My advice in response was simple: don’t set up a college plan for your young child. It’s a bad idea and a poor use of money in light of all the other things you can do with money that are better.
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“I am a young father of two young children. I have a two year old son and a six month old daughter. Education is very important to me, both formal education and informal education. I have a master’s degree, a bachelor’s degree, a high school diploma. I am also a professional financial planner with a high degree of expertise and financial planning.
I am a certified financial planner. I actually have a master’s degree in financial planning, but I refuse to establish a college savings account for my kids. Now, it’s not because I don’t know anything about them. I’m actually a subject matter expert in that area, but I just think they’re stupid and a waste of money and today, I’m going to try to convince you to join me.”
[0:01:08] JS: Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheats and I’m your host. Thank you for being with me today. Today, we’re going to deal with this question and the inspiration comes from an e-mail that I’ve received from a friend of mine who is a young father. Asking me, “Joshua, should I open an account for my kid?” And my response is, obviously, an emphatic, “Absolutely not.”
Now, perhaps if you’re not familiar with Radical Personal Finance, perhaps you’re surprised by an opinion like this. “Why would a financial planner not do that?” And no, I’m not wasteful with my money. I am actually a dedicated saver. I do plan and prepare for the future. I think carefully about all the opportunities that are facing me.
So it’s not just that I’m a spend thrift. I’m really not, but I have some reasons and ideas that I want to share with you but let’s start with this e-mail that I received from a personal friend of mine. He wrote me this note. He said:
[0:02:11] “Joshua, my wife suggested I reach out to you for advice as we plan to start saving for our soon to be born son’s education. It’s hard to believe it’s going to be a few weeks now. I’ve looked into our state’s 529 plan but wasn’t sure if there were better options. Any advice would be greatly appreciated and I will basically check the Radical Personal Finance archives as well because I’m sure you’ve put some content up there. Thanks for any advice.”
[0:02:33] JS: My response to my friend was, “Don’t open one.” But I’ve got to defend that a little bit. And so I told him I’ll record a podcast episode and lucky you, you get to listen to my episode because here’s the deal. Although I am massively in favor of education, my position is that education is of utmost importance and although I’m in favor of some formal certification, my position is that formal certification can be useful for at least some people in some careers.
I don’t believe the college plans are a good idea for the majority of people who are in situations like me as a young father or situations like my friend. In today’s world, college rarely equals education. Can it? Yes, it can, but it rarely equals education and college certification is rapidly losing value in the market place.
So when you are sitting down and looking at a situation with limited resources, in my opinion saving for your kid’s college represents about the worst of your potential options and if it’s not the worst, it certainly at least the most inefficient choice, the most inefficient way for you to deploy your capital.
The specific college accounts are of limited value and the opportunity cost of participating in those accounts is simply just too high in my opinion and so I’m going to try to convince you to come over to my side, which is that parents should not save and invest in their kids’ college, rather they should save for and invest in their kids and there’s a big, big difference between those things.
So I’m going to give you four major overarching reasons in the beginning of this show that I believe this position to be a good one for many people to consider. I’m also going to give you five specific ideas and alternatives, better uses of the dollar that you can use instead of opening up a 529 plan or Coverdell Education Savings Account.
Finally I’m going to give you, if you insist on saving for college, I’m going to give you three options that I think are better to consider first than a 529 Plan than a Coverdell ESA. Please note: I am not ignorant of the benefits of specific college saving accounts. If you would like to hear an in depth discussion of what they are, how they work, the major overarching function and structure of these plans and the specific little hacks that you can apply to them, there’s about 15 to 20 hours of content in the Radical Personal Finance archives.
Just search the website for 529 plan, you’ll find all kinds of detail. I am not ignorant of those benefits and I’m also not saying that nobody should consider using these accounts because they are a useful tool in the tool belt of a competent financial planner and in those shows, I clearly describe where I think they are useful.
But for somebody like me or for somebody like my friend, prudent young parents saving for their kids, I don’t believe they’re useful. So I hope you’ll stick with me and give me a chance to present my opinions to you. Before we get through the details of those reasons, I want to talk about our sponsors for today’s show, and appropriately, today’s sponsor number one is Jay Fleischman.
Jay is a student loan attorney, a bankruptcy attorney and host of the Student Loan Show — Student Loan Show Podcast. He’s been interviewed on the Radical Personal Finance twice and if you have student loans or if you know anybody who has student loans or if you’re considering getting student loans, you should go and listen to those two episodes. They are episodes 214 and episode 258, just search the website or look back on the feed on your mobile device.
You should listen to those shows because you’ll learn more about student loans over the course of about that three hours and then frankly, you probably have ever had known. But more importantly, if you have student loans, you should consider sitting down with Jay for a personal option. He is a consultant, a very competent consultant. He travels all over the country, teaches other student loan attorneys how to actually work through their options.
And he has made available whose consulting services at a reduced price for listeners of the Radical Personal Finance Podcast. For details on that, go to studentloanshow.com/radical, but if you have student loans as we begin 2016 here, make sure that you’re at the minimum, sign up for an email review of your student loans with Jay Fleischman. Details on those packages are studentloanshow.com/radical and also while you’re there, make sure you subscribe and listen to his podcast.
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So let’s get to my reasons why I think that you are ill-served by opening up a college saving accounts for your kids and reason number one, it’s my opinion that the market value of college certification and screening is declining and will continue to do so. Now, those of you who are familiar with data and statistics should instantly say, “Well prove your case Joshua. Where is your evidence?”
I would say, “Well done. I would definitely need to prove my case with a statement like that,” because we’re all familiar with the chart that shows that the higher your level of formal education, the higher your earnings ability whether it’s a high school graduate or a high school dropout earns the lowest amount.
A high school student earns a little bit more and the minimum wages absolutely do rise based upon your level of formal education and your level of certification. So if I’m going to make a statement to the market value of college certification screening is declining and will continue to do so, you should demand some good evidence.
I do not dispute the fact that on average, college graduates earn more than non-college graduates. I do not dispute that, and I don’t even dispute the fact that the college degree can be very valuable. Very valuable in the market place even especially for somebody with a technical degree. Details on that later in the show.
But I do dispute the fact that for the majority of college graduates, gaining some kind of miscellaneous liberal arts degree, that their college education is what really makes the difference for the level of educational attainment. Number one, go back through the data and do some research and compare the number of people who start college versus the number of people who finish college. All of a sudden, you find that the numbers change a little bit.
And what you find is that college graduates who earn well are the ones who finish their college degree. They were the ones for whom college was a good choice and yet, there are many people who based upon data and saying, “I’ve got to go get a degree,” put themselves in very difficult positions and they’re calling Jay Fleischman where they’re deeply in student loan debt for a degree that they didn’t finish that has zero market value and college wasn’t right for them.
Next, I personally believe there is much more correlation between the type of people who finish college degrees and their career success then causation and consider me as a sample set of one as I illustrate my own personal experience with college. The highest level of formal academic certification that I’ve achieved is a master’s degree.
I think at some point, I will wind up earning a PhD or Doctorate degree in some discipline. Possibly in financial planning, possibly in some completely different unrelated field like philosophy. I have an interest in those types of things, but I don’t expect that PhD or Doctorate to make any impact on my earning ability.
It’s just simply the type of thing that fits my character set. I’m the type of person who finishes things and if you put a challenge in front of me that has graduated steps to it, then I’m the kind of person who will just go ahead and I’ll try to achieve the highest that you can and many people, especially those people who are good earners have similar character traits.
I can give you an example from my youth that will illustrate this more clearly than even a college education. I’m a licensed amateur radio operator, HAM radio operator and when I first got my amateur radio license, I think when I was I don’t know, 11 or 12 years old somewhere in that before I was a teenager. I had very little interest in radio. I had a very little bit of interest but not a ton of interest.
But I got it simply because I had a wallet. The only thing I have in the wallet at that time was cash and I didn’t have anything else in the wallet so I thought it would be cool to put some kinds of licenses in the wallet. My dad was an amateur radio operator so he said, “Well, get a HAM license,” so I got a HAM license.
Well at that time, there were five levels of amateur radio licensing. There was a novice class, a technician class, a general class, an advanced class, and an amateur extra class which is the equivalent of bachelors, masters and PhD. Today, there are three levels of licensing. Technician, general and amateur extra.
So at that time, I quickly got my novice license and I quickly got my technician license because what I really wanted to be able to do is to be able to talk in the local area on something in amateur radio terms, which is called a two meter band which is a local VHF, very high frequency radio waves that are suitable for your local area and that’s what I want. I needed a technician’s license but I’m the kind of person who likes to finish things.
Now, the major benefits to increasing your level of licensure in amateur radio are simply that you have expanded operating frequencies on the amateur radio bands. You can use more of the frequency spectrum and you can use additional bands if you get a higher level of licensing. But this is primarily applicable in what I call the HF, the high frequency bands.
And I didn’t really do much of anything in the high frequency bands but I wanted to finish things. I went as high as I could in the licensing classifications at that time but my constraining factor was my speed with being able to communicate using Morse code, and as you went up in the licenses, your speed had to increase. I believe it was up to 30 words per minute.
And I wasn’t dedicated enough to get my speed past about the 15 word per minute that I needed for the general class. Well, I few years later, the amateur radio rules changed and they eliminated the higher speed necessary for the higher levels of licensing. Well, I immediately went out, got a book, studied it for a few hours, went and took my amateur extra test and got the highest level of licensing.
As soon it became easy enough for me to do so and I didn’t have to do the long time consuming morse code thing. I had zero benefit or zero practical use for the additional licensing. It was just bragging rights and I wanted to have the highest level. I checked the box, I went on with my life. I didn’t touch a radio until recently. I didn’t touch a radio for five or six years.
Just never bothered with it, but I still keep that license because I’m the type of person who wants to finish things. Now, that same thing has been evident in my life through other areas. So the nagging thought of, “I want to get a PhD,” is simply a calculation of the hard work of it versus the interest and the desire to go as high as I can.
Many people who have college degrees are similar. When you apply those things over into the work field, it shows a character ability and you bring somebody who had academic ability, that person is likely to go higher and when the path into college is relatively easy in today’s modern US American society, most people like me are going to do what I did and just take the easy path, easy route, go into college, have that as a backup plans.
And because collage was so instrumental in my parent’s generation as far as being that mark of success, that mark of a guaranteed source of income even though the market has changed, people still do it and it’s not that college causes that financial success per se, it’s just that the type of person who’s likely to be skilled in college is also likely to be skilled, more likely to be skilled in a modern technical workforce.
So filter that data for me in terms of causation and versus correlation and prove me the case. I believe it’s much more correlative than causative. But more important than either of those two reasons, the market place is changing. As the best evidence of that, consider the new stories back in 2014 when Google, one of their key employees that was head of HR, some high level dude, the guy’s name was Block or Bach, or something like that.
Google came out and started talking about how they, at this point, were generally disregarding college degree certifications and GPA. Because there is no predictive value from those factors that would indicate the level of success and the level of effectiveness that an employee would have and they were looking for people who would establish their own path, who had demonstrated other skill sets.
Thankfully, as I understand it from the news reports they wrote at the time, they were also dumping some of the weird questions they would ask interviewees, the Google interview process was always legendary. I was always offended by it. I thought it was stupid, but they have their reasons. I never understood them but thankfully, they were shifting away from some of the wacky questions that became so famous. But the point of the college degree was that it wasn’t predictive of success.
Now, it’s easier to see that in a quickly moving tech company that has to be at the Vanguard of an industry that’s in and of itself very fast paced. But even though that pace of change is harder to see in other industries, the same thing is happening and the idea that you can prepare a student in today’s world with 12 years of studies to be well equipped for what’s the world is going to look like 12 years from now is laughable.
The idea that you can teach content in four years of university studied that is going to be applicable to the world that exist in any industry four years from now is, I wouldn’t say laughable, but it’s a hard pill to swallow. There are a very few hard sciences in which that may be the case and there might be some degrees that teach principle and that have a well-developed body of knowledge.
But most of the degrees that many of the students are earning today, these soft squishy liberal arts degrees, very little benefit and the world is marching on. College is not going to be predictive of career success. The whole formal structured career plan that was supposedly going to be based on colleges disappeared and if your industry is not being affected by that, I believe it will be.
So we’ve got to something completely different. Those are forward looking statements. I believe there’s good evidence for them but you’ve got to look at it. Just ask yourself, “Is your career success based on your college degree and are you still using that for predictive purposes in your business?”
Now, there are businesses that will still use that as a screening tool. So in my initial opening statement of my position, I do think that formal certification can be useful. In my business for example, financial planning, college certification is still a screening tool. But the presence of a college degree is not the guarantee that it possibly was years ago. It still benefits.
If you want to know all my benefits or my reasons or my in depth discussion, go listen to Episode 227 of the show entitled The Five Benefits of College and Radical Ways to Exploit Them. There are the benefits of college, but when you take those industry changes, those technical changes and then look forward and you combine that with the fact that any person can now effectively market themselves using digital tools and can market themselves into a job, into a career, into a specialization, that is truly powerful.
And that demonstrates, that type of marketing is the type of thing that companies are looking for. They are looking for people who are self-starters like that. So point number one, the market value of college certification screening is declining and my prediction, it will continue to do so at an ever increasing speed. Don’t put your hopes for your child’s economic future in a college degree.
My argument number two, the cost of college is declining and will continue to do so. Now here again, I’m at odds with the majority of news articles that you read about the constant never increasing cost of college but read those articles and ask yourself this, “What are they using as the metric for the cost of college?” And you will usually find a couple of factors.
Number one, they used the retail cost of college. What’s quoted in the school’s catalogue is their retail price rather than the actual cost that students are paying. Number two, they don’t include the cost of classes. They include the cost of classes and room and board and tuition and so yes, you’re subjected to the same factors.
Then often, if you look at it, just because the general cost is increasing doesn’t mean that the alternatives are not there. Today, the best one I’ve seen, I think it was the University of the People, I can’t remember but I saw one college, one online university that is offering college degrees, accredited certified college degrees for about $4,000 total.
There are a bunch of options that will offer you an accredited online degree for $10,000 or $15,000 total. You compare that to the cost of $15,000 a semester and there better be a significant economic benefits on the other side to make you be willing to pay a $120,000 total if you’re preparing $15,000 a semester to $15,000 total.
Big difference there and when you compare the cultural dissatisfaction that recent college graduates have with the price that they paid for college, the price competition is only get more and more severe. Now we’re stuck with all the legacy costs of the ridiculous system that exist. We’re stuck with way too many professors earning way too much money. Way too many big fancy Ivy covered buildings and the world has gone technical and online.
If you want to support that system, go for it but I’m going where the future is. If I were doing it today, not a chance in the world I would spend the money and cost to go to a traditional brick and mortar university when I could massively cut those costs and punch that certification ticket with an online only school.
So the first factor that the cost is declining is that there are newer cheaper options. The next factor is look at the political wins. By the time your or my child gets to the age of college entrance, the majority of college educational options are likely to be free as in paid for by your fellow tax payer as part of state benefits.
So why on earth should you bother to waste your time and money saving for something that the political wind say is going to be free? Do you really see anybody arguing against that? The majority of you who are in the listening audience and the majority of US American citizens have their children in a state paid for school. Your fellow tax payers are sending your kids to school. So most of you are not saving for your own kid’s private education. You didn’t need to plan for it so you’re planning for college.
Well, look at the political wins that are in this country. My best guess, Hilary Clinton will be elected our next president. Bernie Sanders is obviously gained a huge foothold. None of the republicans have any really serious objections to the expansion of state sponsored education. So why would the trend not continue? Over the last few years, you’ve got people striking on the street. You’ve got all kinds of dissatisfied people with their student loans.
The government is already heavily involved with the establishment of the expansion of federally guaranteed student loans, stabilization of interest rates, it’s this cultural thing. It’s the only state sponsored religion that we have in the United States of America, is the religion of state run schooling. So why would it not be expanded to the college age?
So could I be wrong? I could be, but my guess is, by the time my two year old is there, it will be free and thank you all for paying for it if I ever send that kid to that. Who knows? We’ll have to see what happens in 15 years but it’s going to be free. You say, “Well, if I have money I’m going to vote against to it being free because that isn’t fair.”
Well, the number of people who are going to vote against it is very small versus the number of people who vote for it. The trend in most of Europe is to have free college tuition payments. I don’t see any practical serious indications that is going to be any different than the United States of America.
So my prediction: it will be free. Why bother to save for something that’s going to be free? Interesting question there with regard to macroeconomics. I’ll leave it for you to consider. But even if it’s not free, paid for by the state, for good students college today is free and can be free and if your child is not a good student, then why on earth should you torture them by going to college?
The people who do well in college are the people who are good students, and the people who are good students already have tons of options to get paid for for school. I was a good student in high school. If I had made different choices, I could have gone to a state run school and just gone on a state run school and with scholarship grants, academic stuff, fully had that entire thing for.
I had to pay some out of pocket because I chose to go to a private university instead of a public university but why torture your child with college expectations of they’re not a good student? And if they are a good student, there are already tons of options to go to school for free.
So argument number two, the cost of college is declining and will continue to do so especially for those people who are good students, especially in the cultural environment that we have and especially as the entire world transitions to the delivery of educational material online.
Number three, the financial and tax benefits of college savings accounts are minimal for most families. The tax savings are minimal and the investment options are mediocre, generally speaking. Why are the tax savings minimal? Number one, most people don’t put much money in them.
Generally, like my friend, I don’t know and I haven’t asked his specific situation but people like my friends are going to set up an account. They’re going to put a hundred or $200 a month in there. Well, when comparing that amount of savings to the total retail cost of a tuition bill, it’s meaningless.
In my financial planning career, meeting with over a thousand people, I couldn’t count dozens who had fully funded educational accounts. There were not that many. There were some but there were not that many. Generally, the only people who had those fully funded accounts were people who had done a prepaid tuition program paying a tuition only approach and things like that.
But most people are not going set aside seven or $800 a month into a college savings account which is probably what they need in order to pay the tuition at the prestigious Ivy league school. So most people aren’t saving very much.
Number two, the tax benefits on college savings accounts are slight. There’s no upfront tax deduction for contributions to an account. So you fund the accounts with after tax dollars. The only tax benefits that you get is the year by year deferral on gains and the possible tax free distribution when those gains are used for an accredited certified college program.
So how much money is that actually? Well, if you want to hear some detailed calculations, go back and listen to all my shows on 529’s and ESA’s. It’s not that much especially when you factor in the volatility which leads you to the fact that you generally are funding these accounts with mediocre investments that aren’t very aggressive.
By mediocre investments I mean many of the accounts are restricted to main stream investments. We face at least a much more difficult head wind in the fourth coming decade, much more difficult economic head wind in the United States, especially for mainstream investments and these investments due to the relatively short duration of planning for college as compared to planning for retirement, you have to be much more conservative.
Which automatically lowers your returns, and worse, many of the investments in these types of college plans are overladen with fees and expenses. What I mean about time horizon is that if I am planning for my two year old’s college tuition payments and I’m going to assume that he’s going to go to the traditional route of going to school at the age of 18, going to school from 18 to 20, my total perspective time horizon is 16 to 20 years.
That’s longer than the five year time horizon that we financial advisers tell people to plan for what their investments — “Okay, I’ve got 16 to 20 years.” But what happens when my kids starts to become 15 years old and we’re going around doing the great college tour? I’m going to be looking pretty carefully at my accounts and especially if I am facing a big tuition bill, I’m going to start to pull that account back in terms of volatility.
I’ve got to manage it much more carefully than a stock account that I’ve got set aside for my retirement where I’ve got an investment time horizon of 30 to 40 years. So when you compound these factors, I don’t believe the tax benefits to be all that great for parents who are going to be setting aside a hundred or $200 a month.
Tax benefits can be great for parents or grandparents who are setting aside massive lump sums early in their child’s life. For details on those strategies again, go listen to all my previous shows. But for me, for my kids tax benefits are minimal, investment options are often poor. Reason number three to avoid the accounts.
The number four, when you calculate the opportunity cost of saving money for my kid’s college, the opportunity cost, what I’d be giving up with that money is simply to high especially given the fact that I can’t know the future and I especially can’t know the future for my child. I don’t know what the college situation is going to be like in 15 to 20 years, neither do you. I don’t know what the economic value of a college degree is going to be like in 15 to 20 years, neither do you.
I could be right about the political wins or I could be completely wrong about them. None of us know, we’ll have to wait and see. And I don’t know if college is going to be appropriate for my child. I think the system will look dramatically different in 15 years. I see the market forces at work and I don’t see how the entrenched bureaucracy can withstand those market forces, so I think the situation will be different but I just don’t know.
When you add all of that uncertainty, to all of the uncertainly with investment choices, all of the uncertainty with tax codes, all of the uncertainty with all of those other factors, there’s so much uncertainty and when you look at some of the alternatives that I’m going to lay out for you and the benefit those can have in your child’s life, I believe the alternatives are much more certain.
So when you compare all that uncertainty with some of these much more certain alternatives, I am not willing to give up the things that I can do with the money now to invest in my children in order to segregate it into a separate account that is specifically earmarked for college expenses and let’s go onto those five alternatives that are big picture alternatives I’d like you to consider.
Before I do that, I need to correct myself on one thing that I misspoke on the previous point where I said the financial and tax benefits are minimal and I stated that you get no upfront deduction. Let me clarify that. These details are totally clear and the extensive shows that I have done previously. But let me clarify because some of my sharp eared listeners will catch me in that mistake.
There are no upfront Federal tax deduction benefits for contributing to most college savings accounts. It’s possible that there can be some state income tax deductions for some 529 Plan contributions. So check your state, those very dramatically across states and they may or may not have value depending on the state that you live in but they’re minimal but there’s nothing on the federal level. So just that quick correction and let’s go onto my alternatives.
Alternative number one, a better use for the money that you would save in a college account is this, switch your focus from helping your adult children to helping your children-children. So number one, if you just change from focusing of the four years of your child’s life from 18 to 22 to focusing on the four years of your child’s life from zero to four, I believe you will have much better results.
Time will tell, you’re welcome to look at my children in 20 years and we’ll find out together but I think the argument is compelling and here are some ideas for how to do that. Number one, take the money and if you have to use the money to do this, get mom home with the kids. Get mom home with your little babies and your young kids. That is much, much tougher for mom but it has dramatic benefits for the child.
Now, I’m always interested in personally, this starts first with a religious conviction because mode as much as the character formation of the children comes in the first few years and I’m not willing to surrender that over to paid care givers of questionable reputation. But whether or not you share my personal religious convictions, I’d encourage you research the subject. I am always interested in the intersection of the modern secular social sciences with my own personal convictions and there is a bunch of interesting data on this.
Well, I’ve just got a book as an example. I just got a book called Home Alone America by Mary Eberstadt, The hidden toll of day care, behavioral drugs and other parent substitutes. One past, she wasn’t a guest — I guess she wasn’t a guest. I had scheduled an interview but it didn’t work out. Penelope Trunk, formerly associated with the Brazen Careerist, is a woman who has written extensively about this from a secular perspective.
So whether or not you share my perspective or not, check it out from a social science development and it’s fascinating. Most families would enjoy that. Most moms want to be with their children especially during those early formative years. I don’t particularly care if I can finance or fund my child’s college education if I’ve already invested in them for the first few years. So take the money and get mom home.
Even better, take the money and get dad home. Get both parents involved. Downsize your lifestyle and if you downsize your lifestyle where you take that money that you would otherwise save and you use it for less overtime, less weekend work, less travel, transition to a job that gives you more flexibility, transition to a job that you can integrate your children in, transition to a job that helps you to have a relationship.
Now, you’ve got the ultimate and it really bothers me when I see parents who are trying to set aside money for their child and what your child is craving is not money but time. So get mom home and get dad home and then invest that time and money into training their character and into early childhood education whether that’s formal education or informal education.
Go and do the research. The best one to research would be, if you want to talk about the formal education side, research all the Montessori Schools. They are the most vocal with their research on early child education. Spend the money that you would spend on four years of college on an early Montessori education for your child or create your own option of experiences.
One of the biggest things that for me, is if you study the amount of knowledge that a child learns, the amount of the character development, their world view, their vocabulary, their perspectives on life, so much of it is determined in the first three, four, five, six years of life. So if you’re raising your child in front of a TV or you’re paying a minimum wage day care worker to care for your child so that you could go off and earn a bunch of money and save it for your child’s college education, I don’t think that’s the most efficient use of your money.
So switch your focus from helping your adult child to helping your child-child and if you do that, you won’t need to bother with paying for your child’s college education because they’ll have the ability to figure it out themselves. I didn’t need my dad to pay for my college education. I was easily able to figure it out myself.
Many of you were as well, but would I have had the character and the discipline to do that if my mom and dad hadn’t been there in those first few years? If I haven’t learned to read and study at an early age? If I hadn’t developed those academic skills? If mom and dad hadn’t poured their lives into me in those first four years? Consider it.
Number two, switch your focus from college education to primary education. It’s very difficult for me to understand why anybody would save and bother to save and buy college schooling for their child if they haven’t created some kind of better option in the primary and secondary years.
Now, we can argue night and day about what option is best whether it’s un-schooling, home schooling, self-directed education, Montessori, your local charter school, a private school, a Thomas Jefferson education or whatever the latest thing is, you’ve got to deal with that. But any option like that is going to be better than government schooling.
Now, it’s a little bit scary because if you invest in those options, your kid might not need the college education because they might be financially independent by the time they’re 25 or they might have enough money to pay cash for their own house by the time they’re 23 or they might have a business that they started in their spare time when they’re 15 that has them earning $100,000 year by the time they’re 18.
It’s a little scary, but all of those things will be much better for the economic future of your child. So simply switch your focus from college education to primary education. Now here’s the fun way to do that: calculate what you think is the cost of college and then ask yourself, “How could I spend that money now on their earlier education opportunities?” And then figure out what’s right for you and your family. It’s not my place to tell you what’s right but figure out what’s right and be willing to put the money there.
Number three, switch your focus from social and societal acceptance to the individual development of your child. Switch your focus from school to education and then even better, switch your focus from school and education even to character development. Switch your focus from social indoctrination to personal empowerment.
Ask yourself, “How can I spend money on the actual individual development of my child?” And if you’re writing the checks, you might care a little bit more about the content of your child’s curriculum. You might throw out a bunch of the time wasting stuff that really is irrelevant because every single one of us with a high school diploma and a college degree would look back and easily recognize how much of what we studied was irrelevant.
You might work on things that are a little bit more relevant to actual social career success. Focus on the actual development of the child. I guess my next one, number four, I’ve jumped the gun but invest your money in your child’s education not their schooling. What if I gave you a budget? Here are some ideas that I’ve had working through these with my own children.
What if I gave you a budget? Let’s say I’m going to save $300 a month into a college account for my child. That would be a good starting point. “At this age I could fund the state school with the retail price and my financial planning software if I set aside $300 a month.” So what if I took that $300 a month then I said, “I have to spend this money now on my child. I can save a little bit of it up and I can take some of that money but I’ve got to spend it at least once a year.”
What if I have to spend $300 a month once a year on my child each year? Well, if they show some particular skill, some particular talent, I’d have the money to invest in a world class tutor for that skill or talent instead of taking whatever we’re around, and hoping that somehow the local state school has a good professor, I can choose a world-class tutor. I can send that child for a week to go with some world-class tutor in the area of interest. I could buy a lot of books.
So if my child demonstrates a real interest in a subject area, we can cancel a lot of the time wasting stuff in the government school system and I can buy a lot of books with $300 a month. Especially buying used books off of Amazon. I can afford my high speed Internet connection so they can have access to the world’s greatest tutors there. I can pay for some web hosting fees to help my child develop an online presence. I can buy my child whatever gear and equipment that they need.
So if there’s demonstrating an interest in a technical field, like that young man who was building robotic arms for his middle school classmate, I could afford to buy the computers or the material that he’d need for them and give him the money that way. I could take the money and instead of wasting a summer working a minimum wage job, I could send my kid to Washington DC and tell him to spend weeks wondering to free museums all across the city.
Which of you had the time when you were young and your parents did something like that? Dozens and dozens and dozens of world-class free museums. Think that might help the exposure? See one of the major problems with college is, people are going to college to figure out what they want to do.
That’s an expensive stupid way to figure out who you are and what you want to do. Much better to figure out who you are and what you want to do early and cheap and then when you go to college and you know this is what you want to do, you have a purpose behind it and now, you’re much more likely to be successful at following through, finishing school and you’re much more likely to actually use the knowledge and education that you gained.
For me, my own personal story is an example of this. My undergraduate degree was in international business. I used nothing, nothing from that, no specific knowledge from that degree perhaps I used study skill, perhaps I used generalized ability to write or to read or to study or to manage my time. I certainly had formative experiences during those years but in terms of actual content I used nothing from that degree.
But then, when I got a master’s degree in financial planning, I used far more of that because I was a financial planner and many of you the same thing. For example, my friend who wrote me this note is an engineer and just finished a master’s degree in engineering. Getting a master’s degree when you are an engineer is far different than being a sheltered, unexposed 18 year old wandering into a college classroom trying to figure out who you are, what you want to do and what you believe about the world.
So take the money that you would invest in your child’s schooling, especially college schooling and invest them in their education now and you probably won’t even need to buy any college tuition down the road. And that way, whether or not college is the appropriate fit for your kid, they have a lot more options. A lot more options.
And number five, switch your focus from equipping your child with a college certificate to equipping your child with economically valuable skills. My best example of this, I interviewed in the past Jonathan Harris, the site member of 10K to Talent and Jonathan and his wife Rene are members of the community. They’re involved in the Facebook Irregulars Group and they do a great job but they have a bunch of kids.
And I follow one of their children, a young man named Caleb who is an amateur knife maker. I follow his stuff on Instagram and Caleb, I’m actually going to be giving him some advice. I intended to release it in a future episode, but Caleb I think is 17 years old and he’s build for himself an incredible platform as an amateur blade smith, helping and encouraging other amateur blade smiths.
And the work that Jonathan is doing at 10K to Talent to helping your child to actually develop and build talent is truly awesome. Now, Jonathan and Rene haven’t told me about what they’ve spent or haven’t spent. It’s none of my business but I’m pretty confident that they had to spend some money to help Caleb get established.
But if you take the money that you would be putting into a 529 Plan and you take it and use that to buy your son a forge and an anvil and the special metal that he needs to forge blades while he’s blowing through the stuff, screwing up the first 250 versions of it, if you take that and make that investment, then you wind up with a 17 year old young man who is nationally known as a young and up and coming amateur blade smith.
That’s what I mean by opportunity cost. What if you’re putting the $300 a month into the 529 plan? Well, guess what? Anvils and forges and metal are not approved qualified distributions from a 529 plan. Which of those is going to make a bigger difference? Now, if you got the money can you do both? Sure.
But I don’t at the moment have the income where I can do both and most people who are in my bracket, young families, don’t have the money income to do both either. And so we rob the now in order to fund the future for a system that’s antiquated, out of date, and broken. If you shift the attention from the four years of 18 to 22 and you shift that from the years of zero to I don’t know, 12, 15, 18? You won’t need to do all that hard work from 18 to 22. It will already be done.
And instead of investing in the financial markets where the value will go up and down and your investments will wonder around and your subjected to the latest vagaries of the government regulation and a bunch of bureaucrats who write laws, you invest it in a person with whom you have a relationship, and guess what? Whatever the world is in 15 or 20 years, that person with whom you have a relationship will be competent to fend for themselves.
And I think this is one of the best ways that parents can fulfill the old axiom of teaching a man to fish instead of giving him a fish. My dad didn’t fund my college education. He offered to let me to live at home rent-free during the years of college if I wanted to but he didn’t fund my college education. Never regretted it, I never was bitter towards him, never needed it. I looked at my friends who were dependent on their parents and had this weird controlling relationship with their parents where they had to go show their report cards at 21 years old because their parents were funding their college.
I was like, “Why don’t you just do it yourself?” That’s probably a useful content to talk but we will not discuss it today but as far as the dependency that continues on and the control that parents probably try to exercise too late because they’re financing something but I just looked at my friend and I was like, “Why don’t you do it yourself? Have some self-respect. You’re an adult.”
When you look at the options, there are many more effective uses of the money now and it’s a much more secure investment. The very few ideas I’ve laid out here is just the tip of the iceberg. Now, let’s say that my arguments are not compelling to you or let’s say that my arguments are compelling and you just say, “Well, I’ve got the money. I want to do both. I’ll fund what’s now but I will also want to fund the future.” Awesome, here are three final ideas.
Number one, don’t dilute your wealth building efforts and fool yourself with the idea that by funding various accounts on a minimal basis, you’re somehow going to become rich. Start by getting rich and then paying for the stuff that you want. Here’s what I mean. Many people do a little here, a little there.
Put a little bit of money in a savings account to save for Christmas, pay a little extra on their credit cards, put a couple percent on their 401(k), put a $100 a month into the 529 Plan because that’s what we can afford and they don’t make much progress because they don’t really focus on anything. Do a little here and there, as Zig Ziglar used to say, they’re wondering generalities.
I believe the impact is far higher of you become, as again as Zig Ziglar used to say, a meaningful specific. Focusing on clear specific goals. It doesn’t mean you can’t use those accounts. It means that you have a plan. The best behavioral finance guy I know is Dave Ramsey. If you look at the power of the Dave Ramsey plan for people who are in debt where he focuses them in, laser focus on, “You’re going to get out of debt.”
Guess what happens? People get out of debt and it works because they’re focused, one bill, one credit card, one baby step at a time. Well, take that same thing and fast forward it to your wealth plan and so many people will be much better served by saying, “I’m going to get my debt paid off. I’m going to get my house paid off. I’m going to get the down payment saved up for a rental house to buy. I’m going to get this account fully funded.”
Much better to focus on one of those things one at a time than try to do a little bit here and a little bit there and if you’re rich, you can pay for college. So start by just having a clear plan to get rich in a short period of time as is appropriate to your situation. Those things are not necessarily mutually exclusive. You can work a good job, you can say, “I like this job. I’m happy with it. I’m just going to fund this accounts and do fine,” if you have enough time.
It’s not mutually exclusive but make sure you have a clear plan and a clear focus as appropriate to you. That generalized plan could be personality or could be effectiveness. I don’t know, it doesn’t work for me. I’m rather obviously, something of an extreme guy. There’s a reason the show is called the Radical Personal Finance Podcast but I just find it far more effective to focus. If you’re going to work, work. If you’re going to play, play. So number one, don’t dilute your efforts and do a little everywhere. Have clear financial goals that are measurable.
Number two, before you fund a college plan, if you at least recognize that there is at least some uncertainty with the future value of this accounts, consider some type of cash flow plan rather than a savings plan and here’s what I mean. If I’m right about my predictions of college and things that are going to happen.
The potential challenges is the limited benefits from the tax perspective, the fact that you’re diluting your efforts, blah, blah, blah all that stuff that I just spent 56 minutes going over with you, if I’m right about that thing, that stuff, then having a few thousand dollars on a college savings account is not going to be really impactful.
But if you focus on other things first, specifically having free cash flow then if you want to just pay for college when your kids are older you can do that. So take that focus and focus it in on paying off your cars and not borrowing money on cars. Focus it in on paying off your credit cards and not borrowing money on credit cards.
Focus it in on getting your mortgage paid off and if you arrive at the time that you have an 18 year old heading to school and you don’t have a mortgage and you don’t have car payments and you don’t have credit cards, even if you’re just working a job, you can just simply cash flow the college payment.
Since there is an economic benefit to all of those things that works whether your child goes to school or not, or whether they go to an expensive school or whether they get scholarships or not or any of those other factors whether the school is free or not, you’re going to be better off either way. So plan ahead and plan on a cash flow plan.
Another option is, just simply plan on a cash flow plan with regards to your investments. So my point number three here is fund your retirement accounts first. Please don’t open a 529 account or an ESA until you have first funded fully your retirement accounts, 401(k)’s, Roth IRA’s, whatever accounts you’re eligible for.
Because it will give you far more flexibility and you might be able to use the money for college or you can pursue the cash flow plan. So with a Roth IRA, what I would do is first fund the Roth IRA for you and then if you want to pay for college then just take your basis distributions tax free out of the Roth IRA and use that to pay for college.
First fund a 401(k) as aggressively as you can until it’s full and then probably the best move is just, if you have to, cut your contributions to the account while your child is in school and or cut them to the at least the level of the employee match and then pay cash for the college tuition payments. At least in those situations you have options and from a financial aid perspective, you have options, your child has options.
If you have encourage your child, and your child is academically excellent, you’re not stuck with $15,000 in an account and you say, “Well you’ve got to get a master’s degree now.” You’ve got the money in the retirement account which is a little more flexible and a little bit more useful to you. So fund your retirement accounts first.
Then, only after all those things are done, you got a plan to get rich, you got a plan to be debt free, if you’re going to pursue retirement accounts, those retirement accounts are fully funded and you’re investing in everything that you can see now that’s going to help your child now whether that’s the exclusive $40,000 a year private school tuition, there’s a reason you don’t see the elite in our society sending their kids to a local government school.
There’s a reason they go off to the boarding school. It’s a very different education approach. If you’re not aware of that stuff, go and research, research, research, research but after you have done all of those things, then you can consider the retirement account and hey, good luck to you.
I hope this has been useful to you. I hope you enjoyed it. I know I am presenting some very strong opinions. I’m doing that because A, I hold strong opinions but I’m also doing that simply because I’m fighting against the general tide of advice and information that comes out in our society and you’ve got to see through it because otherwise, the peer pressure is all around.
“You’re a bad parent, you’re not saving for your kid’s college because don’t you know the college tuition is going up.” Most people are out of touch with the actual facts of what’s going on in society. Most people are out of touch with the benefit of a college degree. Most people are out of touch with a college degree cost. Most people are out of touch with the options.
Very few people are in touch with the changing roles of many industries. There are always exceptions to all these things that I’ve said but you’ve got to recognize that most people are out of touch. I can be out of touch, you’ve got to be the judge of that but go and research these things heavily.
Read a book on Maria Montessori, go and visit with your average 18 year old government school graduate and ask yourself if you want your kid to look like that. Do some research and make an educated decision but this is my go to resource now as to why I refuse to save money for my kid’s college.
I think it’s a dumb system, it’s antiquated out of date, it was never that effective to begin with, I think it’s a bad use of the dollar, too many risk and uncertainties. If you disbelieve all that stuff, hey, I’ve got 15 or 20 hours of free stuff to tell you how to exploit all those accounts and all the loop holes and everything like that so go search my website.
Thank you all for listening. If you’ve enjoyed this show, let me know. Drop me an e-mail or send me comment on the show, feel free. If you hated it, feel free to let me know that too. I don’t mind that. If this has been useful to you or beneficial, please consider supporting the show on Patreon.
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