It's been a week since I left my contract job and so far I've enjoyed every minute at home. Except for the last few days before an interview. As usual, I was very nervous and started reading my CFA textbook to prepare myself for the technical questions.
Also, I have started playing Wii Fit as an attempt in losing weight. I think I have ballooned in the past 2 years that even my cousins couldn't recognize me from Facebook photos. My PIL who has encouraged me to put on weight since my wedding day has admitted that my stomach is getting too big hehehe..
As I don't really enjoyed exercising, it's quite hard to be consistent in my morning jog. I was determined to watch "Lust, Caution" at 6am this morning and was still watching it when my FIL left for jogging. And, I was still watching it when he had come back from his run and when my MIL went for her power-walk.
The weather is getting warm lately and it is actually a good weather to swim. Our apartments' pool was directly behind my unit, but I made excuses that the pool looked dirty with leaves. Hubby and I promised that we would start cycling when he's back from work but so far we only managed to go for 2 evening walks and a walk to Woolies yesterday.
Also, I should actually start studying for my level 2 CFA exams (June-2009). Well, perhaps later..
Aud is going down and down... and I'm trying to recall if anybody owes me money in Singapore. And now the deposit rate is going down, I would start looking for other deposit account once Bankwest 8.10% stops in Jan-09. I was thinking of putting some money to new NAB U-Bank account but, alas, the rate has dropped from 8.5% to 8% for 3-mth term deposit.
We are thinking of buying a house of our own but not sure of what kind of house (house, townhouse, flat), the size (2-bed, 3-bed) and location. Personally I prefer buying a less-than-ideal house first, so we could upgrade to an 'ideal' one later. So we could settle for a cheap 2-bedroom apartment somwhere near train station 15-20 km away from city, and try to repay the loan as soon as we can (thus reducing the interest expense of the loan). But 2-bedroom means we would not have spare room for guests.....
The irony about not working is that .. now I have time to pursue my hobby (dancing-ballroom/latin) but I am reluctant to spend the money. But once I start working, I am more willing to spend, but no time to do it (most of the classes are on weekdays). Maybe I would keep this hobby with my knitting project for retirement.
Talking about retirement, I have been asking my girlfriends to start planning of what type of retirement village we should go to. I think it will be more fun to retire with 'old' friends. We don't have to waste time getting to know new people, we could play cards together and we could reminisce old times. One of my girlfiend suggested that instead of going to retirement village, we could buy a large land and build our houses next to each other. Sounds good.... only that it's hard to find big land in Sydney and to agree on good location for 2 families. Let's see how it goes...
Monday, October 27, 2008
So You Want Your Kids to Go to Harvard?
by Suze Orman
Saving for your children's college education is the last thing you should do.
Now that I have your attention, let me explain.
One of the biggest mistakes I see parents make is to put saving for college ahead of all their other financial goals. Granted, it is a loving and well-intentioned mistake. But it is still a mistake.
You need to listen up here: You must take care of your other financial needs before you save one penny for your kids' college educations. That means getting rid of your high-rate credit card debt, contributing enough to your 401(k) to get the maximum company match, saving up for a home if you don't yet own one, funding a Roth every year if you meet the income eligibility requirement (under $95,000 for a single tax filer, $150,000 for married couples filing a joint return), and saving up an eight-month emergency cash fund. And when all of that is done, go back and max out on your 401(k) contribution and save a bit more for retirement in a regular taxable account.
All of that comes before you are to even think about a college fund.
Now, I know this runs against the conventional wisdom these days. But the harsh reality, my friends, is that no one is going to help you out with paying for your retirement -- while you and your kids can get plenty of financial help for their college costs. Just look around you. There are tons of student loans available for both kids and their parents. But I do not know of a single loan available to help you afford your retirement.
So that's why you need to focus on taking care of yourself first. You need to build your financial security before building a college fund.Get Over the Guilt Trip
I know that's not an easy thing for a lot of you to hear. Your kids mean everything to you, and so you want to give them everything. Including money for college. In a perfect world I would agree with you. But life ain't perfect, right? So you need to step back for a second and be a rational, rather than an emotional, parent. If you ignore all your financial needs for the sake of building up a college fund, you will screw yourself over, and possibly your kids as well.
This becomes clear if you think things through for a minute. Say that instead of building up your retirement assets, or paying down your mortgage, you focus on the college fund. So the kid goes off to school on your dime. Great, you think. But now let's jump forward another 10 or 20 years. You've reached retirement age -- or worse, have been pushed out of your job earlier than expected. The problem is, you discover you can't quite afford to retire. You simply haven't been able to save up enough. Why? Because 10 or 20 years ago, instead of funding a Roth IRA, contributing enough to your 401(k) to get the max company match, and also saving on your own in regular taxable accounts, you poured all your money into the kid's college fund.
And that has put you in a financial pickle. Your kid got a "free ride" through college on your financial back, but now you're straining to support yourself. So what do you do? You start living off of credit cards and running up dangerous debt; or you take out a home equity line that you can't afford to pay back. You're too proud to tell your kids what's going on, but trust me, they will eventually figure it out. I constantly hear from young adults who are torn up about their parents' financial problems. And they all tell me the same thing: "Suze, I feel so guilty that they spent all that money on my college education, when they should have been saving up for themselves. And now I am worried about how I can help them. If only they had been straight with me back then, I could have gotten student loans and worked my way through school."
If only.
Please don't allow yourself, and your kid, to fall into that trap. Focus on getting your debt under control, saving for retirement, and creating an emergency cash fund. Knock those big-ticket items off of your To Do list and you'll be sitting pretty when it's time to retire. That'bs by far the best thing you can do for your children.And I just want to take a sec right here to make sure you don't make the biggest of parental blunders: you are to never ever take out a home equity line of credit or a home equity loan to pay for college! Consider this scenario: You tap the equity in your home and five years later you are laid off. You are struggling to keep up with the payments and thus at risk of losing your home. Meanwhile, your kid is just out of college and lucky to be making $30,000. So all she feels is guilt over the situation. I have seen this happen over and over. And again, what I hear from the kids is that they wish their parents had just been straight with them; they realize it would have been so much easier for everyone if they'd taken out student loans to finance school.
When There's Money to Spare
Now I know that many of you have a solid grip on your financial life and are in a position to save up some money for your kid's college education. Great. But please check out my advice in the next section of this article: Tough Love: Letting Your Child Pay Their Own Way on why and how your children should participate in financing their college education anyway. Because unless you are 100 percent sure you can finance 100 percent of the cost without breaking a sweat, you really do need to involve your kids in preparing for the cost of college.
The first rule of saving for college is to size up your time frame. If your child is just a few years away from starting school, you simply don't have time to invest in stocks or stock funds. You are going to need to use that money in a few years, so you need to be positive the money will be there for you then. Over short periods of time -- say, under five years -- stocks are far too risky. Just look at the past five years. If you invested in 2000 and pulled your money out today, chances are pretty good you'd be under water.
Stocks and stock funds are only for long-term investments; if you have a kid under the age of 10 or so, then you can go this route. But if you have a 15-year old, my advice is to stick with very low-risk savings vehicles such as short-term bonds, CDs, or money market accounts. I know you aren't going to make much -- but you will be sure that the money is there when you need to write the first tuition check. By the way, check out the excellent American Dream Savings Account offered by EmigrantDirect; right now, you are guaranteed a 3.25 percent yield, which is a terrific rate for a guaranteed investment.
When it comes to saving up for college you have a variety of options. And you need to choose wisely, because some types of college savings accounts will have a bigger impact than others on how much financial aid you and your kid qualify for. You want to avoid the investments that can count against you big-time when financial aid is figured out. Also, I need to point out that some of the key tax breaks tied to some college accounts are scheduled to expire after 2010, unless Congress extends the current law. There's really no way to guess what might happen with this. One would hope Congress can act to help Americans save for college, but when we're staring at such big federal deficits, any tax break is going to face a lot of scrutiny.
So with that in mind I want to begin by suggesting a great college savings tool you might not have thought of: a Roth IRA.
If you are married and file a joint tax return with income under $150,000 (or are a single filer with income below $95,000), you can invest a full $4,000 a year in a Roth. True, you get no tax break on your initial investment, but your money grows tax-deferred. Here's the kicker, though: not a penny of your Roth assets are considered by the financial aid wonks in figuring out your kid's eligibility for loans.
As you have heard me say before, the neat thing about a Roth is that your contributions -- not the earnings, but the money you yourself invest in the Roth -- are always under your control 24/7. You can take the money out at any time and not owe a penny in penalty or tax. So let's say you invest $4,000 a year for the next 15 years. That's $60,000 you'll have saved up. And if you want to raid the earnings too, the IRS gives you a break if you are under 59 1/2 years old. Remember, typically when you try and take earnings out of an IRA before you are 59 1/2, you get hit with a 10 percent penalty. If the withdrawal is to pay for school costs, however, the penalty is waived. The only catch to keep in mind is that you will indeed have to pay income tax on any earnings that are withdrawn before you are 59 1/2.
Another advantage to the Roth is that if your child manages to qualify for a ton of scholarships -- or decides to skip college -- you can just leave all that money in your Roth and be that much better off when it's time to retire.
You can also check out opening a Coverdell Education Savings Account (these used to be called Education IRAs). With a Coverdell you can invest $2,000 a year for each child. Like a Roth IRA, you will not get any initial tax deduction on your contribution; but your money grows tax-free, and if you use the money for school costs it won't be hit with Federal tax. And I mean any school cost, not just college. Coverdells can be used to pay for any schooling prior to college, too. Individuals with income below $95,000, and married couples who file a joint tax return with adjusted gross income below $190,000, are eligible to contribute the full $2,000 a year to a Coverdell. A maximum of 5.6 percent of Coverdell assets are factored into financial aid eligibility formulas, so that's not too big a hit.
What's known as a 529 College Savings Plan is also a good way to save and not throw off your financial aid chances. Like a Coverdell, just 5.6 of your assets in a 529 Savings Plan count against you in financial aid calculations. There are no income eligibility limits with a 529, and you can invest much more than is allowed with a Coverdell. Your money grows tax-deferred and will not be hit with federal tax when it is used for college expenses. But unless Congress acts to extend this tax break, it will expire after 2010. And do not confuse a 529 Savings Plan with a 529 Pre-Paid Plan. The problem with pre-paid plans is that every dollar you have saved in a pre-paid will reduce your financial aid by a dollar. So if you think you will be applying for school loans, you probably want to steer clear of pre-paids. You can learn more about 529s at Yahoo's College Savings Center, and you can also check out a new breed of 529s where your savings can be applied to future tuition costs at 240 private schools, at http://www.independent529.org/.
Tough Love - Letting Your Children Pay Their Own Way
Talk about a rock and a hard place. The cost of college keeps increasing well above the inflation rate, and yet at the same time you know you need to be socking away more money for your retirement: not only are we living longer, but it's also a slam dunk that if you are in your 30s or 40s today your future Social Security benefits will be reduced by the time you get around to retiring.
So please don't feel any shame if figuring out how to send your kids to college keeps you up and sweating bullets at night.
You need to rethink your approach. College is not your sole responsibility. You need to make this a true family project and have your child contribute to their own education.
This is not a sign of parental failure. Stop thinking that way! It's actually a sign of parental wisdom. You are not going to screw up your financial future by paying the entire college bill. That is a great example to set for your kids.
Now let's talk about how to talk to your kids about this.
The effectiveness of your chat depends on timing and tone as much as anything else. There are two key "don'ts" here. Don't wait until they are 17. And don't start out with "I wish I could do more for you, but..."
You need to let your kids in on the game plan when they are young teenagers so they have the time to prepare -- and to really help their cause. Tell a 13-year-old that they will be responsible for a portion of their college costs and you have the ability to motivate the child to a) do really well in high school -- both in and out of the classroom -- to boost their chances for scholarships and grants; b) get a part-time job to save up for some school costs; and c) mentally prepare for being asked to take on student loans.
You need to deliver this message with strength, not weakness. The correct tone is: "We are going to save as much as possible for your college education, but we're also going to need you to pitch in too. Here's what we are saving for you, so let's talk about what you can do to help." Notice that nowhere did you say, "Gee, we're really sorry about this..."
I realize your child may not be jumping for joy at the news, but let's get real here. You are not punishing your child. And you are insuring that down the line you are not going to be a financial burden to them. I don't expect a 13-year-old to fully comprehend that right now -- and wouldn't recommend even bringing it up -- but, trust me, when your kid becomes an adult they are going to appreciate completely what you have done for them. In addition to a college degree with no strings attached, you'll have given them an empowering example of financial responsibility: yours and theirs both.
Saving for your children's college education is the last thing you should do.
Now that I have your attention, let me explain.
One of the biggest mistakes I see parents make is to put saving for college ahead of all their other financial goals. Granted, it is a loving and well-intentioned mistake. But it is still a mistake.
You need to listen up here: You must take care of your other financial needs before you save one penny for your kids' college educations. That means getting rid of your high-rate credit card debt, contributing enough to your 401(k) to get the maximum company match, saving up for a home if you don't yet own one, funding a Roth every year if you meet the income eligibility requirement (under $95,000 for a single tax filer, $150,000 for married couples filing a joint return), and saving up an eight-month emergency cash fund. And when all of that is done, go back and max out on your 401(k) contribution and save a bit more for retirement in a regular taxable account.
All of that comes before you are to even think about a college fund.
Now, I know this runs against the conventional wisdom these days. But the harsh reality, my friends, is that no one is going to help you out with paying for your retirement -- while you and your kids can get plenty of financial help for their college costs. Just look around you. There are tons of student loans available for both kids and their parents. But I do not know of a single loan available to help you afford your retirement.
So that's why you need to focus on taking care of yourself first. You need to build your financial security before building a college fund.Get Over the Guilt Trip
I know that's not an easy thing for a lot of you to hear. Your kids mean everything to you, and so you want to give them everything. Including money for college. In a perfect world I would agree with you. But life ain't perfect, right? So you need to step back for a second and be a rational, rather than an emotional, parent. If you ignore all your financial needs for the sake of building up a college fund, you will screw yourself over, and possibly your kids as well.
This becomes clear if you think things through for a minute. Say that instead of building up your retirement assets, or paying down your mortgage, you focus on the college fund. So the kid goes off to school on your dime. Great, you think. But now let's jump forward another 10 or 20 years. You've reached retirement age -- or worse, have been pushed out of your job earlier than expected. The problem is, you discover you can't quite afford to retire. You simply haven't been able to save up enough. Why? Because 10 or 20 years ago, instead of funding a Roth IRA, contributing enough to your 401(k) to get the max company match, and also saving on your own in regular taxable accounts, you poured all your money into the kid's college fund.
And that has put you in a financial pickle. Your kid got a "free ride" through college on your financial back, but now you're straining to support yourself. So what do you do? You start living off of credit cards and running up dangerous debt; or you take out a home equity line that you can't afford to pay back. You're too proud to tell your kids what's going on, but trust me, they will eventually figure it out. I constantly hear from young adults who are torn up about their parents' financial problems. And they all tell me the same thing: "Suze, I feel so guilty that they spent all that money on my college education, when they should have been saving up for themselves. And now I am worried about how I can help them. If only they had been straight with me back then, I could have gotten student loans and worked my way through school."
If only.
Please don't allow yourself, and your kid, to fall into that trap. Focus on getting your debt under control, saving for retirement, and creating an emergency cash fund. Knock those big-ticket items off of your To Do list and you'll be sitting pretty when it's time to retire. That'bs by far the best thing you can do for your children.And I just want to take a sec right here to make sure you don't make the biggest of parental blunders: you are to never ever take out a home equity line of credit or a home equity loan to pay for college! Consider this scenario: You tap the equity in your home and five years later you are laid off. You are struggling to keep up with the payments and thus at risk of losing your home. Meanwhile, your kid is just out of college and lucky to be making $30,000. So all she feels is guilt over the situation. I have seen this happen over and over. And again, what I hear from the kids is that they wish their parents had just been straight with them; they realize it would have been so much easier for everyone if they'd taken out student loans to finance school.
When There's Money to Spare
Now I know that many of you have a solid grip on your financial life and are in a position to save up some money for your kid's college education. Great. But please check out my advice in the next section of this article: Tough Love: Letting Your Child Pay Their Own Way on why and how your children should participate in financing their college education anyway. Because unless you are 100 percent sure you can finance 100 percent of the cost without breaking a sweat, you really do need to involve your kids in preparing for the cost of college.
The first rule of saving for college is to size up your time frame. If your child is just a few years away from starting school, you simply don't have time to invest in stocks or stock funds. You are going to need to use that money in a few years, so you need to be positive the money will be there for you then. Over short periods of time -- say, under five years -- stocks are far too risky. Just look at the past five years. If you invested in 2000 and pulled your money out today, chances are pretty good you'd be under water.
Stocks and stock funds are only for long-term investments; if you have a kid under the age of 10 or so, then you can go this route. But if you have a 15-year old, my advice is to stick with very low-risk savings vehicles such as short-term bonds, CDs, or money market accounts. I know you aren't going to make much -- but you will be sure that the money is there when you need to write the first tuition check. By the way, check out the excellent American Dream Savings Account offered by EmigrantDirect; right now, you are guaranteed a 3.25 percent yield, which is a terrific rate for a guaranteed investment.
When it comes to saving up for college you have a variety of options. And you need to choose wisely, because some types of college savings accounts will have a bigger impact than others on how much financial aid you and your kid qualify for. You want to avoid the investments that can count against you big-time when financial aid is figured out. Also, I need to point out that some of the key tax breaks tied to some college accounts are scheduled to expire after 2010, unless Congress extends the current law. There's really no way to guess what might happen with this. One would hope Congress can act to help Americans save for college, but when we're staring at such big federal deficits, any tax break is going to face a lot of scrutiny.
So with that in mind I want to begin by suggesting a great college savings tool you might not have thought of: a Roth IRA.
If you are married and file a joint tax return with income under $150,000 (or are a single filer with income below $95,000), you can invest a full $4,000 a year in a Roth. True, you get no tax break on your initial investment, but your money grows tax-deferred. Here's the kicker, though: not a penny of your Roth assets are considered by the financial aid wonks in figuring out your kid's eligibility for loans.
As you have heard me say before, the neat thing about a Roth is that your contributions -- not the earnings, but the money you yourself invest in the Roth -- are always under your control 24/7. You can take the money out at any time and not owe a penny in penalty or tax. So let's say you invest $4,000 a year for the next 15 years. That's $60,000 you'll have saved up. And if you want to raid the earnings too, the IRS gives you a break if you are under 59 1/2 years old. Remember, typically when you try and take earnings out of an IRA before you are 59 1/2, you get hit with a 10 percent penalty. If the withdrawal is to pay for school costs, however, the penalty is waived. The only catch to keep in mind is that you will indeed have to pay income tax on any earnings that are withdrawn before you are 59 1/2.
Another advantage to the Roth is that if your child manages to qualify for a ton of scholarships -- or decides to skip college -- you can just leave all that money in your Roth and be that much better off when it's time to retire.
You can also check out opening a Coverdell Education Savings Account (these used to be called Education IRAs). With a Coverdell you can invest $2,000 a year for each child. Like a Roth IRA, you will not get any initial tax deduction on your contribution; but your money grows tax-free, and if you use the money for school costs it won't be hit with Federal tax. And I mean any school cost, not just college. Coverdells can be used to pay for any schooling prior to college, too. Individuals with income below $95,000, and married couples who file a joint tax return with adjusted gross income below $190,000, are eligible to contribute the full $2,000 a year to a Coverdell. A maximum of 5.6 percent of Coverdell assets are factored into financial aid eligibility formulas, so that's not too big a hit.
What's known as a 529 College Savings Plan is also a good way to save and not throw off your financial aid chances. Like a Coverdell, just 5.6 of your assets in a 529 Savings Plan count against you in financial aid calculations. There are no income eligibility limits with a 529, and you can invest much more than is allowed with a Coverdell. Your money grows tax-deferred and will not be hit with federal tax when it is used for college expenses. But unless Congress acts to extend this tax break, it will expire after 2010. And do not confuse a 529 Savings Plan with a 529 Pre-Paid Plan. The problem with pre-paid plans is that every dollar you have saved in a pre-paid will reduce your financial aid by a dollar. So if you think you will be applying for school loans, you probably want to steer clear of pre-paids. You can learn more about 529s at Yahoo's College Savings Center, and you can also check out a new breed of 529s where your savings can be applied to future tuition costs at 240 private schools, at http://www.independent529.org/.
Tough Love - Letting Your Children Pay Their Own Way
Talk about a rock and a hard place. The cost of college keeps increasing well above the inflation rate, and yet at the same time you know you need to be socking away more money for your retirement: not only are we living longer, but it's also a slam dunk that if you are in your 30s or 40s today your future Social Security benefits will be reduced by the time you get around to retiring.
So please don't feel any shame if figuring out how to send your kids to college keeps you up and sweating bullets at night.
You need to rethink your approach. College is not your sole responsibility. You need to make this a true family project and have your child contribute to their own education.
This is not a sign of parental failure. Stop thinking that way! It's actually a sign of parental wisdom. You are not going to screw up your financial future by paying the entire college bill. That is a great example to set for your kids.
Now let's talk about how to talk to your kids about this.
The effectiveness of your chat depends on timing and tone as much as anything else. There are two key "don'ts" here. Don't wait until they are 17. And don't start out with "I wish I could do more for you, but..."
You need to let your kids in on the game plan when they are young teenagers so they have the time to prepare -- and to really help their cause. Tell a 13-year-old that they will be responsible for a portion of their college costs and you have the ability to motivate the child to a) do really well in high school -- both in and out of the classroom -- to boost their chances for scholarships and grants; b) get a part-time job to save up for some school costs; and c) mentally prepare for being asked to take on student loans.
You need to deliver this message with strength, not weakness. The correct tone is: "We are going to save as much as possible for your college education, but we're also going to need you to pitch in too. Here's what we are saving for you, so let's talk about what you can do to help." Notice that nowhere did you say, "Gee, we're really sorry about this..."
I realize your child may not be jumping for joy at the news, but let's get real here. You are not punishing your child. And you are insuring that down the line you are not going to be a financial burden to them. I don't expect a 13-year-old to fully comprehend that right now -- and wouldn't recommend even bringing it up -- but, trust me, when your kid becomes an adult they are going to appreciate completely what you have done for them. In addition to a college degree with no strings attached, you'll have given them an empowering example of financial responsibility: yours and theirs both.
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