Why can't college be cheaper?
November 30, 2009 7:04 PM   Subscribe

My 1 year old daughter has been given money... what now?

I know you're not my investor or anything, and thanks in advance for any help.

Every holiday my daughter receives money from her grandparents. She's up to $600 in cash as well as savings bonds. I'm trying to do the right thing and put her money up safely for her, I'm just clueless about the best way.

I have her money in a savings account that gains .60% APY as of now.

People in my family (namely - my mom) are telling me that I should put her money into savings bonds, it's the smarter thing to do, i need to be responsible, i need to save for college, yada yada yada...

Other people are saying I should look into college savings plans.

I've looked into it myself, but I'll confess that I get a little confused trying to compare everything... What's best for my daughter?
posted by anonymous to Work & Money (17 answers total) 4 users marked this as a favorite
We've got 529 accounts set up for our girls. Of course they are currently worth about as much as the kids' piggy banks are, but they are a decade or so away from needing the funds so it should be okay, I guess.

If you expect frequent funds from relatives and to be saving yourself as well on her behalf, you might as well put it somewhere with some yield. That kind of leaves out a traditional savings account, and savings bonds are not exactly gold mines (but still oh so adorably popular with the grandmas of the world).
posted by padraigin at 7:10 PM on November 30, 2009

Talk to a financial planner, and the usual advice is to get one that works for a flat fee or hourly rather than commission. The cost of doing so is generally tiny compared to the present value of the savings you can amass for your daughter's benefit, if you get good advice early.
posted by Inspector.Gadget at 7:14 PM on November 30, 2009

My parents starting putting money such as that into CDs for me from an early age and I still keep some of it in a CD because you can choose the amount of time you'd like to keep the money in them and they give out higher yield than a normal savings account.
posted by kthxbi at 7:18 PM on November 30, 2009

We have a 529 for our 1-year old, as another data point. We add to it monthly and also put any gift money given to our kiddo there as well.
posted by rabidsegue at 7:19 PM on November 30, 2009

I've opened a separate savings account for both of my kids (5 & 1) just to have somewhere to deposit cash gifts from grandparents and other relatives.

All of the money accumulated in their savings accounts is then put into their separate 529 accounts.
posted by cjets at 7:19 PM on November 30, 2009

Put the money in a CD. Don't invest it in the stock market.

Pick a 5 year or longer CD - the longer the time period, the higher the interest rate. You can usually set it up so when the CD matures, it will automatically be reinvested. There is often a fee for withdrawing the money before the CD matures, so if you're worried you might need the money before 5 years, you can invest in multiple CDs, and stagger their maturity date, so you won't have to wait very long to get part of the money, should the need arise.

US treasury bonds would also be a good low risk place to invest it.
posted by Salvor Hardin at 7:54 PM on November 30, 2009

529 plans can end up being a really bad deal if the kids don't want to go to college, or want to go to a foreign college that isn't U of Toronto. Or if the stock market tanks right before they go to college. Or if the financial aid laws change. Just saying. The tuition-lock in at state schools can be really great if you live in a state with decent schools and don't plan to move, of course.

You should probably hire a financial planner. I know personally lots of people who were really underserved by these plans. Here's hoping in the future they work out better for the kiddos.
posted by shownomercy at 8:07 PM on November 30, 2009

529 plans can end up being a really bad deal if the kids don't want to go to college, or want to go to a foreign college that isn't U of Toronto.

But 529 plans are transferrable to any other child and still transfer the tax exempt status. That's worth something.
posted by Pants! at 8:39 PM on November 30, 2009

Index funds for the win.
posted by Cool Papa Bell at 8:41 PM on November 30, 2009 [1 favorite]

Seconding talking to a qualified financial planner, if you don't go that route go with an index fund. US Bonds are pretty much bullet proof, but many index funds will be partially invested in them anyway.

Financial planners aren't evil, I've had good experience with edward jones personally, but shop around, talk to several of them and figure out who you feel most comfortable with.
posted by iamabot at 9:05 PM on November 30, 2009

The other one to consider is UGMA. You might also consider a Roth IRA in your name with her as the primary beneficiary. Also, you can avoid taxes on Roth IRA distribution earnings if the money is spent on qualified higher education expenses.
posted by mattbucher at 9:15 PM on November 30, 2009

In the meantime while you are sorting all of this out, for gods sake get her money into a savings account with a better rate. You can just check on Bankrate to easily find a savings/MMA account with no minimum balance and no fees that is above 1.3%. Will take you all of an hour to more than double your interest rate.
posted by Elminster24 at 10:34 PM on November 30, 2009

Short: No load index funds are the way to go. Check out Vanguard, Fidelity, TIAA CREFF, American Century, T. Rowe Price, or Dodge & Cox

Longer: Savings accounts are for people who need to access their money on a regular basis, at the expense of higher interest. Bonds and CD's are for people getting close to retirement who need stability at the expense of higher interest. Individual stocks are for fools and idealists. They're unlikely to beat the stock market average by any significant margin, and you'll end up spending a lot of time (or paying someone to spend a lot of time) making sure that you're invested in the right place(s). An index fund is the way to go. By the time she's eighteen, a 10% return on just that $600 will grow to 3K ---- an 8% return on will grow to only 2200. Cut out 1-3% of expenses to a middleman every year by going with a no load index fund. Vanguard, Fidelity, TIAA CREFF, American Century, T. Rowe Price, and Dodge & Cox all offer well set up funds

Good luck!
posted by andythebean at 1:52 AM on December 1, 2009

529 plans can end up being a really bad deal if the kids don't want to go to college, or want to go to a foreign college that isn't U of Toronto.

But 529 plans are transferable to any other child and still transfer the tax exempt status. That's worth something.

That's all good if you have another child. If you don't, its not much of a benefit.

My financial planner seems to think that 529s are only a good idea if you have large sums of money (thousands and thousands of dollars) to put aside for college and need the tax benefit of the 529. Otherwise, you're limiting the way your child can spend the money. But its basically pouring money into the stock market (not my idea of "low risk") and it also means that should you need that money to cover some other expense for the child (say, medical costs or your child becomes a musical prodigy of something) you're sort of screwed.
posted by anastasiav at 6:05 AM on December 1, 2009

Nthing index funds--particularly Vanguard--and CDs.

Look, we really aren't talking about all that much money. $600 a year, with 6% interest (yeah, andythebean gives better numbers, but I'm not so optimistic), will be about $17,000 when she turns 18. This isn't chump change, but it isn't going to go all that far towards a college education either. Not by itself anyways. And the amount of money she's going to ear in interest is pretty negligable, no more than a few hundred bucks a year. As such, savings plans like 529s aren't really needed; even as a dependent, she's allowed to earn more than that before she has to start paying taxes.

Using a college savings plan puts some restrictions on your ability to spend the money, and because the tax savings will be minimal at best, I'd recommend going with a more traditional investment vehicle.
posted by valkyryn at 8:31 AM on December 1, 2009

You are investing for a Very Long time horizon here, so let equities be your friend. Savings accounts and CDs, etc. are better suited for retirees not babies. This isn't mission critical money.

I would recommend investing most if not all of it in "SPY" which is a very popular ETF that mimics the S&P 500 index. It's really low expense at 0.10% and takes the stress out of having to pick a mutual fund.
posted by jameslavelle3 at 4:23 PM on December 1, 2009

Really it's not going to be possible to give you the right answer without knowing more about your current and future finances (for that go to a financial planner), but I can bring up a couple of considerations that I don't see above.

Re 529 college savings plans: how worthwhile these are depends a lot on your tax bracket. I don't have the exact numbers, but I did a research paper on this a while back. One interesting surprise a 529 plan gives more tax savings to a rich family who doesn't use the money for education (i.e. taking the penalty) than a lower income family that uses the funds for education. The higher your tax rate is the more worthwhile it is to be using a tax deferred account like a 529 (I believe this would only apply to the liquid assets you have and not the savings bonds, but I am not 100% sure.) You should read into the details, but remember that you can always take money out of the 529 for other uses, it just will cost you some of the benefits that you would otherwise have gotten.

Re asset allocation: (I am seconding what jameslavelle3 says above) separate form the issue of whether you want to put the savings in a 529 you should think about how you want to allocate the assets. Even in a 529 you could (i believe) invest in low risk low return classes like CDs. I think given the long time scale you are much better off investing in something with a bit more risk and much higher returns such as a stock based mutual fund or index. On average the returns from stocks are a huge amount larger than the anemic returns you'll be getting with CDs or savings bonds. This would be different if you were saving money for an emergency or for retirement, since in those situations the risk of losing a significant portion is (or can be) much worse than the chance that you'll end up earning a lot more money. With education savings, especially given the prevalence of need-based scholarships and aid, its worth taking a bit more risk since the downside is not as bad. (This can vary a bit depending on your likelyhood of getting financial aid and on the type of school)

In summary I would guess your best option is to invest your liquid (cash) assets in a 529 plan in a low expense no load mutual fund. (no load since you are getting frequent relatively small sums of money, so you don't want the transaction fees to eat into your potential earnings) (low expense to minimize the money that gets taken away). ETFs can be great, but since you have to pay a trade fee fr each transaction I think they won't be as good for you compared to a no load mutual fund that wont have any fees to buy and sell.
posted by vegetableagony at 4:13 PM on December 6, 2009

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