know how all cell phones work, I just need to know how mine does. I also don’t need to know how all investments work, just what’s best and latest for my situation and family.
Disclaimer: I am not a licensed financial advisor. Take-aways from this blog are purely based on my own personal research. Please consult a financial advisor for more details on what financial programs work best for you and your situation. I will gladly connect you with the professional I’m working with, if you’d like.
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