Finance: College savings and grandparents

If you are saving for college for your children, I advocate putting the funds in someone else's name as much as possible, to avoid these assets counting against your child's financial aid. As currently implemented, the system penalizes those who are responsible and save their money, while rewarding those who spend money as soon as it comes in and don't think about the future. This is not right.

I also think that no other business would be able to get away with the level of price discrimination and collusion that universities do. For example, if you went in to buy a car, and before the salesman would quote you a price, he asked for your last few tax returns and a list of all your assets so he could decide what was "fair," you would immediately run the other way. But you really do need to buy a car, so you go to another dealership on the opposite side of town. But this dealer has an agreement with the first dealership and wants the same information before he can quote you a price.

As a recent college graduate, this is how I view the current financial aid system. I don't deny that we all have some responsibility to help increase the level of education in this country (since we all benefit from a more educated populace through increased productivity and quality of life) but the current system is far out of balance.

Some parents have started asking their parents to open 529 accounts for their children, since grandparents' assets are not counted against the student's financial aid. However, this can create another problem, as the grandparents' 529 will be counted against their Medicare eligibility. And if they are forced to take distributions from it for healthcare expenses, those withdrawals will be taxed, not tax-free if they had been used for qualified educational expenses. Here's an article on the subject.

Finance: Taxes and savings bonds

Someone wisely pointed out that I should consider paying my savings bonds' interest each year, rather than deferring it and paying it later on. If I hold the bonds to maturity in 30 years when they stop earning interest, I could be forced to pay tax on their earnings during my highest-income years. Thus, it would be better for me to pay the taxes now, while I am in a lower marginal tax bracket. However, I do not think that the tax structure can be predicted with any confidence beyond the next few years, given the propensity of Congress and the President to meddle in such affairs. So for the time being, I am going to continue to create a deferred tax liability on my savings bonds...although really, this should be reflected on my balance sheet, I have omitted it for the time being.

Savings Bonds: tax considerations

One idea was to use the savings bonds down the road to pay for the education expenses of potential children. Generally, savings bonds interest is tax-free if used for educational expenses. However, the IRS doesn't allow this because I was not yet 24 years old when I purchased the bonds. This seems like a fairly arbitrary and capricious rule, but I don't have much choice. More details at:

IRS Publication 970: on savings bonds and education

Another potential pitfall is that my income might be high enough that the interest exclusion would be phased out, but this is impossible to predict so far in the future.

Finance: 9 tips for the rest of your life

From Scott Adams' "Dilbert and the Way of the Weasel." These simple tips encompass 90% of the advice I've seen in the myriad personal finance books I've read. Certainly, you can make things a lot more complicated than this...but for someone who is clueless, this is a great starting point to learn more.

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.

From this article at the formerly great Motley Fool...how far they've fallen!

Finance: Auto insurance

Tips for saving on car insurance:
Schedule policy renewals intelligently – 11%

When I first signed up for my own car insurance policy last year, I timed it so that the policy would renew shortly after my birthday. As a young single male driver, my rates are sky high, although I've done my best to keep them under control by avoiding speeding tickets. Turning a year older resulted in an 11% discount from my last policy renewal with the same coverage. If my policy had renewed just a few weeks earlier, I would've lost out on the discount for the entire 6-month term (even bigger if you had a year long policy).

Even if you're not in the high-risk insurance pool based on your age/gender/marital status, you can use this same tactic to get a past accident/ticket to drop off your record sooner. Depending on your situation, it could save you +$100/year.

Paying the full amount due – 10%

I was able to save another 10% by paying the entire balance up front, rather than going month-to-month. This is a far higher risk-free return than I could achieve elsewhere with idle cash.

Charging it – 2%

Since my insurer accepts credit card payments with no added surcharge, I receive 2% cash back from my credit card company by putting on the plastic.