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What Drives the Cost of College

With all of our clients who have children, planning for college expenses is the one of the biggest concerns that keeps them up at night.  Retirement planning may be a bigger issue in the long term, but the children will be going to college a lot sooner than their parents will retire.

As I work on putting together plans for clients to balance their own retirement and send their kids to a good college, I find myself stepping back wondering how college became so expensive.  Since the mid 1980s, the cost of college has increased 500%! And it continues to grow faster than inflation.  Today’s students are graduating with a mountain of debt.  In fact, there is now more student loan debt than credit card debt.

Just look at this chart to see how out of control college costs have gotten over the last twenty years:

What does this chart say?  Over the last twenty years, items in blue have actually gotten cheaper.  TV’s, software, toys, cars and clothing are all cheaper than they were twenty years ago. The items in red, such as housing, food, health care, childcare and COLLEGE have gotten more expensive over the years.  As much as we complain about the escalating cost of healthcare, it’s not nearly as bad as college.

How did we arrive at this problem?  A simple answer is that money is freely available for people to borrow to pay for college.  The cost does not become a big driver in the decision making process when there are grants, scholarships, tax credits, and even loans involved that mitigate the financial bite.  This results in universities having to offer more services, bigger buildings, better facilities, etc in an effort to attract students who are not as cost conscious as before.

With the government stepping in to provide assistance (loans and tax credits), they are actually contributing to the problem and making it worse.  They are creating a gap between the perceived cost a student pays to go to college and the actual cost to attend.

This happened with real estate when the government wanted everyone to own their own home – loans and incentives fueled the market.  The good intentions of the government backfired as people were given mortgages they couldn’t actually afford, which spurred housing prices to soar… for a while at least.

A similar problem exists in health insurance.  The insured are insulated from the true cost of a service because the health insurance pays for most of the expenses incurred.

If you’re interested in reading more about this and seeing the kinds of solutions that might work, I found this article to be a fascinating read on the subject of college costs.

 

How to Retire Real, Real, Real Early

The “Retire in your 30’s concept” has been gaining some traction these last few months.  There are a lot of success stories being shared from others about how they have been able to retire early.  From time to time, I find one that is particularly interesting and want to share it.

JP Livingston is 28 years old.  She has been saving about 70% of her take home pay and investing it. Over the last 10 years or so, she has been able to amass about $2 million by socking money away and living well below her means.  No secret tricks.  No get rich quick schemes.  She was disciplined enough to save.  What makes this story unique is that she did this while living in NYC!

Check out her story here

Critiquing a Financial Plan

The following article examines five young people and their financial plan (more like their lack of planning).  They are then offered some preliminary advice about how to improve their situation.  Unfortunately, in every case I found the advice to be overly simplified.  Here’s the article

And here are some overarching strategies that apply to all the case studies:

1)      Emergency fund.  Start here first and make it a priority to build an emergency fund that can cover non-discretionary expenses for 3-6 months.

2)      Save more.  If you can’t save more now, earmark any future raise toward saving.  When asked about a rule of thumb for how much to save, I’ll often respond with “Save as much as you can”.  Young people and millennials are unlikely to have pensions and with the questionable future of Social Security, the burden to save is placed on their shoulders much more than previous generations.

3)      Automate.  Make sure any savings are set to occur automatically.  The mental anguish of writing a check every month or year to a retirement account can be surprisingly difficult.  Many times it is our own biases that create obstacles to reaching our own goal and simple processes like automating our savings can have a huge impact.

4)      Disability.  Life insurance is commonly discussed when a couple has children.  But disability insurance is rarely brought up.  What’s odd is that people are more likely to file a claim for disability insurance than life insurance.  And it doesn’t apply just to physical injuries, either.  We’ve had several clients and prospects tell us about their long term disability that affects their ability to do a desk job as a result of a bad car crash.

 

How To Save, When You Can’t Save Today

“ I want to save for retirement, but I can’t afford to do so right now.”

This is a common complaint we hear, especially with our younger clients. They are dealing with debts, saving for their children’s education, and even helping to take care of their aging parents. These younger clients want to save for retirement but just don’t know what to do.

So, what should they do?

Over the last few months I have written about this concept extensively:
Is a Creative Saving Strategy Right For Me?
The Most overlooked Saving Strategy: The Serial Payment
The Three Flaws With The Most Popular Saving Strategy

The strategy that I outline is to come up with a plan to consistently save more and more every year. Perhaps you save an extra 1% of your paycheck each year, or every year allocate a portion of your raise to retirement. This concept is also referred to as Saving For Tomorrow, Tomorrow and there is a great Ted Talk about it here.

If you’re on board with this concept, visit this New York Times calculator to see how this could work for you: One Percent More Calculator

Einstein is claimed to have said that “Compounding interest is the eighth wonder of the world”. And by combining the benefits of compounding interest and compounding savings into a retirement plan, it would make for a much, much more powerful strategy.

How To Retire in 4 Years

The story about a couple’s desire to retire in 4 year is compelling.

They have applied many of the important financial planning concepts:

1) The plan to live a very modest lifestyle in retirement – They plan to need 30,000 a year in retirement.
2) They have cut and reduced many of their expenses. They realized how freeing it is to not have a large mortgage.
3) They plan to work part time. Retirement is being redefined. Working part-time, doing a fun job, is becoming common.
4) They have a plan. While I have not checked their math, it’s appears they have thought through many of the common issues retirees face.
5) They are diversified. Between side jobs, investments, and real estate they will have multiple sources of income available for them.

Is a Creative Saving Strategy Right for Me?

Someone can reach an ambitious financial goal (such as saving for college education) despite having limited cash flow available to fund the goal.  The goal can be accomplished by using a creative saving strategy called a serial payment.

Many clients that I have worked with this year have expressed a strong desire to fund a majority of their children’s college education but currently have limited resources to commit to it today.  Instead, they have promising careers in which they expect decent raises in the future or expect their spouse to re-enter the workforce once the children are in school.  They have already tightened their belt and understand that a portion of future raises will be diverted to their future goals.  This strategy gives them a roadmap for the future.

For more details, read these other posts to learn about the process.