The High Price of Education and Ignorance

 

“If you think education is expensive, try ignorance.”

-Derek Bok, Harvard University President

We all know the cost of education as been increasing in recent memory and will probably continue doing so.  A normal and somewhat understandable response would be to throw up one’s hands and/or bury one’s head in sand; doing nothing about it.  A secondary option is to begin setting aside some money each month.  The latter is what we’ll be talking about today.

While there exist several options for saving for college, I’m going to focus on 529 plans.  A 529 plan is a tax-preferenced account that sometimes offers a tax break on the contribution, almost always offers tax-deferred growth, and almost always allows tax-free withdrawals for education related expenses.  For information on specific plans available to you, click here.

So, how much does one need to save?  Let’s assume you’d like to have funds available to pay for half of the cost of four years at a state school; here’s how much you’d need to save on a monthly basis to get there.

If you started when you’re child were born, you’d need to save $185 a month.

At five years old, you’d need to save $247 a month.

At 10, you’d need to save $384 a month.

At 15, you’d need to save $971 a month.

If you’d like to plug in your own numbers, click here.

Another option, and nice feature of 529 plans, is crowdfundingyour kid’s education.  What I mean is, a 529 plan allows anyone to contribute to your child’s account-grandmas, grandpas, aunts, uncles, your neighbors; anyone is able to contribute up to $15,000 a year into the plan.  All kidding aside, it’s a common practice for grandparents to contribute to 529 plans, click herefor more information.

Last month, I interview Katie Flynn from SavingForCollege.comon the Money Savage podcast.  We go into depth on this topic and she provides a lot of valuable insight, you can listen on the links below.

iTunes

Google Play

What Money Can’t Buy

First, the Beatles informed us that money can’t buy love, and in yet another blow to money, Warren Buffett tells us it can’t buy happiness either.  He said, doubling your net worth won’t make you won’t make you happier.
I spend a good amount of time thinking about how I can help people to lead more contented lives.  Lives in which they wake up inspired to go to work, are fully engaged while they’re there and return home fulfilled at the end of the day.  The reality is, most of us spend more time at work than anything else.  A second reality is, many of us don’t enjoy the work we’re doing.
If getting rich is your desired endgame, Buffett still advocates for happiness along the way.  Instead of letting your happiness be defined by what you don’t have or how quickly you make money, Buffett said “you can have a lot of fun while you’re getting rich.”
Or, instead of letting happiness be defined by the amount of money we make, which sometimes leads us to work that we don’t enjoy, which takes us away from what we do enjoy, perhaps a change of perspective would be beneficial.
In my recent podcast with Louis Efron, VP of Teammate experience at DaVita Kidney Care, you’re professional happiness all comes down to meaning.  The more you’re able to connect to your purpose, the better.  Do you know and embrace the purpose of the company you work with?  Have you taken the time to explore your own purpose?  Louis encouraged people to think about what truly gets them out of bed in the morning (not the alarm clock) and to think about what they’re truly best at.  From there, have conversations about that purpose with your family, friends, coworkers and managers.  This will help you to both personally and professionally align.
Life’s to short not to feel good about what you do.
Contact me with any questions!
Click on on the links below to listen to my podcast on Finding Your Purpose with Louis Efron.

Personally Responsible

This morning, I published a podcast episode with a well-known financial expert, Peter Dunn, better known as Pete the Planner. We covered a lot of ground, but two main ideas came forward:

  1. It’s imperative to take personal responsibility for our financial futures.
  2. You need to become a millionaire.

Pete referenced a University of Utah study he found troubling. In the study, the people who participated felt their personal health was only 46% their responsibility. They felt their doctors and others were responsible for the majority, or the remaining 54%.

He connected that study to the world of finance, specifically retirement savings. We talked about how it hasn’t been that long since we, as Americans, have become almost completely responsible for our financial success. It used to be that we’d work at the same company for 30 years and didn’t need to worry about saving money because we’d retire with a pension. Not anymore.

Now, pensions are available to only a small percentage of employees. It’s time we caught up with the reality that it’s up to each of us to save money.

Another topic we talked about was the idea that you need to become a millionaire. In order to replace 20 – 30 (or more) years of income in retirement, it’s probably going to take $1,000,000. Think about it: if you retired at 65 or 70, it’s highly possible you’ll live to 100. We tried to demystify the idea of becoming a millionaire and shared the reality that you can – and need – to expect to become one.

Obviously, everyone’s situation is different but it’s time for each of us to do our part. Accept personal responsibility for your financial success.

Click one of the links below to listen to my podcast episode with Pete the Planner.

iTunes

Google Play

Stitcher

Podbean

 

Time

“Tell me how you use your spare time, and how you spend your money, and I will tell you where and what you will be in ten years from now.” Napoleon Hill

 

Do you ever feel like there just aren’t enough hours in the day to get things done? Do you know how much time you spend working everyday? How about how much time you spend on your phone? Do you ever feel like you’re wasting time?

 

I’ve been guilty of wasting time and still am today, but I’ve grown to better recognize when I’m doing it and to refocus. I’ve also learned that having a one year old limits my “free” time, so I better become more efficient.

 

According to the Bureau of Labor Statistics, here’s how the average American spent their time in 2016.

 

8.77 hours personal care including sleeping

1.08 eating and drinking

1.07 household activities

.50 purchasing goods and services

8.28 hours working

3.13 leisure

 

Here’s an ugly number-the average American spends 2 hours and 51 minutes a day, 86 hours a month, on their phones. Safe to say, not the most productive use of one’s time.

 

To make matters worse, our minds wander 46.9% of the time. So, going back to the idea that there are never enough hours in the day may or may not be true. Perhaps we’re simply not effectively utilizing those hours.

 

The concept of Deep work tells us “To produce at your peak level you need to work for extended periods with full concentration on a single task free from distraction.” I fully embrace this idea and know I’m a terrible multi-tasker. One proven method to practice deep work is the Pomodoro Technique.

 

The Pomodoro Technique is a method of time management developed by Francesco Cirillo in the late 1980s. It uses a timer to break work down into 25-minute intervals with short breaks in between each interval. The technique also advocates planning your work in advance, tracking each 25 minute segment on a piece of paper and talking a longer break of 30 minutes after the fourth segment. Give it a shot, many people get great results from using it.

 

In the spirit of, “what get’s measured, get’s done,” there are many ways to track time; I personally use the Hours Pro app.

Food

“That which nourishes me destroys me.” –Christopher Marlowe

Turkey, stuffing, Christmas cookies, things made out of pumpkin-so many good things to eat this time of year. How do your spending habits on food stack up to the average American? Let’s take a look.

Food accounts for 12.5%, or just over $7,000 in the average budget according to the Bureau of Labor Statistics.

And with so many good things to eat, and some many great places to do that eating, an incredible thing happened since that most recent survey from the Bureau of Labor Statistics; Americans began spending more money at restaurants and bars than they did on groceries. How you react to that information is probably telling regarding your eating behaviors.

And how does this fit into the 50 20 30 budget model? This is trickier than you might think because technically, food falls into the Needs category. But, going out to dinner at your favorite restaurant bleeds over into the Wants section. And when I say “bleeds over,” I mean it moves completely over to the Wants section. Therefore, for many Americans, the money they are spending on food has moved from the 50% Needs category, to the 30% Wants category, and without knowing the details of their personal budget, I’m going to assume it wrecks it.

Going out to eat is one of my favorite things to do, as it is for so many of us. It’s also a quick and easy way to wreak havoc on our budgets. Be mindful and strong this Holiday Season!

Cars

Americans have always had a love affair with cars. But are they messing up our finances? Are you paying too much for your car (or even for multiple cars)?

Here are some stats for perspective:

  • 1 percent of total petroleum consumption is by people in the United States
  • In 1960, Americans owned more than 61 million passenger cars—about one car for every three people.  In 2008, Americans owned 137 million passenger cars—a little less than one car for every two people
  • The average new car cost in 2017 was $31,400 after incentives

Experian Automotive 2017 reports show:

  • 86% of new cars were bought with the help of financing, higher than in previous years
  • The average car loan was $30,000, the highest since Experian began tracking the data
  • The average length for a new-car loan was 68 months—or five and a half years—and some loans are for as long as seven years.
  • Auto leases are becoming more popular, accounting for more than 30% of new-car transactions in the first quarter

The annual cost to own and operate a vehicle in the United States in 2016 was $8,558 according to AAA’s 2016 Your Driving Costs  study. Here’s how that breaks down:

Fuel $1267.50
Insurance $1,222
Depreciation $3,759
Maintenance $792
License, Registration, Taxes $687
Finance Charges $683
Tires $150

In 2015, Americans spent $1,184 billion on transportation, or 9.6% of all personal consumption expenditures per household.

Bankrate provides a tool to encourage better car buying habits. Remember the 20/4/10 rule:

  • Aim to put down at least 20% of the car’s price in cash
  • Take a loan for no more than four years
  • Keep the cost of transportation to no more than 10% of after tax household income.

Care for an example or two to see this in action?

  • Assuming an annual income of $75,000 and income taxes of $11,925 (15.9%), you should spend no more than $6,307 (or 10%) per year on a car.
  • Assuming an annual income of $150,000 and income taxes of $28,200 (18.8%), you should spend no more than $12,180 (or 10%) per year on a car.

*Find a table to figure out your tax bracket here.*

Add up your auto loan, car insurance, monthly gas expense and any other auto related expenses. How are you doing? Is your auto expense 10% of your after-tax income? More? Less?

Giving

In 2014, the U.S. government allocated over $32 billion for economic assistance to other countries. In 2016, Americans gave over $389 billion to charitable causes, a 4.2% increase from 2015. Corporate giving was over $18 billion, a 3.5% increase and Foundation giving was over $58 billion, an increase of 3.5% as well.

It’s difficult to pinpoint the exact amount raised for disaster relief over the past several months, but estimates suggest it’s over $150,000,000.

 

Bottom line: Americans give.

 

If you’re like me, you want to help, but don’t want to give to an organization that’s inefficient, ineffective, or worst case, fraudulent. For example, after the 2010 earthquake in Haiti, NPR reported the Red Cross spent over a quarter of the money raised– $125 Million – on internal expenses. So, what can you do to have the greatest impact, while at the same time vet the organization you’re donating to?

 

Consider these four things according to the New York Times:

 

  • Sending money is almost always best—Transporting, storing and sorting goods can divert resources from more pressing work.
  • Pick the issue with your heart and the organization with your head.
  • Do your research before you give—organizations like Charity Navigator can help you to vet charitable organizations.
  • Follow up because recovery takes a long time—if you’re donating to disaster relief, keep in mind that donations surge in the immediate aftermath, but recovery takes place over a much longer timeline.

 

What should you know about charitable donations and your taxes?

 

  • Check that the organization you donate to is a tax-exempt 501(c)(3) organization by using the IRS’sonline tool.
  • Charitable contributions of money or property can be deducted if you do not receive anything in return—otherwise, the value of what was received must be subtracted from the contribution for deduction purposes.
    • Example: a $50 cash donation to a tax-exempt organization would qualify for a full tax deduction if you receive nothing in return.
    • Example: if you purchase a ticket to a charity’s gala for $250 and the value of the meal and entertainment is worth $100, then you can only deduct $150.
  • Donations of material goods can be deducted for the fair market value or the price the property would sell at in the open market on the date of the contribution.
  • Use the Charity Navigator giving calculator for more scenarios

Stop Giving Yourself So Much Credit

There are days I feel like a broken record (and you probably feel the same way) but I’ll say it again: our goal should be to live as debt free as possible.

Recently, I read about how American credit card debt has just gone over $1,000,000,000,000 (one trillion dollars) for the first time since 2008.

This article had a bothersome statement:

With consumers feeling better about the economy, the amount of money borrowed has reached its highest level since the Great Recession.

 It implies that when someone feels good, they buy things they can’t truly afford. It’s not that Americans are relying on credit because of emergencies, it’s because times are good and we feel good.

 Maybe this applies to you, maybe it doesn’t. But, the way you feel should not dictate your use of credit. In fact, you should leave feelings and emotions out of every financial/buying decision such as purchasing a home, selling a stock, or even buying clothes.

Borrowing is what led to the 2008 collapse, an event that caused many of us to “tighten our belts” and reduce spending and expenses. It appears that enough time has passed and we’ve forgotten the feelings of uncertainly and angst that the financial crisis brought. Don’t fall victim to overspending.

One more thing: it’s time for the adults in the room to do their job and stop letting their kids take on astronomical amounts of student loan debt. That number just crossed over $1.4 trillion with an average balance of just under $35,000.

Is it possible to attend college and leave debt free? Of course it is: ASU costs $10,792 a year. Minimum wage in Arizona is currently $10 an hour. Working part time, 20 hours a week, for 50 weeks earns your kid $10,000 a year.

Hacking

Not sure if you’ve heard or not, but there are allegations that Russia hacked the last Presidential election. Recently, a friend of mine had her identity hacked—or as more commonly stated: stolen. The thief filed her taxes and applied for a home mortgage and credit cards. This was a scary, unsettling and cumbersome problem to fix.

 

In 2016, identity theft and fraud cost Americans more than $16 billion, according to CNBC. That’s a 16% increase from 2015 and a problem that affected more than 15.4 million people.

 

Cybercrime is probably not news to you. It’s important to recognize the potential impact on you and your family. I encourage everyone to evaluate the available protections, including purchasing cyber “insurance” services to cover the risk. Comprehensive coverage for a family will cost between $20 and $30 per month. These insurance services focus on five primary areas:

 

  • Daily 3-Bureau Credit Reports
  • Credit-Monitoring Tools and Services
  • Customer Alerts
  • Recovery Assistance
  • Customer Service

 

Remember, just as health insurance does not prevent you from becoming sick or life insurance does not prevent you from death, cyber insurance does not prevent your identity from being stolen. What it will do is monitor your credit profile and help minimize damage when a breach occurs by quickly notifying you and providing resources for reversing any damage. Most options provide up to $1 million coverage for financial liabilities including:

 

  • Lawyers and experts needed to help resolve identify theft cases
  • Reimbursement of money stolen due to ID theft
  • Reimbursement of costs for documents, travel, and lost wages

To be proactive in preventing ID theft from happening, follow these steps:

  • Access financial information only on a private Internet connection and never with a mobile device
  • Don’t email private information like birth dates, Social Security numbers or credit card information
  • Avoid social media posts with personal information that could take a hacker inside a family’s home or divulge whereabouts on vacation
  • Establish passwords (the most common security breach) no one can guess or decode by creating a combination of letters, numbers, and symbols

When it comes to protecting yourself and your family from cyber threats, an ounce of prevention is worth a pound of cure. Just ask my friend.

Here’s a great additional resource to check out!

Online Identity Theft: What Is It and How to Protect Yourself

Delayed Gratification

Hopefully everyone had a great 4th of July holiday. When I was looking back at the specific events of our Nation’s independence, I forgot just how long the war lasted. Although independence from England was declared on July 4th, 1776, it took until September 3rd, 1783 to finally win the Revolutionary War and be recognized as a sovereign nation. We had to wait over seven years to officially recognize our freedom—but it was well worth the wait!

 

There’s value to holding off and waiting. For example, you may not have had the experience of rewinding or fast-forwarding a tape cassette (a technology to be celebrated!), but when you finally got to the spot you wanted to listen to, the sound was that much sweeter! In our one-click world where you can download your favorite tunes in an instant or most anything can arrive at our door within 24 hours, has delayed gratification gone out of style?

 

In the 60’s, the somewhat famous marshmallow experiment was held with kids as the test subjects. Here’s the gist of it: the scientist would give kids one marshmallow, tell them they could eat it immediately…or wait and get a second marshmallow. The kid would then be left alone for 15 minutes and, as you would guess, some ate the marshmallow immediately while others were able to hold off. The interesting part of the experiment came later in life when the researchers found that the kids who were able to hold off had fewer behavioral problems, lower stress, stronger friendships and higher SAT scores. A great lesson for the parents out there, but there’s also value for us grownups.

 

Often times, succumbing to instant gratification results in buying things on credit or installment instead of saving up and paying cash. While not a universal truth, I believe most of us would eventually like to be debt free.

 

Personally, I was terrible at this (meaning I bought things with credit cards and never waited) up until I met my wife. I’m happy to say we’ve done a pretty good job over the past 10 years of saving up for larger purchases.

 

If you’re already great at this, excellent! If you could use a little improvement, I want to challenge you the next time you’re thinking about making a purchase of greater than $1,000; instead of using your credit card or some form of installment payments, save up and pay with cash.

 

Doing so will get you closer to living debt free and, like our Nation’s Independence, an independent future is worth the wait.