spend more, not less

Wait, what?

It’s the holiday season, and I’m a personal finance guy — shouldn’t I be harping on The Reason For The Season, and It’s Not How Much You Spend That Matters, and all that? Is it time to chuck all that stuff and go back to good ol’ fashioned consumerism, and forget this whole frugality business?

Not exactly. But every now and then, it’s good to take a step back and remind ourselves what being fiscally responsible is all about.

The end goal of personal finance isn’t to spend as little as humanly possible. Heck, that’s not even the beginning. But frugality has made a comeback, and so we’re constantly being deluged with “10 ways to save on clothes” and “5 ways to save on travel expenses”. This is handy, but it’s not an end unto itself. The goal is to spend less on some things so you can spend more on other things.

That is, after all, the point of budgeting; to figure out what your values are and assign a numerical value to them. You’re going to value some things more than others — why not spend more on them? After a talk I gave earlier this year in which I mentioned the value curve, I was approached afterwards by a woman who said that she had decided to spend more on travel, not less. She told me this with a look of chagrin, as if expecting disapproval; on the contrary, I thought this was fantastic! To be mindful enough, awake enough, to be able to make your own decisions about what you value and align your money accordingly — this is what personal finance is all about!

A handful of assorted morsels to chew over on this topic:

Consider spending your money where you spend your time. I’m a big fan of Lifehacker, and they recently posted an excellent article on this subject. I spend a lot of time on my computer, and when I do have free time, I love to play video games — so I conscientiously put money into my PC, making it as fast and reliable as possible. You spend all day in your clothes — why not make them comfortable? And if your mattress is messing up your sleep patterns, for the sake of everything that’s holy (not to mention your sanity, productivity, health, and general well-being), get a better one!

If you’re looking for education or self-improvement, don’t underestimate the value of a tutor or coach. Full disclosure: that includes a personal finance coach, of course, but Get Rich Slowly will back me up on this one. Money for an expert who can hold you accountable is extremely well-spent, especially if you find that motivation is an issue (and it so often is!). And the really good coaches will not only teach and motivate you, but teach you how to learn and motivate yourself!

Don’t just put money into a generic “savings account”. This is a specific example of “give every dollar a job”, but it’s an important enough to single out. When you have a pile of money that’s just sitting there, waiting for you to use, you’re going to use it sooner rather than later. This isn’t inherently a bad thing, except the thing you buy sooner may not be as valuable to you as the thing you would have bought later. Sure, remodeling is great — you spend a lot of time in your home, after all — but would that money be better spent on a mini-retirement, or a new car, or even just specifically set aside as emergency savings in case you experience, ahem, cash flow difficulties? Maybe it would be — but having different savings accounts for different goals forces you to ask yourself the question, and gives you an extra barrier to pulling money out at random (“I was really looking forward to that walking tour of England…maybe I can put this other thing off for a year”).

Be generous. Give your money away (mindfully, not willy-nilly — Christmas debt doesn’t do anyone any favors, the gospel of consumerism notwithstanding). But not just for the holidays. Tip 20%. Give money to your church and organizations you care about. Spend money on things that don’t benefit you directly. The unfortunate part of the recent rise in frugality is that it’s based on fear, and generosity is the best way to actively combat that. I often come back to idea that you should own your money, not the other way around, and giving it away is a great way to show it who’s boss.

Happy spending!

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mommy, tell me about my 529

You asked for it, and I’m happy to give it to you — the lowdown on 529’s, especially if you’re in Texas. What the heck they are, why you’d want one, and the better ones out there — it’s all here.

What the heck is a 529?

Actually, there are two kinds: a 529 prepaid tuition plan, and a 529 college savings plan. I’m going to spend this post talking about college savings plans, but if you’d like to hear about a prepaid tuition, sound off in the comments section.

In a nutshell: a 529 college savings plan is a tax-advantaged investment account, similar to an IRA or a 401(k); you contribute money to specific mutual funds in the plan, and you get a tax break on the investment returns if you only withdraw it for qualified college expenses — withdrawals for other purposes are penalized. To break it down further:

Tax-advantaged: specifically, while the money you put in is not deductible (as opposed to (generally) money you put into a traditional IRA), the money grows tax-free until you withdraw it. (Also, if your state has income tax, contributions to that state’s 529 plan are generally state-tax-deductible — not that Texans have to worry about that kind of thing.)

Specific mutual funds: like a 401(k) and unlike an IRA, there are very specific mutual funds you can choose from. Which funds these are depends on the 529 plan in question. There’s almost always an “autopilot” option that gradually shifts the investments towards more stable securities (i.e. from stocks to bonds to cash) as your child approaches matriculation.

Qualified college expenses: Tuition, room and board (if you’re enrolled at least part time), and computers, books, etc. that are required by the institution. However, it is possible to transfer beneficiaries of a 529 plan; in other words, if your child decides not to go to college, you can switch it to any cover direct relative, including siblings, cousins, in-laws, or step-siblings.

Penalized: In addition to being taxed on the earnings, you’ll take an additional 10% tax penalty on those earnings.

Why would I want one?

Because the tax benefits put money in your pocket, especially if you invest for a long time and contribute a large amount. To give an oversimplified example, if you put $34,000 into a 529 and let it sit for 18 years, during which it happened to earn 5% each year, by the end you would have about $82,000 (which, incidentally, is what it takes to send your child to Texas A&M for four years nowadays). However, if that same money were sitting in a standard investment account, you would have to pay 15% (assuming it was all long-term capital gains) of the gains to the taxman, leaving you with not quite $75,000. (Again, a state income tax would knock that down even further.)

Which 529 plan should I pick?

If your state has income tax, the choice is generally pretty easy — you pick your state’s plan. However, in cases like Texas, there’s no reason not to take your pick of any of the 529 plans out there. There are generally two factors that come into play: how expensive the 529 plan is, and what its selection of mutual funds is. Given the power of low-cost index funds (not to mention mutual fund companies owned by the funds themselves) my favorites are UtahNevada, and Illinois’ Vanguard plans.

Update 6/24/2013: Utah’s UESP recently added several funds to their lineup that, in my opinion, push them well over the top. They now have nearly every interesting asset class available, including every combination of large/small/international v. value/growth, plus REIT’s and short-term bonds. Moreover, they’ve added options from Dimensional Fund Advisors — in my opinion the only fund provider who might actually beat out Vanguard — making them one of only two 529 plans to do so.

OK, I trust you, but can I get a second opinion?

Kiplinger’s and Clark Howard have good writeups on 529 plans. Morningstar has some ratings, too, if you have premium membership.

Anything else you want to know? Operators are standing by! (Well, the comments section is, anyway.)

what will you wish you had saved for?

As you’ve probably begun to notice, here at financialgeekery.com I’m big on questions. Today’s question: what will you wish you had saved for?

The wonderful thing about money is that it’s so very fluid; it can — quite efficiently — be turned into almost anything! But that’s not all; it’s also fluid in time. You can borrow money from the future to pay for the present, or you can save money in the present to pay for the future. (If you’ve figured out a way to move money to or from the past, let me know in the comments section.)

Of course, rare is the person who figures this out when it can most benefit them. When I was a “freshout”, having just graduated college and making more money than I could imagine (something south of $40K a year, if I recall correctly) at my engineering job, I didn’t really pay attention to my money. I had some vague notions about saving for retirement, but for the most part I just let my money go where it wanted to. Now that I’m older and actually have to watch my finances like a hawk, I wish I could go back and knock some sense into Young Me. “You idiot! Why are you spending money on all this junk you don’t care about? What about that house you’re going to buy in 2001, or the emergency fund for the kids you’re going to have in 2006?”

Sadly, we can’t do that, and there’s no use wringing out hands over the past. You can, however, ask the question: “in the future, what will I wish I had saved for?” Of course, we don’t necessarily know that — but someone else might. Specifically, your friends who are ten, twenty, or thirty years older than you. In fact, a couple years ago, Ramit Sethi asked them for you. The answers are not terribly surprising…and they’re worth considering. I’ll resist the urge to summarize here: go take a look yourself. Don’t just read the big speech bubbles — check out the graphs and see what might be in your future. Your future self will thank you!

While we’re sitting here chatting, tell me, for the benefit of the younger folks in the audience — now that you’re older and wiser, what do you wish you had saved for?