Month: July 2017

The Private College 529 Plan – Alternative Education Savings

We hear a lot about 529 Plans—a way to contribute to your children’s college education while receiving some state tax deductions.  I think 529 Plans are great in that you can save up for college education while getting some tax perks. If you live in a state that allows you to take state tax deductions on 529 contributions, you can reduce around 5+% of the contributed amount towards taxes. Not bad.  If you live in a state without income tax, you can still benefit by contributing to 529s by having the growth tax-free. If the stock market goes on a tear for a whole decade before Junior goes to Harvard, you can really come out ahead by not paying taxes for the investment growth:

You get about $69,000 in growth at 8% before taxes on $1000 monthly contributions for a decade.

In this example, a $1000 monthly contribution for a decade will get you $120,000 in principal and roughly $189,000 after investment gains. You basically “gain” $69,000 tax-free.

What if you want to do better?

Come the Private College 529 Plan.

The Private College 529 Plan is a privately run investment vehicle in which you essentially prepay your child’s college tuition in today’s money as a credit for future tuition. Think of it like a points system that we see in credit cards. It is an interesting concept since private college tuition inflates at an insane rate. For instance, tuition at my college is now three times higher than what it was when I attended. I can tell you now physician salaries aren’t three times higher now compared to back then either (in some specialties it’s actually lower!). Shocking.

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I presume that this sort of system works by investing your contribution in a black-box system sort of how those life insurance investment vehicles work (cough::whole life insurance). This isn’t a bad idea in this case. The burden of growing your money is placed on this investment group, and it is honored by the university that your kid ends up attending. The catch is that your kids has to get into a participating college.

What if my kid needs to attend an Ivy league school?

Smart Money MD is a big fan of going big.

You might also like: Is a degree from a prestigious medical school advantageous for doctors?

Fortunately there are some top-tier colleges in this program. A complete list is here, but I’ve taken the liberty of listing schools that Tiger moms would typically approve of:

  • MIT
  • Princeton
  • Caltech
  • Amherst
  • Stanford
  • Duke
  • Johns Hopkins
  • Emory
  • Pomona
  • Rice
  • U of Chicago
  • Wellesley
  • WashU
  • Rhodes College (maybe)
  • Vanderbilt

My apologies if your favorite alma mater is actually on the Private 529 Participating college list but wasn’t listed above. What’s more critical is that Princeton is the only Ivy League school currently participating in this program. If Junior’s parents and grandparents are Legacy Yalies, this program won’t cover her tuition (yet)!

Realistically the number of participating private colleges is exhaustive. Based on what I’ve seen, most private colleges that kids would be most likely attending are on here. I suspect that today’s tuition of approximately $45k annually will likely balloon up to $90k+ in another decade. You’d have to be making pretty darn good investments to double your investments tax-free in a decade.

What if my kid doesn’t get into any of these colleges?

This might happen. Or they end up getting into a solid public university on a scholarship. You can still transfer the funds/credits over to another kid’s account. If you decide to withdraw the money, you will end up paying tax on any gains that have accumulated (capped at 2%) plus another 10%. I suppose that the penalties are somewhat onerous but not unexpected given the potential gain.

Overall, I don’t think that this is a bad investment if the criteria fits your children’s educational goals.  It’s just tough to predict how their educational trajectory will progress years ahead of time. I also assume that the usefulness of the private 529 plan also depends if the program will still exist by the time your child goes to college too (just like Social Security).

Do you plan to use the Private 529 Plan?

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How would wealth impact your life trajectory?

I frequently wonder how my career trajectory would have mapped out if I knew at a very young age that I’d be financially set no matter what I did. Would I have busted my ass to get a high paying job if I were already financially independent?  Would I have dedicated my life to philanthropy?

Who knows. I’ve met plenty of people in my life who clearly have had various degrees of family wealth. Like the guy I knew in college who was neither a genius nor a hard worker who still got into medical school. I didn’t realize that he came from serious means until his parents cut him a $2 million check when he got into medical school.  Sometimes you can’t actually tell whether someone’s lavish lifestyle is due to wealth or simply egregious extension of their credit lines.

I always figured that if I had the preordained luck to be born into wealth, I wouldn’t have tried so hard in school.  Over the years, I’ve come to realize that the answer may not be as simple.  If I were fortunate to have inherited a family fortune, would I really want to feed off the fat? Or would I have the ambition to build on that wealth to make a name for myself?  Should I just work just as hard and find my true passion? That is a much higher level decision to make than simply working hard to put a roof over your head.  There is a reason why some of the wealthiest people I know still chose a challenging career in medicine.

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You can work and play to you true ambition if money is out of the equation.

I tend to view our life choices as a conglomeration among three needs: (1) fortune, (2) fame, and (3) happiness.  It’s challenging to have all three, but coming into the world with fortune will get you a head start on life.

You can’t have it all.

If money were not a problem (fortune), I probably would have ordered take-out a lot more often and saved myself hundreds of hours of cooking during medical school (happiness). Those hours could be been better spent studying, exercising, or even socializing.  Perhaps that would’ve enabled me to pursue a different specialty in medicine. Would I have chosen a less lucrative profession? Would I have chosen a lower paying but intellectually stimulating job (fame) in a higher cost of living city?

I think that the wealth factor definitely influences how one goes through life. I like to look at it in phases:

Money is awesome phase: This is presumably realized in childhood. Any toys, vacations, foods, or material goods can be had without consideration of cost. This is where bad habits can be ingrained.

Money is a tool phase: As you get older, you start to realize that you can purchase favors or amenities to get ahead in life. Private tutors. Exchanging cash for other people’s time.

Seeking purpose: Everyone experiences this. You try to figure out what you want out of life. Careers. Wealth influences your career choices too. This is where you try to figure out what you ought to be doing to become happy.

Money is a tool again phase: You go about your career with highs and lows. Wealth can be used to ease the daily grind.

It’s clear that wealth can certainly put in an advantageous position to be happy, but wealth can’t guarantee happiness. Had my financial situation been different in childhood, my life trajectory would have been different, but I think that my level of content with my life choices would likely be the same.

Have you pondered these scenarios before?

Lifestyle Tips for the Wealthy – The High-Lo Way

When I was a poverty-stricken resident—I actually lived in a building that had mostly Section 8 units—I bought used items. These were basic hand-me-downs from prior trainees. Desks, chairs, floor lamps…all of the essential items that one might need to outfit a studio.  When I moved on, I actually was able to donate or even resell some of the items. It wasn’t a bad way to own cheap stuff, but the problem was that it was cheap stuff.

Interestingly, one can establish a micro-economy out of this situation. Take it from Financial Panther. There’s money to be had in reselling items that you’ve picked up for free.  If you sell a few $40 desks, you’ll eventually come up with additional spending money.  Look at the entire Goodwill network. They sell donated items, train workers, and do good for society.  It just takes a good eye and time.  Time was something I didn’t have, but I can envision many families with stay-at-home spouses carving out a niche business out of reselling.

Fast forward to the present.  I probably have some time to build up a micro-business in reselling low-dollar items, but is it worth a doctor’s time to do so? WCI recently wrote about trading time for money.  The doctor is the ultimate service worker. We get top dollar hourly rates for our services.  No more. No less. Our ability to build wealth is strictly limited by how much time we have.  And reselling furniture is a low-dollar proposition.  I suppose that it could be fun for a hobby, side business, or short-term hustling, but you’ve got to think bigger if you want to hit it big.  You have to earn your wealth passively if you don’t want to be restricted by time.

High-Lo items for self-use.

Instead of buying crappy used furniture, couldn’t you buy very nice used furniture? We do it with cars all the time, so why can’t we buy a used dining table?

You can. And it could save you some money.

I remember trying to sell a nicely veneered table on Craigslist.  I originally bought it at Costco a few years ago, but we were outgrowing its capacity.  I priced it about $100 less than what I paid for it originally and it sold within a week. Not bad. What was interesting was that I came across an ad for an estate sale in a fancy neighborhood.

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I visited the estate sale company website, and it had photos of sample items that were on sale. It looked fancy.  I decided to check out the sale on one of my free Saturdays and was pleasantly surprised.

You can definitely find furniture on the cheap at estate sales.  Obviously whether you decide to take advantage of these prices depends if you are okay with using other people’s things. That previously owner might have died from a heart attack or cancer—you’ll never know. Perhaps the owner decided to downsize and sell everything.

Would you buy this mattress for $50 not knowing who had used it before? 😉

In any case, buying used household items isn’t for the weak. There were large-scale items like dining sets, beds, desks, lamps, and rugs. The amount of small items available was overwhelming. There were forks, dishware, trinkets, paintings, soap, shampoo—I guess that anything in the house was fair game.

I ended up not buying anything simply because I didn’t really need anything. However I probably would have purchased a nice dining set with buffet station. I think it was listed for $800, but something similar at a furniture store would have cost maybe $3000!

Insane what you can find used.

How often do you purchase used items?

(Image courtesy of Flickr)

Guest Post: These Student Loan Startups are Helping Medical Professionals

Editor’s Note: The following is a guest post by James Fisher, who is a freelance writer with interests in finance. He is looking to become a CPA in the future.  James is a sponsored writer, and may have links to services that he may have relationships with.

An astounding seven out of ten college graduates leave school saddled with student loan debt. For medical students, that number is even higher, and so is their debt load. The average debt load of a medical student entering their residency typically exceeds $100,000. For student loan balances that high, having the best interest rate available is not just a good idea for down the road, it is something graduates need to pay attention to right away. Student loan refinance rates can vary wildly from less than 2.25% to more than 25%, and it can be confusing to go to individual lenders in an attempt to compare their rates and other terms. Luckily, there are several startup companies that are focusing on helping student loan borrowers compare and contrast loan refinancing options, particularly those with high debt loads such as medical professionals.

 

Credible

One of the best-known of the refinancing comparison websites is Credible. After filling out a Credible application, borrowers get to compare personalized loan offers, although as with other comparison sites no offer is definite until the borrower has applied with that specific lender and received a final approval offer. Credible doesn’t charge for its service (but neither do the other companies on this list) and doesn’t ding your credit score for checking offers. Credible has been featured on MarketWatch, VentureBeat, and USA Today. Borrowers who want to find a lower interest rate but don’t have great credit, or haven’t yet established sufficient credit history, can apply with Credible along with a cosigner to increase their chances of getting competitive offers from lender partners. For those borrowers utilizing a cosigner, they should check with the individual lender partners to find out how many payments are necessary before a cosigner can be released.

 

LendEDU

LendEDU is another loan comparison company that works with various lender partners to find borrowers a rate that saves them money. It has been described as a LendingTree.com for student loan borrowers. Even though the company was only brought off the ground in 2014, it receives significant media attention. The company has been discussed on CNBC and written about in numerous publications, including Forbes and The Huffington Post. LendEDU works with a network of “Student Loan Refinancing Partners” to help borrowers compare interest rates and essential terms from many lenders. It starts with a short and free application which is filled out online, after which the borrower receives up to a dozen different student loan and refinancing offers. Since LendEDU doesn’t need a hard hit to the borrower’s credit report, there’s no damage to credit scores, and applicants can compare rates from SoFi, College Ave, Citizens Bank, Sallie Mae, and many other lenders – all at once, and all from their computer screen. Borrowers will be pleased to know that with a short application and a soft inquiry to their credit report, lenders’ offers can be customized to the applicant. Nonetheless, no offer is set in stone until the borrower applies individually.

 

SimpleTuition

SimpleTuition is a student loan comparison site by LendingTree, the website well-known for comparing mortgage rates. And while LendingTree offers loan comparisons for just about any type of loan except student loans, that’s where its progeny, SimpleTuition, picks up the slack. College graduates with either federal loans, private loans, or a mixture of both, can use the well-designed website to learn about multiple student loan refinancing lenders. While this company doesn’t provide the same vetting process for the borrower as the previous two (their application is more of a quick questionnaire) this site is a good place to get a very general idea of what private lenders are out there. The downside to this approach is that by not performing a soft pull on the borrower’s credit report, SimpleTuition is unable to personalize the lenders they promote or give potential applicants much of an idea of what rates and terms they will qualify for. However, SimpleTuition is a good website to go to in order to get helpful information on different kinds of loans and even repayment methods. For borrowers looking for more personalized offers without having to apply with individual lenders, check out LendEDU and Credible.

 

Post mortem by SMMD: I agree with the author that these aforementioned services are worthwhile for the graduating doctor to be aware of, but we should focus on a fundamental debt repayment strategy. Many of my colleagues use SoFi for their refinancing to rid of high interest governmental loans. The rest can be (YMMV) as simple as not upgrading your home/car/other-expensive-item when you start making real money. 

Back to the basics – Attending edition

It’s the beginning of a new academic year.  For those in the medical profession, that means advancement in your training or the beginning of a new job.  Either way, there is a change in your routine. Several of my colleagues who decided to choose a profession that requires an extra decade of training are now finally starting their first “real” jobs.  I feel bad for them, but perhaps they will earn it back in the long run.  I figure that now is a good time to go over some financial assessments that new graduations should consider.  Perhaps my friends will actually read this and take heed of some useful advice when they embark on their first jobs.

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Track all of your financial holdings.

You need to make sure that you are able to log onto all of your bank, retirement, and investment accounts. Update any mailing addresses if you recently moved. Open a Personal Capital account. Make sure you update any loan and mortgage accounts as well. I’ve recently become a big fan of electronic statements—it’ll cut down on what you have to move around if you’re still settling into a new home. Automate any bill payments too. I had compulsively reviewed my receipts prior to paying my bills, but realized that I have almost never found any discrepancies (other than a sushi restaurant adding an extra $10 tip!). Save yourself a few minutes each month by automating your bills. Once you get busier, you’ll find that it’s quite easy to forget to pay your bills.

 Decide whether to consolidate your retirement accounts.

If your prior employers offered matching contributions to your retirement, you probably already have at least one retirement account already. Chances are that your new employer probably will go through a different custodian. That might mean that you won’t be able to contribute more to your old accounts. Decide whether it is worth your time and energy to keep your accounts separate. Most custodians will be willing to accept roll-overs. I ended up keeping my 403b from fellowship open since I had good options on Fidelity, and I still had active accounts with them.

Make sure you have disability insurance.

As we get older and play our financial cards appropriately, disability insurance will matter less. However, it would be wise to buy disability insurance when you start out on your first job. You never know what might happen. The several thousand dollars a year in insurance premiums will be worth it if you are unlucky enough to become disabled early in your career.

Get yourself some life insurance if there’s anyone who will be dependent upon your income. That includes children or spouses. If your spouse earns more than you do and you don’t have any kids yet, perhaps you could delay for a little bit. Depends on how much income you will have starting out.

Don’t go crazy upgrading your lifestyle…yet.

That includes furniture, cars, and your home.  I kept my beaten-up desk from medical school for several years after I started my first job until some college student needed it.  Eventually you will want nicer stuff, but don’t upgrade all at once. Plenty of doctors who play their cards right will be able to buy boats and expensive cars (::cough::WCI), but they went through many years of abstinence before letting loose.

Many years of tape and water stains weathered down this particleboard desk top!

That’s it. Simple and nothing earth shattering. I know that most people starting out their first jobs will have limited brainpower and time to dedicate to this. It’s certainly helped me out over the years as I build upon my core knowledge and common sense.