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Lisa J. Montano CPA, PA

Certified Public Accountant

Lisa Montano's Financial Advisory Blog

Saving For College – Get Started and Then Stick With It!

September 21st, 2011

Here’s my personal experience with saving for our children’s college education and how it is actually playing out.  We have two kids, each attending a different public university in the State of Florida.  From early on, we’ve considered college a natural progression from high school.  There was never any question as to whether or not they would attend.  You could say it’s been a high priority to us.  It hasn’t always been that way.  I’m a first generation college graduate, and my husband has a two-year technical degree.  I guess we’ve always felt it was our responsibility to provide the gift of education to any child that God might bless us with. 

We can have a lengthy discussion of which savings plan is best.  There are many options to choose from:

Uniform Transfers To Minors Accounts (UTMA):  This is the traditional way to save.  No tax breaks.  Income taxes apply (Above $950 of earnings, the child has to pay taxes…at the child’s tax rate; above $1,900, the child has to pay at the parent’s tax rate.)  At age 21 (18 in some states) the child gets full control of the money (to use for anything).

Coverdell Education Savings Accounts: Earnings accumulate tax-free.  No taxes on withdrawals if they’re used for qualified education expenses.  The most you can stash away is $2,000 per year.  There are limits on contributions by high-income earners.

529 Plans:  These state-sponsored programs are the favorite of many.  You do not necessarily have to live in the state program you select.  Like a Coverdell, the account grows without earning any taxes, and withdrawals for college purposes are tax-free.  No income limits.  If you wish, you can even bunch up to 5 years worth of contributions ($65,000) in one year, without exceeding your annual gift-tax exclusion.

Prepaid College Programs:  These are state sponsored programs that allow you to prepay college tuition, dormitory, and other college costs.  Rates increase the later you start the program (because the child is older and closer to using the funds).  There are some strings attached, it is not as flexible as a 529 plan.  However, the tuition is fixed at the amount you contract. 

My Story:  Our youngest daughter turned 7 and was entering the second grade (her sister was 9, going into fourth grade) when I realized it was late already.  We hadn’t started any higher education savings plan.  I knew in my heart and in my head that was wrong.  The pressure was on to start something before it was too late and too expensive.  Having already been debt deep in mortgage and other payments (obviously, this was a period of time prior to me becoming a financial adviser!!), we opted for the Florida Prepaid College Plan, which, unlike the other formats, offered something we could rely on.  If we made the payments according to the contract, we’d be guaranteed the coverage.  After weighing all the pros and cons of each scenario, that was the most important feature for us. 

There were a few different prepaid plans to choose from.  Today there are even more. The plan we chose was called the 2+2 plan, meaning the tuition and fees associated with 60 credits at the community college followed by 60 credits at the 4 year university would be pre-paid.  We also included the 2 year dormitory plan.    Here’s a description of the contracts we entered (in 2000) and the current situation of each: 

Daughter  #1, started plan at Age 9: 115 monthly payments of $130; payments totaled approximately $15,000 over 9.5 years. 

Today:  Age 21 (Junior):  Since she entered the 4-year university as a freshman instead of attending community college for the first 2 years, the prepaid plan’s tuition portion is being used up at an accelerated pace.   We only had the 2 year dormitory plan, so now at the beginning of the third year, housing would have been an out of pocket cost, except the smarty pants went and got herself a part-time job in the leasing office of a privately owned/campus affiliated housing complex, where she’s been living rent-free since the beginning of this semester.  The annual Grandma Ada scholarship (contact me if you want to hear that story) helps with the cost of the books, and she’s figured out how to buy and resell them online.  A big part of her current life experience is learning how to draw from the bank account she’s worked so hard to grow since age 15.  I just hope she’s buying groceries once in awhile.  I’m feeling positive because we’ve been able to engage this child to participate in the process.  It seems to have a positive impact on her feelings of self worth and gaining confidence about moving forward.

Outlook:  During the Spring 2012 semester, the plan will be fully exhausted and there will be out of pocket costs associated with tuition and local fees beginning the following semester.  The State of Florida has a Bright Futures scholarship program for all high school students achieving certain GPA and test scores.  Budgetary constraints have reduced it from the beginning, it’s currently about $1,200 a semester for daughter #1.  This is a lot of money to her, and she seems to be able to bank most of it!   Although she’s pointed out recently her realization that she’d have been better off working her old on-campus job and paying the rent, if she keeps her job at the leasing office, the rent-free housing situation will continue.  Because she took a couple of courses online over the summer breaks, and earned a few college credits in high school by passing the advanced placement classes, it looks like she will earn her bachelor’s degree about a year from now.  So this means daughter #1 will graduate a semester earlier than the traditional 4 years, with very little out of pocket costs.  I’d venture to say that it looks like her college experience, at least in a financial sense, will be positive.  If she can escape all those luring offers from the credit card companies and actually get a job after graduation, we’ll really have something to celebrate.

Daughter #2, started plan at age 7: 139 monthly payments of $115; payments totaled approximately $16,000 over 11.5 years

Today:  In her first semester of college.  She too, has forgone the community college and enrolled directly in a 4-year university.  Accordingly, her prepaid plan will run out before she earns her degree, probably in the junior year.  Fortunately, due to her many high school advanced placement classes, she entered with over a full semester of college credits.  So, unless she takes too long to declare a major, this child should also be able to graduate early. 

Overall, I guess you could say my husband and I are happy little empty nesters right now; renewing our relationship and readying for our retirement years, that we really understand are just around the corner.    I suppose we could run simulations to see if we chose the right platform after all.  However, even without running any computerized scenarios, I know we made the right choice, for us.  The prepaid plan has worked in our favor, when you consider the discipline involved with the contract payments, the general market and economic conditions, and the twists and turns our lives have taken.

Most parents encourage their kids not to drop out of school.   Now I’m here to encourage you.  Don’t drop out on your long-term investment program, especially if you’re saving for a child’s (or grandchild’s) college education. 

I’d love to hear from you with any questions or ideas you might have.

Start Your Own Business!

August 19th, 2011

I was talking to a lady the other day who decided to look into her     401(k) account that she left at a company for several years after she stopped working there.  She knew it existed, but hadn’t paid any attention, thinking it didn’t amount to very much.   You can imagine how pleasantly surprised she was to find out her account was worth over $60,000.  She went ahead and rolled it over to an IRA and has begun making monthly deposits, and is now actively working toward her goal of growing her retirement nest egg.

How, when times are tough as they are, is she going to find the money to make the contributions and additions to the account?  A little brainstorming revealed a way for her to make some extra money.  She really likes triathlons and has volunteered to officiate at several of them.  With a little training she may be able to start and hold her own events.

This got me thinking….here’s this lady who’s taking control of her life situation and probably building a nice future for herself, and all the while doing something she enjoys!  I’m sure she’ll succeed.  She has the desire and makes the time to do this thing she finds enjoyable.  I look forward to watching and encouraging her in her venture.

My thoughts wander back to matters that seem all too much at the forefront of our minds these days….the many challenges facing the world economy and financial system.  The ever worsening real estate market and unemployment problems.  I think it would be fabulous if the powers to be would step up to the plate and try to address these things, but the daily news reports show the whole lot of them remain in denial and will probably continue to play the blame game for the foreseeable future.

What about the rest of us?  How can we be like my new friend whose taking steps to establish a nice, healthy, future in an enjoyable way?   Many of us have already sized up our situation, automated our banking, made a plan to eliminate debt, and decided to get serious about saving for retirement.  But with money being so tight for everyone right now, how can we find the funds to start, or add to, an IRA or employer sponsored retirement account?   Here are some ideas that come to mind:

  • If you like sports, or work out regularly, maybe you’d like to be a sports official.  These positions are usually part-time or seasonal, and the pay isn’t bad for a few hours on the court or behind a plate.
  • An idea for the entrepreneurial spirited is a direct-sales business.  Look at www.InternetBasedMoms.com for a list of many low cost start ups, which are usually commission based….great little side businesses for selling anything from cookware to clothing to home décor.
  • Do you have a hobby?  Like photography, or to sew? Think about turning your hobby into a little business.  You might surprise yourself at how lucrative it can be.  Start up costs usually involve a business license and maybe insurance, and you’ll be getting paid for doing what you’re already doing in your spare time.
  • Do you like to write?  Find out how to become a blogger.  See www.Blogger.com or www.WordPress.com for information.  If you’re good, and develop a following of readers, you can earn money by writing about something you know and enjoy.

There are lots of other ways to come up with some spare cash.  Here are some more ideas, some of which might seem a little hokey, but the folks that are doing, are laughing on their way to make the bank deposit:

  • Find a roommate.  Generate some extra rental income by sharing your home with a co-worker, friend, or family member.
  • Participate in clinical trials.  If you’re eligible, you can pick up a few bucks being a guinea pig.  Check out www.clinicaltrials.gov for information.
  • Search for unclaimed funds.  You have to search within both federal agencies and state agencies.  Some websites to start are www.unclaimed.org and www.missingmoney.com.
  • Sell stuff on consignment, at a flea market, or pawn your valuables.  You won’t get much in terms of what your things are worth, but if you don’t need (or want) the items, it’s a great way to clean up.
  • Get paid for your opinions.  Join a market research focus group (www.delve.com) or take phone/online surveys (www.HarrisInteractive.com and www.SchlesingerAssociates.com) or become an online juror who gives opinions on legal cases (www.Ejury.com and  www.OnlineVerdict.com).

I’m not saying you should give up your day job.  At least not right away.  But you’ll definitely be in a win-win situation if you can find a way to make some money while doing something you enjoy.  It might be a great way to add to your retirement savings, or start making extra payments on your home mortgage.

Are you doing any of these things (or something else) that you’d like to share?  I’d love to hear from you.

Is It Time To Move To Cash?

July 23rd, 2011

It might seem like a good idea in periods of uncertainty because your account’s cash value is not impacted by market fluctuations, right? We know that over time, the amount you can buy with a dollar will be eroded, but for now, the cash account balance isn’t impacted by the market’s ever-changing mood. As I write this, the U.S. debt ceiling debate remains unresolved (something that may or may not change by the time you read this) the economy is moving along at a sluggish pace, and Europe is still dealing with its problems. There are all the reasons in the world to have an unfavorable and uncertain outlook. Yet this week, the Dow closed up over 150 points at over 12,700.

The problem with moving to cash when market conditions are unfavorable is knowing when to get back out of cash. One of the most common investing mistakes is moving into and getting out of cash too late, locking in big losses and missing out on big gains.

Over short periods, an allocation to cash is not a bad thing, especially if it accounts for a small portion of your portfolio. This is particularly the case if you sold a security or fund and are trying to decide where to reinvest the proceeds. Cash also makes sense if you know you are going to have an upcoming withdrawal from your account, such as a required minimum distribution (RMD) from an IRA. If there is a large expense that you expect to incur within the next couple of years, such as a new car, you should keep those funds in cash.

Consider all of your accounts contribute to your net worth, and anyone with a savings account already has an allocation to cash. Remember, the cash you’ve set aside equal to several months of expenses, unexpected events and emergencies, is already giving you some protection against the market’s volatility.

A key to portfolio risk is to find a balance between what allows you to sleep at night and what allows you to achieve your financial goals. If you want to protect your wealth against the eroding effects of inflation, you will need some exposure to stocks. Cash can provide short-term safety, but it won’t protect you against the dual threats of inflation and the risk of outliving your money.

Question: Do you tactically shift your portfolio into cash? If so, how do you determine when to move into and out of cash?

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