Knowing Your Financial Bad Habits

One of the most common questions I receive is how to most efficiently save for education expenses. And I understand why – it’s a daunting prospect! The cost of college continues to rise, and student loan debt can plague you for decades following graduation. There is also a growing realization that college is not for everybody. How do you prepare for an expense that might not actually occur? However, it doesn’t have to be such an intimidating process. In fact, there are several effective strategies you can deploy to efficiently – and effectively – save for your child’s education expenses.

First, you need to determine how much you’ll need to save. Do you plan to cover the whole cost of school or just a portion (for instance: undergrad only, or will you cover grad school expenses for your child(ren)? Once you’ve set a number, your financial planner can assist in calculating a monthly savings rate required to work toward that goal.

The next step is deciding what type of savings account(s) to use. There are different accounts that are specifically designed to save for college, for example: 529 plans and Coverdell Education Savings Accounts. Below are some of the reasons why a 529 Plan and/or investment accounts may be a better solution.

A 529 plan allows you to contribute to an account on behalf of a named beneficiary (in this case, your child). Because the government wants to reward saving for educational expenses, contributions to 529 plans receive preferential tax treatment and are able to grow tax-deferred. You can use the money in the account to pay for qualified educational expenses, tax-free. Contributions to these accounts are also typically deductible on state tax returns. The drawback to a 529 is that the money must be used for qualified education expenses – or you will face tax penalties.

An individual/joint investment account is an account owned by yourself or jointly by you and your significant other. Money invested in this type of account does not receive preferential tax treatment; however, your money can be withdrawn for any reason without tax penalties.

Given the shifting trends in higher education, it is my belief that a combination of 529 plan contributions and individual/joint account contributions will help to save for college education. This form of education planning allows for flexibility; for instance, if your child(ren) decide(s) against traditional higher education, you won’t have to pay tax penalties on all of your education savings, as a portion of that savings is held in an individual/joint account with no restriction on how the assets are used.

While education planning is important it is only one component of a full financial plan. If you would like to talk more about education planning and its impact on your personal financial plan please contact me at zach.swaffer@trilogyfs.com

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.

We all know we should save more. We all want to save more. Yet, month after month we face the same Groundhog Day scenario: paying all of the bills only to realize that – yet again – there is simply nothing left to save. Sound familiar?

Think about it for a minute. In our Groundhog Day scenario, you are dutifully paying every creditor in your life except for the most important: yourself! It’s time to change the narrative: moving forward, think of saving money as paying yourself. You spend all month working hard. You deserve to keep some of the compensation for that hard work. You on board? Great! To keep you honest, we’re going to set up automatic contributions.

Automatic contributions to savings or investments are a crucial step in building a stable financial foundation. Establishing automatic transfers tied to your paycheck schedule ensures that you will pay yourself for all of your efforts at work and invest in your future. It codifies the “pay yourself first” mentality and aligns your monthly spending with your available discretionary income. For example: if I see extra money sitting in my account, I’m likely to splurge on a fancy meal, or buy a plane ticket to visit my sister. Then the end of the month rolls around, and there is no money left over for saving and investment. On the other hand: if I never see the money in my account, I don’t miss it!

By paying yourself first (saving as money comes in), you will see less money sitting in your account and, accordingly, you will spend less. Over time, you won’t even notice the money being set aside. Your spending habits will have auto-adjusted to your new, post-savings cash flow. (I promise!)

One of the best parts of a “pay yourself first” system is that you don’t have to feel guilty about spending the money in your checking account. Having automatically set aside your monthly savings, you’re free to spend the rest of your money as you wish! Regardless of your balance at the end of the month, you can rest easy knowing your financial foundation is secure.

As a financial advisor, I find a “pay yourself first” savings model to be far more successful than any strict budgeting system. Budgets require line item expense tracking and don’t adapt easily to unexpected expenses. Establishing automatic transfers to “pay yourself first” allows you to maintain a more flexible budgeting system – while still sleeping well at night knowing that your saving objectives have been met.

If you would like to talk about establishing an automatic savings plan or your personal situation please contact me at zach.swaffer@trilogyfs.com.