Investing in Yourself: An Economic Approach to Education Decisions

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Page One Economics, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. Recently there was an article titled “Investing in Yourself: An Economic Approach to Education Decisions” that caught my eye and I felt it would be a great fit for the Financial Tip. It is re-printed here with permission from The Research Library. We encourage your comments and thoughts at http://mufinancialtip.blogspot.com.

 

There is a classroom version of Page One Economics available for teachers for free at: http://research.stlouisfed.org/pageone-economics/pages/newsletter_summary.php?id=75&edition=classroom

 

To subscribe to their newsletter or for more information and resources, visit their website and archives at http://research.stlouisfed.org/pageone-economics/pages/newsletter_summary.php.

 

The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.

 

“When I travel around the country, meeting with students, business people, and others interested in the economy, I am occasionally asked for investment advice…I know the answer to the question and I will share it with you today: Education is the best investment.”—Federal Reserve Chairman Ben S. Bernanke, September 24, 2007(1)

 

One of the most important investment decisions you will ever make is the decision to invest in yourself. You might think that investment is only about buying stocks and bonds, but let’s take a step back and consider investment a little differently. Economists use the word investment to refer to spending on capital, which can be either physical capital (tools and equipment) or human capital (education and training). Let’s briefly look at each type.

 

Investing in Physical Capital

 

A firm invests in itself by buying capital that it uses to improve what it does. In other words, it invests in physical capital to earn higher profits in the future. For example, a firm might invest in new technology to increase the productivity of its employees. The increased productivity raises future revenue (income earned by the firm) and profits (revenue minus costs of production). Seems like an easy decision, right? Well, before a firm invests in physical capital, it must consider three very important points.

 

First, a firm invests in technology now with the expectation that it will lead to higher revenue and expected profits in the future. But this expectation might not be realized. For example, the technology might not increase productivity as much as the firm expected. Or the demand for the good the firm produces might decrease, resulting in less revenue than expected.

 

Second, a firm considers other investment alternatives. A firm can invest in many ways to raise future profits. For example, maybe investment in technology A results in profits, but investment in technology B, which is more expensive, leads to much larger profits.

 

Third, a firm also considers the potential return on investment (ROI). The ROI is a performance measure of the effectiveness of an investment. It is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment. A firm compares the expected gain with the investment cost to make a sound decision. Of course, the result of any investment lies in the future and must be projected. Predicting the future is always tricky; therefore, any uncertainty about the result must also be considered.

 

Investing in Human Capital

Investment in human capital is the effort that people expend to acquire education, training, and experience. People invest in their human capital for the same reason a firm invests in physical capital: to increase productivity and earn higher income. An added benefit is the increase in job opportunities for those with more education: The unemployment rate for those with a bachelor’s degree is 4.1 percentage points lower than for those with only a high school diploma. Of course, higher education is expensive. To increase the likelihood that the investment will pay off, let’s consider three points.

 

First, an investment in human capital might not pay off. Just as a firm’s investment in physical capital involves risk, there is also a risk that the expected outcome from investing in human capital will not be realized. Research consistently shows a correlation between more education and higher income (see the second graph), but there is no guarantee. One way to think about the ROI in human capital is the college wage premium, which is the percent increase in earnings of those with a bachelor’s degree compared with those with only a high school diploma. Recent research suggests that the college wage premium has been growing—from 40 percent in the late 1970s to 84 percent in 2012.²

 

Second, people should consider what kind of an investment to make. Getting an education will most likely lead to higher income, but there are vast differences in the projected income and job opportunities of the various courses of study available. For example, according to the Bureau of Labor Statistics (BLS), an elementary schoolteacher with a four-year degree earned $51,380 (median) in 2010,³ while a computer programmer with a four-year degree earned $71,380 (median) in 2010.⁴ Both earned a higher income than they would have if they had not acquired a college degree, but the difference between the median earnings is significant.

The job opportunities available in different professions also vary. The BLS forecasts job outlooks for various occupations. For mechanical engineers (2010-20), the BLS forecasts job growth of 9 percent,⁵ while for registered nurses job growth of 26 percent is expected.⁶ Again, there is a significant difference. Given these facts, does that mean that you should not become an elementary schoolteacher? Does it mean that you should consider only computer programming or nursing? No, but the median income and the expected job growth rate are two factors to consider when making decisions about future education and training. In fact, there are many opportunities to gain training and valuable job skills besides the usual college route. Vocational, technical, and trade schools teach specific, practical jobs skills that can lead to a good job within 2 to 4 years. For example, many such schools offer programs in computer-aided design and drafting (CADD); law enforcement; heating, ventilation, and air conditioning (HVAC); and information technology (IT).

 

Third, people should consider the cost of various kinds of educational institutions when they think about investment in education. For example, the average cost of attending a four-year public university (tuition, room, and board) from 2007 to 2011 was $58,623, while the average cost at a four-year private university for that same period was $125,604.⁷ Does that mean you should consider only public universities? No, but cost should be considered in making your decision. The ROI for a would-be elementary schoolteacher would be higher if he or she chose to attend a four-year public university.

 

Conclusion

 

A firm invests in physical capital in an attempt to increase its revenue (income) and potential profit, but only after considering the return on investment. People might consider using a similar strategy when deciding whether and how to invest in their own human capital.

 

NOTES

1 Bernanke, Ben S. “Education and Economic Competitiveness.” Speech presented at the U.S. Chamber Education and Workforce Summit, Washington, D.C., September 24; 2007; http://www.federalreserve.gov/newsevents/speech/bernanke20070924a.htm.

2 Jonathan, James. “The College Wage Premium.” Federal Reserve Bank of Cleveland Economic Commentary, 2012, No. 2012-10, August 8, 2012; http://www.clevelandfed.org/research/commentary/2012/2012-10.cfm.

3 Bureau of Labor Statistics. “Kindergarten and Elementary School Teachers.” Occupational Outlook Handbook, March 29, 2012a; http://www.bls.gov/ooh/education-training-and-library/kindergarten-and-elementary-school-teachers.htm.

4 Bureau of Labor Statistics. “Computer Programmers.” Occupational Outlook Handbook, March 29, 2012b; http://www.bls.gov/ooh/computer-and-information-technology/computer-programmers.htm.

5 Bureau of Labor Statistics. “Mechanical Engineers.” Occupational Outlook Handbook, March 29, 2012c; http://www.bls.gov/ooh/architecture-and-engineering/mechanical-engineers.htm.

6 Bureau of Labor Statistics. “Registered Nurses.” Occupational Outlook Handbook, March 29, 2012d; http://www.bls.gov/ooh/healthcare/registered-nurses.htm.

7 National Center for Education Statistics. “Fast Facts: Tuition Costs of Colleges and Universities.” See http://nces.ed.gov/fastfacts/display.asp?id=76.

 

GLOSSARY

Capital: Goods that have been produced and are used to produce other goods and services. They are used over and over again in the production process.

Human capital: The knowledge and skills that people obtain through education, training, and experience.

Investment: The purchase of physical capital goods (e.g., buildings, tools and equipment) that are used to produce goods and services.

Investment in human capital: The efforts people put forth to acquire human capital. These efforts include education, training, and experience.

Productivity: The ratio of output per worker per unit of time.

Profit: The amount of revenue that remains after a business pays the costs of producing a good or service.

Return on Investment (ROI): A performance measure of the effectiveness of an investment. ROI is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment.

 

 

Ryan H. Law, M.S., CFP®, AFC

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

Personal Finance Symposium V Sustainable Family Finance

It is that time of year, again.  Time for our annual Personal Finance Symposium.  This year’s line-up of speakers continues the tradition of outstanding leaders in the profession.  Please see the list of speakers below, as well as how to register for the program.  I have also attached reply cards, invitations, and a poster if you have others you’d like to invite to participate in the Symposium.  We look forward to seeing you on 17 April!  - Rob Weagley   Personal Finance Symposium V Sustainable Family Finance April 17, 2013 Reynolds Alumni Center University of Missouri - Columbia, MO Program 9:30 a.m. Welcome and Introduction Robert O. Weagley, Ph.D., CFP®, Chair, Personal Financial Planning Betsy Rodriguez, Vice President for Human Resources University of Missouri   10:00 a.m. “Money Sanity Solutions: Build Healthy Money Habits for a Successful Future” Nathan Dungan, President and Founder; Share Save Spend, Minneapolis, MN   11:00 a.m. “Choosing the ‘Best’ Insurance Product: Matching Needs with Solutions” John Olsen, President; Olsen Financial Group, Kirkwood, MO   12:00 Lunch   1:30 p.m. “What Recovery? The Muddle-Through Economy” Juli Niemann, Executive Vice President, Research and Portfolio Management; Smith, Moore & Co., Clayton, MO   2:30 p.m. “Financial Literacy 101 from a Past U.S. Treasurer” Anna E. Cabral, Unit Chief of Strategic Communications in the External Relations Division of Inter-American Development Bank and former Treasurer of the United States of America, Arlington, VA   Registration: Program: $30/person (includes lunch) $60/per person for 4 Hours CFP® Continuing Education Credit (includes lunch) $10/student (includes lunch) For more information or to make your reservation, please contact Amy Sanders at (573) 884-5958 or sandersal@missouri.edu or mail check (payable to University of Missouri) to 365 McReynolds Hall, Columbia, MO 65211   Open to the Public ~ RSVP Required Sponsored by the Personal Financial Planning Department - University of Missouri Office for Financial Success, Center for Economic Education and the College of Human Environmental Sciences

 

 

Robert O. Weagley, Ph.D., CFP^(r)

Chair, Personal Financial Planning

241 Stanley Hall

University of Missouri

Columbia, MO  65211

573-882-9651 - o

573-884-8389 - f

The 3 C's of life

 

Choices, chances, changes.

You must make a choice, to take a chance or your life will never change.

 

 

Tax Planning

Tax Planning

 

University of Missouri Extension and the Department of Personal Financial Planning operate a Volunteer Income Tax Assistance site on the MU campus (times and locations). In this tip, I want to share with you some ideas I have gleaned from my interactions with clients over the years. Some of these may run against conventional wisdom, but before you call me crazy, consider what I am proposing. If you still think I am crazy, let us know by sending an email or commenting on our blog.

 

Never rely on your refund to save you

The vast majority of returns process correctly. However, that means that a sliver of returns do not process correctly. Over the years, client’s refunds have been delayed for several reasons. The IRS may decide to look closer at a return, the return may have been prepared incorrectly, or other unique problems may arise. I remember one taxpayer who came in and was counting on the refund to make a payment on a vehicle loan. The money didn’t come through in time, and he lost his vehicle.

 

There are avenues to explore if your refund is taking longer than expected. The Taxpayer Advocate is your voice at the IRS, and this agency within the IRS can sometimes accelerate or investigate refunds that have become ‘stuck’. However, the Advocate has tightened what cases it will accept, so you shouldn’t automatically expect the Advocate to step in and help you either.

 

Receiving a refund by direct deposit or check may be inferior to the third choice

Checks can be stolen from mailboxes. Direct deposit routing and account numbers can be entered incorrectly. Both of these problems can eventually be fixed, but the process can take several weeks. The third option is to use your refund to pay next year’s taxes. I first really considered this option when I looked at the tax returns for the leaders of our country:

 

President Obama’s 2011 tax return: http://goo.gl/zx9BQ

 

President Obama’s 2008 tax return: http://goo.gl/65ymQ

 

President Bush’s 2005 tax return: http://goo.gl/TvJo7

 

There is an option on the 1040 page 2 for your refund to be applied to next year’s tax bill as an estimated payment. You are letting the government keep your money (which is not optimal), but you can offset this by changing your withholding so that you have less taken from your paycheck.

 

W4s can be confusing, so you might try an online calculator to help you plan:

IRS calculator: http://www.irs.gov/Individuals/IRS-Withholding-Calculator

ADP calculator: http://goo.gl/JFHGG 

 

Or get no refund at all

Vice President Biden’s return demonstrates this point:

Vice President Biden’s 2011 tax return: http://goo.gl/jVp5q

With an adjusted gross income of $379,035, he paid taxes of $237 with the filing of his tax return. The rest of his tax bill was paid through withholding. Good tax software (including those at the free tax assistance sites) can often calculate what your tax picture looks like next year. Owing a small amount lets you keep your money all year instead of letting the government hold onto it interest free.

 

Bring four years of returns with you when you prepare your taxes

You don’t have to bring everything, but bring at least the tax forms you filed. Several items on your current tax return will reference your past returns.

Examples:

The Non Business Energy Credit includes lookbacks to prior tax years. The credit’s lifetime limitation for 2012 is $500. If you claimed over $500 in those prior years, then you get no credit this year.

The American Opportunity Credit for higher education can only be claimed in four tax years, and the IRS has revised form 8863 to ask taxpayers explicitly if they have claimed the credit in four prior years.

First time homeowners that claimed the First Time Homebuyer’s credit  in 2008 and 2009 (but not 2010!) must repay the credit over 15 years. The max amount of the credit was $7,500; over 15 years, that ends up being $500 a year.

If you sold capital assets in a prior year at a loss, but you were not able to use the entire loss to offset income, then you may be able to carry the loss forward to decrease income in future years.

 

Never destroy your tax returns

Tax returns tell stories. We often don’t consider them as family scrapbooks, but they actually are. They hold clues to who we worked for, when we were married, the birth of children, buying or selling a home, the organizations we donated or belonged to, and other small details.

I picture myself sitting with my grandchildren on a rainy day going through old tax returns and telling stories: here is when your grandmother and I were married; this is when we bought our first house and paid the interest; here is when we made some energy improvements; here is when we sold the house and moved; we made our first deductible contribution to the symphony society; here is when we first claimed your parents; etc…

 

In addition, old tax documents can help correct errors that could crop up in the future. For example, if your Social Security and Medicare wages are reported incorrectly in one year or several, it would be useful to have the documents to correct the error instead of scrambling to find replacements. The IRS can also audit you within six years of the due date of that year’s tax return.

 

Bonus tip: When you call the IRS at their main hotline, 1-800-829-1040, be patient and do not press any buttons on your phone

The automated phone tree at the IRS relies on touch tone phones. Almost all phones are touch tone, but some individuals still have their rotary phones. To allow people with rotary phones to talk to someone at the IRS, the IRS has left a secret way to get in touch with the operator who can connect your call. If you call the main number, 1-800-829-1040, and do not press any buttons, then the IRS assumes that you are calling from a rotary phone and will connect you to the operator. You will have to listen to many lists of options, but it is still easier than navigating the tree to speak to a human.

 

YIPPEE!! We're Making Money!!

The past few weeks have been wonderful for those who are invested in the stock market.  Heck, just the other day I had a meeting with some business partners and one of them went to great lengths to tell me about his “never-lose” options trading strategy.  Last weekend, moreover, I was talking to an artist friend who told me she was about to “get into the market”, so she can accumulate enough money to retire.  Both conversations made me cringe with fear, as the old market psychology of everyone wanting to get on the band wagon, once the parade has started, is unfolding again right in front of my eyes.

 

I’m not saying the market is about to collapse.  To the contrary, my personal belief is that there is still room for this market to go up.  Clearly, a lot of fear remains in the market.  This is especially true, when one considers Europe, our recalcitrant Congress, and the headwinds provided by unemployment and sequestration.  Fear should be holding prices down and, if these issues move toward resolution, I expect investor confidence to be buoyed.  Yet, this tip is not about what you should do now.  It is about what you should always do. 

 

If you are not in the market, should you take all of your money and invest?  The answer is “NO”.  I would recommend that you dollar cost average your way back into the market.  Perhaps being patient enough to wait to purchase your fixed dollar investments on the days the indices will inevitably be worth less.  Dollar cost averaging, while using index investing, could be the answer for you to begin to step back into the market with a minimum of investment risks.  (Check out: http://pfp.missouri.edu/financial/tipoftheweek/efficientindexing.pdf ) 

 

What if you’re already invested  in the market?  First, I say, “Good for you!”  You have demonstrated an understanding of the inevitable ups and downs of market investing and have remained confident in your plan.  Secondly, I ask, “When was the last time you rebalanced your portfolio?”  A well constructed portfolio contains stocks and bonds, of both large companies and small companies; real estate; cash; and et cetera allocated in such a way that you take more risks when you are younger and less risks when you are older.  Yet once we set our portfolio allocation, we need to occasionally revisit it and rebalance our portfolio to assure it stays within our plan.

 

I recently read an article in the T. Rowe Price Investor magazine (December 2012 issue) about rebalancing and what it can mean to you.  The rest of this piece is drawn from this article.  Another good article is from our Security Exchange Commission: http://www.sec.gov/investor/pubs/assetallocation.htm .  Let me turn to the problem…

 

Let us assume you had a portfolio of 60% stocks, 30% bonds, and 10% cash at the beginning of 2008.  Let this be your target allocation.  By the end of 2008, your portfolio would have dramatically changed to 46% stocks, 41% bonds and 13% cash; as stocks lost 37% of their value over 2008, prior to the stock market recovery beginning in 2009.  By 2010, your portfolio would have been 53% stocks, 37% bonds, and 10% cash.  This is closer to your goal, but it is still not what you wanted to own.  You need to sell investments that have increased in value and buy those who have decreased in value, in order to regain your preferred allocation.  Why?  The same article provides an answer.

 

If you compare “no rebalancing” to “monthly rebalancing” to “annual rebalancing over both 10 and 20 year periods, the results are quite pleasing.  Over 10 years, while annually rebalancing to your target allocation, would have resulted in a terminal value for a $100,000 original account of $151,179.  This is compared to $148,019 for monthly rebalancing and $144,574 for no rebalancing.   While this amount is appealing, the spread in the results begins to widen, over the next ten years.   After 20 years, the annual rebalanced portfolio has a $418,422 in the account, monthly rebalancing would have $405,271, and the no rebalancing option only $394,322.  Certainly, a difference in final values of $24,100 was worth the time it took to do the annual act of rebalancing.

 

How do you implement this plan?  If you are adding money to the account, calculate how much more you need to deposit in the “low balance” investments to bring them up to the level you have decided to own.  If you are not adding money, you will need to sell those investments that have become over weighted and buy those who are underweighted.   The good news is that you will be selling investments at a “high” and buying more at a “low” and you don’t have to think about it.  You just have to follow your plan.  If this is too much work for you, pay someone to do it for you.  Many mutual fund companies, asset management accounts, as well as investment advisors, do rebalancing for their clients.

 

As for what type of investments you should have in your portfolio, there are many answers and the absolute truth is that no one size fits all.  What is correct for you may not be what “experts” think, on average, is right for someone of your characteristics.  For an example of a tool to help with general allocation questions, the following: http://www.ipers.org/calcs/AssetAllocator.html was referenced in the SEC document we linked to earlier.

Clearly, you cannot control the market but you can control yourself.  The daily ups and downs will help you, as you implement a rebalancing strategy, for you will be forced to sell winners (sell high) and to buy more of some assets who have decreased in price (buy low).  While nothing is guaranteed, a solid plan with minimal management, is a monumental first-step toward financial success.   

Winter Storms

With the recent snowstorms that have been sweeping across the United States it is wise for each of us to think about our own preparation for a major storm. The following suggestions are some things you can do to prepare for a storm and how to stay safe during and after a storm.

Be Prepared for a Storm:

Before Mother Nature strikes, be prepared for a major storm. Everyone should have some basic supplies on hand to survive for at least three days in the event of an extended power outage. Following are suggested items to keep on hand and easily accessible, although everyone should consider the unique needs of their own family in order to create an emergency kit that will provide for your needs.

• Water: at least one gallon per person, per day for drinking and sanitation. If you have pets, have extra available.
• Food: at least a three-day supply of non-perishable food, focusing on items that can be eaten without being cooked. Don’t forget a hand-operated can opener.
• Flashlights and a supply of fresh batteries.
• A corded telephone. Cordless phones will not work when your power is out.
• A battery-powered radio and/or television. Midwest Energy Cooperative works with regional news media to provide regular updates about major power outages.
• A battery-powered or wind-up clock.
• A first-aid kit and hand sanitizer. Be sure to fill prescriptions and have any needed medical supplies on hand.
• Extra blankets.
• Candles and matches.
• Moist towelettes, garbage bags and plastic ties for personal sanitation.
• Wrench or pliers to turn off utilities.
• Rock salt or other product to melt ice on walkways.
• Sand to improve traction.
• Snow shovels and other snow removal equipment.
• Sufficient heating fuel. You may become isolated in your home and regular fuel sources may be cut off. Store a good supply of dry, seasoned wood for your fireplace or wood-burning stove.
• Adequate clothing to keep you warm.

Safety Tips During and After a Storm:

• Pay attention to Winter Storm Watches and Warnings, Winter Weather Advisories and Travel Restrictions. See additional resources below for definitions of the various warnings.
• Stay indoors during the storm.
• Walk carefully on snowy or icy walkways.
• Avoid overexertion when shoveling snow.
• Keep dry. Change wet clothing frequently to prevent a loss of body heat.
• Watch for signs of frostbite. These include loss of feeling and white or pale appearance in fingers, toes, ear lobes and the tip of the nose. If symptoms are detected, get medical help immediately.
• Watch for signs of hypothermia. These include uncontrollable shivering, memory loss, disorientation, incoherence, slurred speech, drowsiness and apparent exhaustion. If symptoms of hypothermia are detected get the victim to a warm location, remove wet clothing, warm the center of the body and give warm, non-alcoholic beverages if the victim is conscious. Get medical help as soon as possible.
• Drive only if it is absolutely necessary. If you must drive, travel in the day, don’t travel alone and keep others informed of your schedule.
• To prevent water pipes from freezing, keep faucets turned on slightly so that water drips from the tap. Know how to shut off water valves in case a pipe bursts.
• If your pipes freeze, remove any insulation of layers of newspapers and wrap pipes in rags. Completely open all faucets and pour hot water over the pipes, starting where they were most exposed to the cold.
• Conserve fuel, if necessary, by keeping your residence cooler than normal.
• If you will be going away during cold weather, leave the heat on in your home set to a temperature no lower than 55°F.
• Stay away from downed power lines. A power line does not need to be sparking or arcing to be energized. Lines that appear to be “dead” can become energized as crews work to restore power. Assume all low and downed lines are energized and dangerous.
• Never drive over a downed line as snagging a line could pull down a pole or other equipment and cause other hazards.
• Be careful approaching intersections where traffic lights may be out.

What to Do If the Power is Out:

• If you plan to use a generator, know how to operate it safely.
• Turn off all appliances, including your furnace, air conditioner, water heater and water pump so you avoid a circuit overload when power is restored. Leave on one lamp to know when power has been restored.
• Keep freezer and refrigerator doors closed. Food will stay frozen for 36 to 48 hours in a fully loaded freezer if you keep the door closed. A half-full freezer will generally keep food frozen for 24 hours. If it looks like the power outage will be prolonged, prepare a cooler with ice for your freezer items.
• Keep candles away from furniture, curtains or any other flammable material. Never leave children alone in a room with a burning candle or open flame.
• Never use gas stoves, charcoal or briquette grills or camp stoves to cook or heat within your home.
• Make sure cell phones and laptop computers are charged ahead of time. Consider using them only to update family and friends on conditions, and to check the weather or road conditions.
• If you can’t stay warm go to a designated public shelter. Text SHELTER + your ZIP code to 43362 (4FEMA) to find the nearest shelter in your area (example: shelter 65203).

Additional Resources:

• Ready.gov Winter Weather: http://www.ready.gov/winter-weather
• CDC Extreme Cold Brochure: http://emergency.cdc.gov/disasters/winter/pdf/cold_guide.pdf
• Weather.gov (http://www.weather.gov/)
• Confused by winter weather watches, warnings, etc.? Read definitions here: http://www.weather.com/encyclopedia/winter/index.html

 

Information for this article was compiled from Midwest Energy Cooperative (http://www.teammidwest.com/your-home/storm-outage-information/) and Ready.gov (http://www.ready.gov/winter-weather).

Ryan H. Law, M.S., CFP®, AFC®

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

College Savings Tips

While many of our readers are students, tips on how to save/pay for college are the keys to one's financial success.  I have been known to say that the most important asset in everyone's portfolio is one's self, for it is one's self who works to earn the income it takes to have a fruitful financial plan.  It is well documented that education is highly correlated with earnings and, thus, understanding how to save for the investments we make in ourselves, or our loved ones, is essential to total portfolio management.  Besides, for our younger readers, it is important to consider the costs of a child, before you decide you want to have one.   

Saving for college is overwhelming for many, the realization that one's children or loved ones cannot succeed in college due to financial constraints can be quite depressing.  Yes, the loved one can and, perhaps, should work to help pay for college.  When average costs for tuition and fees, room, board, books, supplies, personal expenses, and transportation are included, it is estimated by the Scholarship Workshop to annually cost $27,210, at a public, in-state university, and $58,640, at a private university, for academic year 2013-14.  This high price tag makes working to cover the entire cost of a higher education difficult.  As a result, many choose the expensive alternative of student loans.  Loans can help and much has been written about their use and misuse in the education marketplace, however, that is not the focus of a tip on college savings.   So, let's build some education capital!

The most important thing you can do for your child, beginning prior to conception, is to create a healthy environment in which to rear the child.  Good nutrition and exercise is important for the mother, as it will be for her progeny.  Importantly, work with the child to develop a love of learning.  Read to the child, prior to their entering school, in an effort to put them at or above their grade-level.  Academic success is the easiest way to receive financial help for university attendance.

If you intend to help the child with their college expenses, begin shortly after they are born, in order to have the benefit of time and compounding on your savings.  Start small with what you can manage or do a finely-tuned calculation utilizing an expected future cost of four years of college and what it would take on a periodic deposit to help reach the goal, at an assumed rate of return and time period.  Do NOT sacrifice your retirement savings for your child's college expenses.  You need to be on track for saving for your retirement.  Your child is not your retirement plan and they can always borrow the money they need, if they have no other option. 

There are several ways to save for college. 

·         

*       * State-sponsored 529 plans are very popular as they offer federal and, sometimes, state tax benefits.  These include tax-free withdrawals for qualified educational expenditures.  Missouri's 529 plan is called the MOST plan and more about it can be found here: https://missourimost.s.upromise.com/ .  Besides being tax-free, other tax advantages include:

• Investment earnings grow tax-deferred.
• While your contributions are not tax deductible on your federal taxes, they are likely deductible at the state level.
• If you make non-qualified withdrawals, both taxes and penalties will be charged.
• Should a child not use their entire 529 account, a tax-free transfer of the account can be made to a sibling, cousin or another family member. If this person uses the money for qualified education expenses, the withdrawals are tax free.

·        * Gift money to the child.  Money gifted to the child is counted more heavily against their eligibility for financial aid, if one might qualify for financial aid.  These periodic gifts, under the control of the parent, are a great way to save and to visibly state that you believe in your child's future and are willing to put your money where your mouth is – toward their future.

·     

           * Life insurance may have a cash value which can accumulate through premium payments and can be borrowed from the policy later, in order to be used for college expenses.  These withdrawals do not need to be repaid, as they will simply reduce the death benefits to your beneficiaries, should the inevitable occur sooner than planned.  Before you choose this option, make sure you need the life insurance and, if you do, that you have enough life insurance.  It is often the case that savings-type life insurance policies are too costly for many young families to purchase and to still provide adequate life insurance coverage.  Buying term life insurance and saving the difference in premiums is still a very effective plan.

·        

           * Accumulate equity in your home and then refinance, through a home-equity loan or a new first mortgage, to provide liquidity to meet college obligations.  Accumulating more debt, as one gets older, is not the best way for parents to get ready for retirement.  Moreover, this debt is the parents' debt, not the debt of the child.  The investment, however, is being made in the child and the child will be the one who primarily benefits from the investment. I'd let my child borrow the money.  If I want to help, I'll send her a check.

Regardless of your plan, make sure your asset mix is appropriate.  Take greater risks when the child is young by utilizing more equity investments and, perhaps, riskier equity investments.  As the child approaches college, reduce the risks by reallocating to relatively more cash and bonds.  If you have trouble managing your investments, invest in one or more age-based college savings plans.  Most 529 plans have this option, as well as many mutual fund companies have target date funds.  Whatever your chosen investment vehicle, keep the costs of your investments low.  Make sure you remain well-diversified across asset categories, as well as within categories and don't panic with market fluctuations.  Fluctuations are a fact of life and, unfortunately, the biggest losers are those who take their money out, when they can't stand the declining market anymore, and those who put it in, after the market has already appreciated.  Buying high and selling low is not the way to invest.  

One last comment.  If you have a child and want to save money for his education, please begin today.  It is easier to stick to a plan than it is to start a plan.  So, get started.

No More Paper Checks for Federal Benefits

By Brenda Procter, Extension Associate Professor, Personal Financial Planning

 

If you like to hold a paper check in your hand, you will soon be out of luck if you receive federal benefits.  By March 1, 2013, you will be required to switch to electronic payments of benefits for:

 

·         Social Security

·         Supplemental Security Income

·         Veterans Affairs

·         Railroad Retirement Board

·         Office of Personnel Management

·         Department of Labor (Black Lung)

 

Paper checks are no longer an option for anyone after March 1.  You can either have your government check direct deposited into a bank or credit union account or ask the U.S. Treasury to deposit benefits onto a prepaid debit card if you don’t have or don’t want a bank account. 

 

Your benefit will always be deposited on your payment date. If you have the prepaid debit card, you can sign up to get free text, phone or email alerts when your money goes into your card account.

 

Direct Deposit

To sign up for Direct Deposit, you can:

 

·         Enroll online

·         Talk to your bank or credit union

·         Call (800) 333-1795 (Mon-Fri, 8am-8pm ET)

·         Contact the local office of the agency providing your federal benefits (e.g., Social Security or Veterans Affairs office)

·         Enroll by mail

 

Prepaid Debit Card

To request a Prepaid Debit Card for federal benefits, call (800)333-1795.  If you use the prepaid card, Direct Express® Debit MasterCard®, exercise caution.  It is possible to use the Direct Express card for free by buying things at stores that accept Debit MasterCard^® and getting cash back from the cashier when make the purchase.  You can check your balance at ATMs or online at no charge. But be careful, because there are some fees for optional services. Visit www.GoDirect.org or call the Go Direct Helpline at (800) 333-1795 for a list of card fees and features.  The Go Direct Helpline can answer any other questions, as well.

 

What You’ll Need to Sign Up

To have federal benefit payments paid by direct deposit to your checking or savings account, you'll need your:

 

·         Social Security number or claim number

·         12-digit federal benefit check number

·         Amount of most recent federal benefit check

·         Financial institution's routing transit number*

·         Account number* and type - checking or savings

 

 

*This information is often on personal checks.

 

If you want to get your benefit payments through the Direct Express® card, you'll need your:

·         12-digit federal benefit check number

·         Amount of most recent federal benefit check