On this episode of Two Frugal Dudes, we’re learning how to simplify college 529 plan savings with Abby Chao, a college savings geek with a mission to democratize access to the best tools and information available to prepare financially for college and bring families together in the process at CollegeBacker.com.
Abby’s interest in personal finance started in the seventh (or eighth) grade when she was assigned the book “Rich Dad, Poor Dad” for a school project. It sparked her interest in the stock market and retirement accounts. She opened her first Roth IRA at the age of 14, despite having limited income. If Abby could go back and change anything, she’d share more of this experience with friends and family members.
Abby studied business in college and worked as a consultant for corporations, foundations, and the education system. While she was working in education she met her co-founder, Jordan, and CollegeBacker was born.
529 Plans 101
A 529 plan is a tax-advantaged plan that helps you pay for K-12 and college expenses. It is a tax-free account and withdraws are also tax-free, as long as they’re used for education, whether directly or indirectly. For example, room and board, books, and tuition. The main benefit of a 529 Plan is that it can be used at various institutions, including both private and public schools, trade school, graduate school, and institutions both in and out of state.
To ensure that your savings are constantly growing and keeping up with the inflated college costs– which are expected to double again over the next ten years– getting a 529 account is preferable over a checking or savings account with your bank (though kudos to you for saving!)
Risk vs. Reward
There’s a lot of concern amongst parents saving for college regarding the fluctuation of their investments, especially since many are still living in the shadow of the 2008 market crash. Abby’s approach is to look at your portfolio as well as the age of your child.
It’s normal for your investments to fluctuate over time, and if you’re starting an account for a young child, the opportunity for growth usually outweighs the risk. However, if your child is in their teens, a more conservative approach is appropriate.
What Happens if my Child Doesn’t Go to College?
A common concern with 529 plans is figuring out what happens when one’s child decides that post-secondary education is not for them. There’s no time limit on a 529 plan, so if your child hasn’t decided what they want to do yet, you can keep the account for longer.
If your child decides not to go, you can change the beneficiary to another child, whether your own or a family member. Alternatively, if you decided to go back to school, you could use the funds yourself.
Planning to Save
With predictions about college expenses doubling over the next decade, how can someone estimate what they should save? At CollegeBacker there are numerous calculators to help give you an idea of how much you should be saving to prepare. The mathematical formula used is based upon the child’s age, the type of school they attend, etc. to give a rough estimate for planning.
When thinking of saving, there are commonly accepted rules to follow:
- Save about a third of a cost of college, estimating that the other two thirds will be supplemented by financial aid, summer jobs, etc.
- The Lumina foundation recommends saving 10% of your discretionary income for your child’s income.
Does Having a 529 Impact Scholarships and Financial Aid?
529 plans are built to work with other ways of paying for college. If your child earns a scholarship, you can withdraw the money from your 529 for that amount of money without the expected 10% penalty. However, it’s prudent to keep money in the bank for extra expenses that aren’t covered.
For financial aid, 529 plans minimize the negative impact. With other accounts (such as using retirement funds) can be calculated as the student’s income, limiting their potential loan. Financial aid views the 529 as a parent asset and doesn’t add the same limitations to the student’s potential aid.
CollegeBacker as a Gift
The greatest feature of CollegeBacker is the ability for family and friends to contribute to a college fund rather than purchasing good for birthdays, Christmas, and other gift-giving holidays. This helps you take a minimalist approach to holidays and gives loved ones the opportunity to give a gift that will keep on giving.
Frugal Tip of the Week
Sign up for an account at CollegeBacker.com/2frugaldudes and you’ll get a $10 match on your first $10 investment!
Where Our Money Went
Kevin didn’t spend any money during the last week because he was on a mission trip with no access to the internet in Appalaicha Tennesse, rebuilding homes that were damaged with the goal to make homes dryer, safer, and warmer for the Appalachians in need. All meals were taken care of (daily ice cream trips excluded).
Sean’s wife was able to max out her 401K for the year, which was a huge goal accomplishment for the family. Now extra cash is redirected to other areas.
Show Links & Related Episodes
Disclaimer: Kevin and Sean are not professional financial advisors. Do not take any advice they give without first speaking with a professional and performing your own due diligence.