Since my lovely wife decided to create a blog, I decided to create a testosterone counter-balance to her estrogen party. Please note as of late this strategy has ended in utter disaster, so if this is the only post you see from me - don't bother sending a search party.
Behold, my first blog. Where did the term "Blog" come from anyway? Scrap that, from now on this shall be known as my status update.
Oh someone took that already too? Fine, we'll stick with blog... for now.
So as most everyone already knows, I'm an expecting father-to-be. While I don't really have the faintest idea what that really means yet, I know so far it has something to do with a wife who watches a lot of Bravo television and cries about the thought of telling our future kid to put their toys away (don't ask).
I know it also has something to do with money.
Lots of money.
While day care, diapers, food, etc are the most immediate (and important) concerns, I have decided to focus on a more long term and (at least in my head) more manageable expense.
College tuition!
While the thought of saving for our kid's college is kind of ironic since we haven't started paying off Angela's college debt yet, at least we have time on our side. And boy do we need it.
College tuition since 1958 has risen at an average rate of 7.7% since 1958. That means that college costs double on average every 9 years or so (or over TWICE the general inflation rate)!
If that kind of inflation continues, than that $25,000/year education now will cost approximately $100,000/year in 2029.
So what options does that leave Angela and I?
Option #1 - You're on your own.
Basically, this option hopes that our kids will have high enough paying jobs when they get out of college to afford the $400,000+ debt they would owe. In 18 years with an expected wage inflation rate of around 2.5% and a typical 4 year degree, our kids would probably start out earning in the range of $80,000/year.
So starting out life in debt 5 times their expected starting salary - does not sound like a good option if we ever want our kids to pay for mine and Angela's nursing home (or at least get them out of our house!).
So whats the other option?
Option #2 - Take Advantage of Market Returns to Help Offset Education Inflation
Note that I said "help offset", as earning a 7.7% return after inflation over an 18 year period in the market could be a tough goal, but that's what we have to do.
So how do we do it?
The same way we save for retirement. Take advantage of long term market returns and a diversified investment portfolio to deliver the lowest risk (this is only 18 years we are talking about) and highest return (7.7%/year hopefully) as possible..
So what's the plan?
The other day I opened up an Ohio Advantage 529 savings account. There are a few things I really liked about the Ohio 529 plan:
1) $2,000 of contributions per beneficiary per year is tax deductible at the state level
2) Withdrawals are tax free if used for qualifying education expenses (that's the point, right?)
3) Ohio's 529 includes fantastic low cost fund options from Vanguard and Pimco.
4) No account maintenance fees
As noted above, the fund choices are pretty good for a plan like this. I have chosen to start with an 80/20 equity/bond mix with the following allocation:
20% - Pimco Total Return Bond Fond
16% - Vanguard Developed Market International Index Fund
32% - Vanguard S&P 500 Index Fund
32% - Vanguard Extended Market Fund
While it doesn't have as many choices as one would like (no REIT's, Emerging Markets, commodities, etc), at least one can tilt towards small caps with the great performing Vanguard Extended Market Fund. I think in the long run these choices will work out just fine.
My tentative plan is to start moving 5%/year from equities to bonds around the time Jr. is age 5, so that by the time he/she is 18 the fund will be 80%-90% fixed income. The last thing I want to do is have the kid be 17 years old and have a 2008 type crash happen and have 80% of the fund still in equities - Ouch!
Ok, Awesome! So we have a goal - $400,000 ($100,000/year for a 4 year degree), and an expected market return of 8% pear year from now until the kid is 18.
Plugging that all in we only need to save.... $730/month?!?!?!
Really?
Are you kidding me?
For each kid we have?
Ok, is there an other option?
Option #3 - You're On Your Own / I did my Best
And let's hope that the supply/demand curve eventually stops this out of control education expense inflation sometime in the next 18 years.
With the diapers, day care, and everything else, I think option #3 is the best we can do for now.
Sorry Jr.
