My favorite was Oreo.  In her last year, she would curl up in the bend of my elbow and lean her soft, warm, little body against my rib cage, and I would stroke her back and her head for sometimes up to an hour.  Sounds kinda sweet, doesn’t it?

The 529 Is Not the Perfect Pet

Like pet rats, the 529 plan is billed as a perfect investment.  Put in after-tax money, let it grow tax-deferred, and if you pull money out under prescribed rules, the withdrawals are tax-free.  You probably know someone who had a great experience with one.  What’s not to like?

Problem is, you don’t know until you’re knee-deep into the commitment.

Here’s what’s not great about pet rats:  The cage will take up more space that than you care to relinquish, their urine and feces still smells, cleaning the cage takes up a lot of time, the kids likely won’t help like they promised, and vet visits are pricey if you can even find a vet who can treat a sick rat.

Here’s what’s not great about 529 plans:  Just because you funded one doesn’t mean your kid goes to college, you can typically only change investment options once a year, it will likely not cover all of the college costs, and spending the money on the “wrong” things costs you penalties and possibly higher taxes.

For you, the 529 cage might be the wrong size, smelly, and your kids may be no help at all.

Alternatives to the 529

I think what people like about the 529 plan is that it is money specifically set-aside for college.  There’s something mentally appealing about the segregation, and it’s harder to raid the funds in a weak moment when it has little Lizzie’s name on it.

But there are lots of other ways to accumulate assets that can be psychologically earmarked as a college fund:

• A stock/bonds account that can be later transferred to a child to pay for college or pay off student loans.
• Real estate is hugely popular, especially if purchased before a child is born or is very young. Use the rental income or sale proceeds to pay for college.
• Being self-employed and employing your child during the summer has wonderful tax benefits for college funding.
• Some retirement plans allow for withdrawals for college expenses without penalty. You can fund these for your kid if they work while in K-12 and have earned income.

This list goes on.

The 529 is not the be-all-end-all of funding a college education.  If you are going to use one, be judicious about how much you put into it.  While the rules around 529 money have changed over the years (you can even fund a Roth with them now under the right circumstances), the last thing you want is money earmarked for college that will never be used for such.

Focus on the Outcome You Really Want:  A Happy Kid

We loved our rats, but in truth, what we all really wanted was a dog.  At the time, I was unwilling to take on the responsibility or the commitment.

What you probably really want is for your kid to grow up to be successful, confident, resilient, financially self-sufficient, and happy.  College may or may not be part of that path.

I suspect that what you really want for yourself is to grow up to be funded for retirement, confident, financially self-sufficient, and happy.  Flexibility and options are key, and the 529 doesn’t have much flexibility or options.  Choose it wisely.

If you want to talk more about college funding, please reach out.

Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

To review, you should start giving your children an allowance as soon as they can count money, usually at four or five years old. Your sole purpose in providing an allowance is to give your children an opportunity to build money skills. Allowance should not be tied to chores. They get an allowance because they’re part of the household; they do chores because they’re part of the household. When it comes to allowance, you get to make the rules and enforce them. You may have values about money that you want your kids to learn. I’ll share what has worked in my house for years.

My son and daughter get an allowance every week, like a paycheck. They receive a dollar for every year of their age — at age 7 they get $7, at age 9 they get $9, and so on. This may seem like a lot of money. Keep reading.

From that amount, my kids are required to give 10%  to charity and put 20% in long-term savings. They get to spend the remaining 70% pretty much as they wish. They have individual places to put this money. For years, we used a divided piggy bank. Coffee cans work just as well. Now we use storage containers. Every week they get an envelope with all their money with the denominations available to make the allocations. You’ll need to help them when they’re young to count and sort the money — it’s a great coin identification and math exercise.

An important note: Make sure they physically handle the money, especially when they’re young, and make them count money when they pay you back for something you bought for them at the store. You want them to have a real life experience of receiving money and watching it leave their hands. We handle actual money so rarely in our society these days. For the longest time, my kids thought that if you needed cash you just went to the ATM and got some. They had no idea that you had to put money in to get money out. So make this reality of having money come into their possession and leave it a part or your kids’ early lives, so they can transfer that experience to the non-cash-oriented world when they’re older.

With all that cash burning a hole in their pockets, sooner or later your children will want to go shopping. Take them, allowing for a significant amount of time to shop, especially early on. You want to make sure they have time to walk all the aisles, pick a variety of things, put them back, choose something else, etc. But leave their money at home. Pay for their purchase yourself, then have them pay you back when you get home. This avoids a lost money crisis and allows for experiences with sales tax, how credit cards work, paying someone back, making change, etc.

Here’s the real trick:  Do NOT judge what they buy. You can set rules and constraints, but after that, hands off. For instance, I didn’t allow my kids to buy toy guns or candy. Sometimes I will put the kibosh on yet another oversized stuffed animal. After that, they can pretty much get whatever they want. This will take much discipline on your part, but I promise it will be worth it.

This plan has incredible beauty that I never saw coming. More on that next time. In the meantime, get your envelopes ready!

The financial planner in this story goes on to explain to his fellow passenger that it’s not the money you need to pass down, but the skills and values that have helped you build wealth. Money can disappear overnight, especially in the hands of those who have no skills to manage it. The old adage applies: Give people a fish and they will eat for a day. Teach them to fish, and they’re fed for life.

I’m a huge advocate of giving children an allowance for this very reason. As a general parenting philosophy, I believe it’s important to let kids have age-appropriate opportunities to screw up when the stakes are low. Direct experience and its consequences are the best teachers. I’d rather my daughter learn that it’s not such a great idea to put the heaviest block on the top of the tower when she’s three years old than wait until she’s 15, when I need her to stack the dishes in the cupboard. It’s the same with money: You want your kids to learn early.

Here’s another belief of mine: We don’t know what’s “sticking” in our children’s brains. Think about it. Memory is such a subjective and selective thing. Almost everyone has a lesson they learned about money that stuck with them. Most of us heard a parent or influential adult say something about money that influenced our beliefs about it, like “money doesn’t grow on trees.” The best thing you can do for your kid(s) is to let them have lots of opportunities to form their own beliefs about money — for example, not spending more than you have, avoiding deficit spending, delaying gratification — so they can form good money habits early. These are crucial life skills, and they don’t get built through our lectures.

I don’t claim to be an expert in this area. Most of my training has come from financial counselor Kathryn Amenta and from my son and daughter, who have been receiving an allowance since the oldest turned five. I encourage all my clients to give their kids an allowance, even if they are much older than that. Better to learn hard money lessons as late as college than when they get their first real paycheck.

How to make it work? Stay tuned.

Where you spend your money does reflect your values

When my clients were cutting back, here’s what some of them said they made sure to keep:

1. The housekeeper.  For most of them, this was about marital bliss.  Even if times are tough, no one wants to fight about who will clean the toilet this week.  Some have cut back on frequency, but many have kept their usual schedule. In many cases, I have heard that the choice to keep the housekeeper was also about keeping that person employed and making money.  Once they’re around a while, it’s hard to let go of household help where you’ve developed a relationship.
    
2. Holding onto staff. Along the same lines, I’ve seen many business owners hold onto staff for as long as possible to allow those people to keep their jobs, feed their families, hold onto their benefits.  I’ve also seen business owners grit their teeth over this decision, but for now, they’re doing what they feel they want to do.
    
3. Charitable giving. For many of my clients, they’ve continued to give when they could have cut back.  One of my clients said, “Hey, I’ve never been homeless. Times might be tough, but they’re not that tough. I can afford to write a $100 check to help someone out. I’ll take it out of my end somewhere else.”
    
4. Kids activities.  Some activities were cut back but others were kept. I’ve heard parents talk about what they felt were their children’s best activities, the ones that gave them the most joy or the most fun or taught them the most. I’ve heard about parents having frank conversations with their children about having to cut back and asking them to choose.  Those conversations have brought families closer together in many cases.

What have you kept? What have you eliminated? What values are you demonstrating by where you spend your money?  There’s lots of learning going on in this downturn. What’s yours?