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Now that you've made a promise to get rid of credit card debt (hopefully), it's time to explore some alternatives to using credit cards. If you haven't seen our previous posts on ways to save money, please go back and visit them. But now it's time to talk specifically about living within your means.
This goes back to the theme of personal responsibility we've been talking about for awhile now. You have to live within your means: spend what you actually earn, not what you wish you earned. In this country, far too many people feel that they're entitled to a certain type of lifestyle. Perhaps they grew up with it, or perhaps their neighbors have it. And it seems so easy to obtain because credit is available. But credit, of course, is a gamble. If you buy what you can't afford, you can lose it all. And, you are NOT entitled to anything you cannot truly afford (without credit).
So, let's talk about some alternatives to credit! What can you do?
1) Cash
Good, old-fashioned cash. Dave Ramsey recommends the envelope system. That is, at the beginning of the month (or week, or whatever your budget period is) you take out all the cash you need for household expenses and place them into separate envelopes. One for gas, one for groceries, one for clothing, etc. When the cash in that envelope is gone, that's all you get. You can't spend more in that category until you get paid again.
2) Debit Cards
ONLY DEBIT! If it can be used as credit it's no good. If you don't like carrying around cash, though, debit cards will work. Set up a few different accounts and add the right amount of money to each. Set it up so that when the money's gone, it declines your card. At the least, you'll incur fees if you overspend. We use debit cards. We have three accounts: savings, bill pay (house, electricity, gas, cell phones, insurance, etc.), and "house" (groceries, gas, clothes, etc.). There is only so much in each category, and when it's gone, we cannot spend more.
3) Savings Accounts
This is really huge. When you're contemplating a big purchase, DON'T take out a loan or put it on a credit card! Instead, plan ahead and set aside money to pay for it. Then, when you're ready to buy (you might even earn a little interest in the mean time!), take your money into the store and just buy it. It requires a lot more planning, but this is a good thing. It completely eliminates impulse purchases because you have to really do a lot of research to see if you want the item, which item is the best (like, which model or brand), where you can find the best deal, etc. Sometimes you can even get a discount for paying in cash up front.
It's a good idea to use ALL of these forms of payment at one time or another. Obviously you need to have some cash, for emergencies if nothing else (just $10 or so that you keep). You need to have money (cash or debit) easily accessible for groceries, gas, and other basic necessities. And you should also have a savings account for any major purchases. You may even want to have more than one savings account so you can save for different purchases in different accounts.
The important thing about NOT using credit is that it forces you to live within your means. That is, you spend as much or less than you earn. You can't spend what you don't have if you don't have any credit to rely on. I know I've mentioned this before but it's a really, really important reason why you shouldn't use credit. You must be personally responsible for your spending, which means that you can spend only what you have and not rely on others to give you extra money.
This should give you peace of mind, too, even if it seems difficult or annoying at first, for two reasons:
1) Anything you have bought is YOURS. It will always be yours, unless you decide to sell it or give it away. There is no chance that you'll lose your job or have an unexpected expense come up that prevents you from making payments so that you eventually lose the item. There is no gamble, no risk. You are free and clear.
2) You aren't stuck with a decent part of your budget tied up in minimum monthly payments for the rest of your life, so you have that "extra" money to spend on things you need or want! If you really look at your budget, it's likely that a fair amount of your money each month goes to some type of credit payment -- credit cards, student loans, car loans, mortgage, etc. Imagine what life would be like without any of that! Or even with just a mortgage. Lots better, right?
In case you're still not convinced that credit is bad and you should live within your means, I have even more on this topic coming up soon!
Do you have credit card debt? If not, how do you pay for things?
Do you have credit card debt? If not, how do you pay for things?
Posts
No credit card debt here! We do have 2 accounts for the two of us. One gets us 5 cents off per gallon at the gas station we'd be using even without the card. We have it set to automatically pay off every month so it never carries a balance.
ReplyDeleteCard #2 is what we make all of our purchases on. It has a tiered cash back system so by putting all of the purchases we'd make without the card onto the card, we get a higher percentage cash back. We also auto-pay that off every month so it hasn't carried a balance since before we were married (I think my engagement ring was the only balance it carried, actually).
We do have about $31K in loans at a 1% interest rate (seemed like a sweet deal at the time when we took on the $60K in debt since even savings accounts got that much interest). We're paying these off with twice the minimum every month and they should be eliminated by the end of the year. The nice thing about those loans, though, is that they allowed us both to buy our vehicles in cash (kind of) and start our Roth IRAs, which we max out every year.
We do a modified envelope system in that we have savings accounts that are designated 'gifts' or 'maintenance' or things like that. That's where the monthly amount for birthday/family Christmas gifts goes into, and the costs of the gifts are subtracted from the monthly amount that would go into the account. We also already have a 3 month emergency fund for all of those 'just in case' moments, but we haven't had to use it yet, even the month that the truck needed almost $500 in repairs right after the month that my car needed $600 in repairs.
Oh, one other money-saving tip:
If you can't (for whatever reason) get new windows to replace your energy-inefficient ones, buy a roll of bubble wrap. Affix the bubble wrap to the window (you can just do this by dampening the window and sticking the bubble wrap on it). The bubble wrap acts as insulation between the window and the air in your house. We put it in all the rooms except for the room with the thermostat, and the rooms are a TON warmer now. It's a great way to make apartments more energy efficient!
Emma-
ReplyDeleteHow do you see out of the windows if they have bubble wrap over them? Why not just buy the clear plastic shrink wrap? Is bubble wrap cheaper?
Kate-
I saw that someone else asked about paying for your kids' college and that you are already saving for it. Good for you! We are really worried about affording college for our kids and are concerend that the kids may have to go into debt to pay for it. We are so concerned that we plan to stop at two or possibly three kids. We really don't see how we could afford more than that. Do you agree with college loans? Does Dave Ramsey have any advice about how to pay for the escalating costs of college?
Anonymous,
ReplyDeleteI would never make the decision to not have more kids because you're worried about not being able to pay for their college. If you want only 2-3 kids, that's fine, but I'd urge you to have as many kids as you want. Both Kate and I's parents, who's kids are all now basically graduated from college, have told us many times they wish they had more children. Kate and I decided we never want to say that, so at this point at least, we're planning on having 10 kids.
That being said, obviously, college will be a huge deal for us. College tuition has been going up on average 6-7% per year versus the 2-3% of normal inflation. We estimate it will cost about $2,000,000 to send all of our kids to OSU (Ohio State) if they live at home (tutition and books only, instate college)
That sounds like a pretty daunting number; but it's not. If we save about $150 a month for each child from birth to 21 (you're only going to disburse 25% at 18, 25% at 19, 25% at 20, rest at 21), We can fully fund their education. For a normal family of 2-3 kids, that 300-450 a month is probably what your car payment is (US average is about $480). So instead of driving nice cars, we've choosen to drive 5 and 6 year old cars, and pay for college.
Anonymous - you don't see out of the windows. It lets in a nice diffuse light, but we usually have the blinds down most of the time (living in a first floor apartment makes me a little paranoid). If you want to see out of the windows, maybe you could put the bubble wrap on the top half of the window, leaving the bottom pane free to look out.
ReplyDeleteThe reason you should use bubble wrap is twofold, but both reasons boil down to extra air space as insulation. You put the bubbles toward the window, so the bubbles hold off the single layer of plastic between bubbles from touching the window. This air pocket, when combined with the air pockets in the bubble, insulate the air from coming through the windowpane and cooling down the air in the house. The bubble wrap feels cold to the touch, but it's not as cold as that window glass would be without the bubble wrap on it.
Ben-
ReplyDeleteI think the $300-450 sounds manageable, but 10 kids would be 1500 per month (More than our mortgage payment including taxes and insurance!). I know you don't pay for everyone at once, but the number of dollars per month that needs to be saved still seems pretty daunting. Also, what if your kids don't want to live at home? Aren't they missing part of the "college experience" by not living in a dorm/apartment and being progressively responsible for themselves during their interim years?
I don't want to HAVE to limit the number of children we have, but having more than we can afford seems selfish and irresponsible. Currently, the taxpayers end up footing the bill for the educations of the children from large families through grants which is so unfair to the people who save for college and responsibly procreate. What happens if the grants no longer exist?
I really can't imagine how you and Kate will afford 10 or more college educations. Two million dollars is an awfully big number! I hope all of your high-risk investments ay off and that the stock market doesn't slump right when you need the college funds.
That's (at least partly) where compound interest comes in. Compound interest is the fun stuff - you can invest just a few hundred dollars when you're twenty and never touch it again and have more money at 65 than if you'd invested more money per month every month at a higher rate of return from 30 until 65.
ReplyDeleteThat being said, I don't think $1500 a month would be impossible. If you have no payments to anything else (assuming the family is debt free), why wouldn't you be able to spend $1500 a month? One other thing to consider as well is that children can get scholarships to help with college funding (no loans) and you aren't going to go suddenly from $300 a month to $1500. You'll do it gradually so you can find ways to save that much money. It doesn't take much to cut spending dramatically and nothing says you can't put money away ahead of time into a high-yield savings account or a money market account before you have those kids to help defray the sudden increase in amount needed to save per month. If, when you have two kids, you can save $600 for their college funds and have a few hundred extra to put into a savings account (aside from other things you need to pay for, like food, maintenance, travel, etc.), do it. That money will compound, albeit at a slower rate, and you can dip into it if/when you have more kids than you can pay for to go to college.
I guess saving $1500 month is relative to what you make. When kids are older, there are going to be extra expenses like extra cars, insurance, and, of course, more food. We don't have any debt except for our house payemnt, but $1500 dollars a month, EVERY month, is a lot of money. It's way more than our house payment. Also, houses need roofs, washers and dryers, windows, etc. All of that needs to be considered and planned for.
ReplyDeleteAs I said, I know that all of the expense doesn't come at once. However, if the savings need to go up $150 per month for every child, it will increase considerably if kids are born every 18 months or so. I stay home with the kids so adding to our income is not realy possible unless I go back to work. If my husband were to lose his job (a real possibility for everyone in today's economy), we would not only have to stop saving the required amount every month, bus also possibly have to spend some of our savings to pay for food, utilites, and other essentials. I don't think it's quite as easy to finance college as your examples make it seem. If it were, why would our parents and their friends, all responsible adults, say that it is so difficult? Why would financial advisors on TV and in real life make such a big deal of it? I think it is great that you guys are so optomistic and wearing rose colored glasses, but I still think paying our $20 - 60 thousand dollars per year for many, many years will be difficult (when will we ever retire!). And that amount assumes that our kids, if we don't stop at 2 or 3, will live at home and commute. Is it fair to make the decision that they will HAVE to commute for them before they are even born?
From what my older friends say, scholarships are partial at best, even for top students (valedictorians, national merit scholars, etc.). They ALL say to plan on paying full price. YIKES! Good luck and keep saving as much or even WAY more than you think!
Saving to pay for college in cash for one's children, like being debt free and paying cash for all expenses is, once again, a huge paradigm shift. It seems like an unattainable goal (and crazy if others say they will do it) because our current culture is so bent on thinking that borrowing money is the only way to educate our children. It's not. Many people attain degrees through on-line courses, or attending the nearest college while living at home. This goal is not impossible, and in fact, it's admirable that there are people out there that are willing to go against the status quo.
ReplyDeleteIn my humble opinion, I believe my children do not need to "experience college" the way most people think young adults should experience college. They will be in college to get an education, plain and simple. What will they miss out on? The parties? The co-ed dorm life? The sleeping in late and skipping class? Worse? I just as soon they do miss out on those things because I experienced them and am no better for it. Attending college and obtaining a degree will be a time to grow and fully mature into a competent, contributing member of society. Going to school (whether it will be full-time or part-time, on-line or on a campus) will be their job. And, because their father and I will be footing the bill, we believe we will have a say in the matter.
Let me clarify. That sounded as though we will be in total control of our adult children. We won't be. But, with God's sovereign grace and mercy, we will train our children under the nurture and admonition of the LORD all the way through so that when they do become young adults, they will have the tools, and prayerfully, the desire, to make wise decisions when they are "of age."
Anonymous and Emma,
ReplyDeleteI honestly don't think I'm being overly optomistic at all; I think the we have a sound financial plan. Of course, it only makes sense though if you look at the entire picture. Currently we pay $200 per month for our one remaining student loan, and pay an extra $750 toward it out of budgeting. That's $950 a month already.
As far as increased cost of children; when our son was born, our cost of living basically did not change at all. If you 100% cook your own meals, and buy used clothing, furniture, etc... kids cost very little until they start getting older.
You're right about it being expensive, $1500 a month is a lot. However, if you have no house payment, it's easy. We're already on a 15 year mortgage, and we pay on paying it off as eariler as possible. Our goal is in 5.5 years before I turn 31. At that point, we'd only owe a few hundred a month for taxes and insurance.
I know that it seems crazy, but saving for college is actually EASIER then I make it seem, not harder. We live in the wealthiest country in the world, but unforunately, almost no one has good financial planning skills; including my own parents. Despite making a good living, and honestly having the ability to save for my college, my parents "never found the extra money" to save for me. The only savings I had at 18 was what I had earned as a teenager and what I made while working through college. Please let me be clear here; I'm not mad at my parents, far from it. I think they did a better job then most at raising me and my sisters, but they did fall short in this area.
The problem is, that if you don't make it your number one priority, it will never happen. Let me give you an example. According to some sources I've seen anywhere from 3-7% of CHRISTIANS tithe, so maybe 1% of the US population. That includes Kate and I. Despite the fact that we already tithe 10% of our income to our local church, we still have extra money left over to save. The US savings rate was about 5% last year so between our tithing and savings, we're saving at least 3 times the national rate.
The point is, if you decide that the first item in your budget is retirement savings, and the second is college savings, before anything else, you WILL be able to do it no matter how many kids you have. If there is no money in your bank account, you won't find a way to spend it. It's crazy, but every time I have excess money in our account, I think to myself, I could really use this tool, or we need to buy x household item. Your spending will rise to the level of your income, UNLESS you force yourself to spend less.
For the record, we expect $0 from the government and $0 from grants. Both Kate and I recieved some scholarships directly from the school, but paid for most of it ourselves (or Kate's parents paid it from their income). We are saving for in-state tutition for our kids, planning on them staying at home because we have 10 good quality universities with 30 minutes of us. If any of our kids choose to either go to a different school, or live on campus, they will be responsible to work and pay for the difference. The very first semester I worked part time, but after that I worked over 40 hours a week the entire time I was in school full time. Kate worked in the evening and on the weekends teaching as well. There is no reason our kids can't do the same thing and still do well in school.
In all this, I'm trying to make one thing clear; saving for college, even for 10 kids is very easy. However, actually doing it is hard. It's called Personal Finance for a reason, because 90% of it is the "personal" part. Based on the math (which includes planning for things to go wrong), we have a 100% chance of success, as long as we stay out of our own way and actually follow it.
Karly,
ReplyDeleteThanks for your comments. I agree that children do not need to experience "college life." I spent one year in a dorm and went to one party, where I just watched all the drunk people. It was useless and totally not my scene. I don't feel that I'm any better for it at all. It was just NOT for me. I feel like it's part of the mainstream culture that you "need" to go out and drink and be independent but truly, I don't believe that is even a GOOD part of life, let alone necessary! We don't drink. Our idea of a party is to play board games with friends. And we were like that in college too. Since everyone is different, no, not everyone "needs" to experience college life. I think it's important to remember that!
My parents did pay for my college but didn't save for it. My dad took a second job to pay for our school (mine and my brother's). It's not like it sounds -- his first job is at NASA and his second is teaching at a local university. He used all the money from the university job to pay for our school. I got full tuition at one school, and a rather large scholarship at other schools. My parents paid, on average, $3000 per semester (maybe a little less) for my school. Total they paid was only about 1/4 of what they paid for my brother (granted he's a pilot and had flying lessons and etc. too). We're not planning to RELY on scholarships or grants as Ben said, but it would help if our kids get them!
We're also not planning to rely on this, but all our parents and grandparents give the kids money for their college funds for birthdays and Christmas. It's not much, but it does help. It can make up the difference if we happened to fall short one month. (Also the $1500/month will only be necessary for 3 years or so...since #10 would be born when Bekah is 15 at our current rate. We'll be in a MUCH different financial position then, seeing as she is not quite 2 now!)
Anyway -- it goes back to personal responsibility. We truly believe that you CAN make it work if you make it a real priority. That's why you make a budget and stick to it!
Ben,
ReplyDeleteWhat kind of interest rate are you expecting in your calculation? I think I followed your figures and came up with needing a little over a 16% annual interest rate to get $200,000 in 21 years by investing $1800 a year ($150 a month * 12 months) and subtracting $50,000 at 18, 19, 20 and 21. Is that the kind of interest rate you expect or does your calculation work differently? It doesn't seem very realistic to expect an interest rate like that every year.
Anonymous,
ReplyDeleteI'm not sure where you found the $50,000 per year number, but since The Ohio State University is one of the 25 best universities in the country and they are 20 minutes from our house, let's use them.
The current 2009-2010 tuition rate is $8,706 for the full year. Since Bekah is two right now, we need to add 16 years of inflation on that number. For the last 20 years or so, the rate of tuition inflation is about 6%.
That means that her tuition would be:
$22,116.30 - Freshman
$23,443.28 - Sophmore
$24,849.88 - Junior
$26,340.87 - Senior
A total of $96,750.33, or slightly less then half of the number you used.
Since 1989, using the same date range as the tuition inflation example above, the Dow Jones Industrial Average (DJIA) has risen from 2,500 to about 11,000, even factoring in our recent recession. That equates to about a 7% return on investment (ROI) per year during that period. A good mutual fund should return between 10-12% per year, on average of course.
Without delving into all the math, 150/month for 21 years at only an 8% ROI per year, will result in about $98,204.35 in savings.
This is all rough examples, since there are many things to factor in like our actual US monetary inflation rate, stock market performance, tuition inflation at OSU in particular, and the particular mutual funds you choose.
Based on the numbers I gave above, I think we will actually have saved MORE then the kids need by the time they need it, and if not, then we'll certainly be in the ballpark and the difference can either be paid for through our monthly budget or them working part time.
I hope this brings some clarity to the numbers I used.
Thanks for clarifying.
ReplyDeleteYou said you expected to spend $2,000,000 for college. $2,000,000/10 = $200,000. $200,000/4 = $50,000. That is how I arrived at the numbers that I used. How did you come up with the $2,000,000?
You are not thinking realistically. I have two kids in college. One attends a private college that has tuition and room and board of $44,000 per year. The other attends a public university that has a tuition and room and board rate of about $20,00 per year. That's $64,00 per year in TODAY'S dollars. The child attending the private college did get some scholarships, so our acutal cost is about $45,00 for both kids per year before books and other fees. We also pay for their car insurance, health care coinsurance, and food over breaks and during the summer. We need an extra car so they can get to their jobs on the weekends and over breaks, and to their field placements and internships. They share the car, which is difficult since they go to different schools.
ReplyDeleteWe strived to save as much money as possible for their educations, but my husband lost his job at one point, and we spent a good chunk of the of the savings (I was a stay-at-home mom at the time). We also paid for braces ($5000 several years ago) for three kids. I had an illness that cost about $15,000 after insurance paid its portion (and we have great insurance!).
I now work full-time as a teacher, and 100% of what I make goes to tuition. My kids work at either at their college or on weekends at home, and both work full time in the summer.
If you have ten children you will need a large home. That will cost money. You may be able to pay off your current home by the time you are 31, but what about the home you will potentially need? Some of your kids will need braces and your insurance will pay maybe $1,000 or $2,000 toward that. You will more than likely have a period where Ben is unemployed and will need to spend some of your savings. Kate could get a job, but teaching licenses are only good for 5 years, so she would need to go back to school to renew her license - more expense. (That's assuming she could even get a teaching job in Ohio - not likely.)
Your scenario assumes everything goes perfectly for you. It assumes you never have a real emergency that requires you to use savings just for the necessities in life like food and dental care. It assumes your kids never get sick, your interest rate remains stable (12% profit on a mutual fund? We lost 40% of our savings during 2008 and 2009 and are only now getting close to where we once were - and that includes our investments over the last two years.)
You may not have liked living at college, but that doesn't mean your kids won't. Not everyone parties and gets drunk when they live at college. At my school we went to the library and did academic things while living at college. Your stereotyping of what happens on campus is insulting to those of us who studied. Ohio State may be a good school now, but it wasn't well respected just a few years ago. One reason it is considered "good" now is that only really, really high achieving kids get in during their freshman year. What will you do if your kids don't make the cut? (If you have 10, some will not.) Also, what criteria were used to rate Ohio State? I've never seen it ranked in the Ivy League or even baby Ivy category. What if some of your kids are geniuses? Will you limit their potential by requiring them to attencd OSU?
I find your dedication to saving and being responsible for your kids' educations refreshing, and I find your naivete amusing. You have so much to learn! Enjoy the journey!
One more thing - don't forget to figure in the price of a car for each child that commutes. Include gas, repairs, maintenance, and insurance.
ReplyDeleteAlso, your expenses may not have gone up when you had your son, but he is a baby. Kids don't really cost much money, even with diapers and formula which you don't even use, until they are teenagers. Ask your parents; they will more than likely agree. If you think a family of 12 can live for the same price as a family of two adults, a toddler, and a baby, you are way wrong!
Connie,
ReplyDeletePlease be gentle in your responses -- calling someone naive is not particularly nice. I strive to keep the blog positive and you may or may not agree with what we say (and who knows, you may be right), but insulting us is not necessary.
We plan to do a much longer post addressing these issues (college savings) in more detail. Yes, we have thought about many of the things you've mentioned, including cars, a bigger house, etc. Do you not think that our income won't go up from where it is now? Do you think that, at 25, Ben is at the top of his career and earning potential? Any promotions he receives will also make a large difference in our financial situation.
We have many, many plans and a lot of stuff will change. We fully expect our living expenses to increase as we have more children and as they age. They'll need clothes and shoes and food. What they don't need, of course, are the latest, most fashionable clothes and shoes, or to buy lunch out everyday. They'll get lessons -- but they won't get to do EVERYTHING they want (and they shouldn't).
Finally, I went to college and lived in a dorm too. I studied too. Most of the people around me partied and drank, even those who also studied. It is my observation. Many college students do that but I never said ALL do. That is what many consider to be "the college experience" though.
Ben has further comments, I'm sure, so I'll let him respond as well.
Kate-
ReplyDeleteI see your naivete as refreshing not insulting. I think it is cute that you have such great plans and are so optomistic. When I was your age, I'm sure I wasn't any wiser than you two are. Perhaps I should have said uninformed or inexperienced. Do those terms seem gentler?
Yes, Ben's income may go up, but as incomes rise so, too, does the cost of living. The average family in the US makes, I think, around $50,000. Perhaps Ben can make three or four times that amount (maybe he already does). But whatever he makes, as the sytem stand now your Expected Family Contribution (EFC on the FAFSA) for college will be about 1/3 of your family's GROSS income. If you have savings, that number will be higher. Assuming you will pay about 28% in taxes, you will save 15% for retirement, and you will pay 33% in college costs, you will have 26% of your income for housing and repairs, utilities, food, life insurance, medical insurance and copays, dental costs, vision costs, cars (purchases, insurance - boys cost a fortune-, and repairs)and a multitude of other expenses. You may be living on 26% of your gross income right now, but your expenses will be much, much higher.
You did make it sound as if every person who lives at college parties and lives it up which I found insulting. The college experience also means learning to budget, learning to deal with adult situations like renting an apartment and paying bills monthly, coping with illness on your own, managing your time without mom and dad advising you, and many, many more things. My husband and one of my kids both commuted for a while, and it is not the same as handling life on your own. My opinion is that college serves as a great transition to adulthood, and I think living at college enhances the overall learning experience. You can feel any way you want, but your kids may not, and, if you have 10,likely won't all feel the same.
My kids, like most people, certainly want and wanted specific things. Sometimes they had to earn the money for those things themselves; sometimes we gave them to the kids for birthdays, Christmas, etc. It is human nature for kids, and adults, to want some of the latest fashions and gadgets. I know I did and do, and I bet you did and do too. Does everything have to be the latest gadget or fashion? No. Is it nice to have some things you desire for whatever frivilous reason? Yes. (Didn't Ben get a Lego set for Christmas? Hardly a necessity for a grown man, or anyone for that matter, yet it made him happy. Don't you have a laptop AND a desktop? Obviously neither computer is necessary, and two computers is frivilous.)
You make decisions every day about what you want to spend your money on. As I said, good for you for saving and for planning. You are ahead of the game. I think you need to realize, though, that you can plan all you want and life will throw you curveballs. It's nice to have plans and goals, but your self-assuredness about exactly how your life will go is the stuff of fiction, not reality. Good luck and God bless.
Connie,
ReplyDeleteThe level of wisdom a person has, is not based on their age, and I can name many, many, people far older then us who are much more foolish. Please refrain from any negative personal comments to stick to arguing the facts.
While you are correct, that living expenses do increase as your income increaed, the vast majority of the increase is due to the individual "finding a purpose" for that money. In the past, every time I got a raise or bonus, we found something that we "needed" to spend it on (this was 3+ years ago). Now we have a specfic budget for each item and any excess is automatically saved. Therefore as our income increases, we will increase the money toward living expenses some, but most of it will go to a higher and higher savings rate (college, retirement, home payoff, etc...)
The FAFSA EFC has no validity in this discussion. If, according to the FAFSA, we made 5 million dollars last year, not that we do of course, our kids would need 1.6 million to go to school. That 1/3 of gross income has nothing to do with actual costs. If we have saved for the child's tuition and books already, then our "expected costs" will be pretty much indentical to what they were when they are 14-18. There won't be a magical jump in our living costs when each child reaches college age, therefore we won't have to live on 26% of our gross income, even though we already do live on considerably less then we make.
Again, Kate clearly stated that not ALL college students party constantly. Although having just graduated in the last 5 years as well, I can tell you it is probably 70-80%.
Many of the examples given like budgeting and paying bills are things we believe a child should learn well before they go to college. I myself, had a checking account, debit card, and was responsible for paying bills and purchasing my own clothes at 15.
College is a transitionary period for many people, and that is a good thing, but again we never said our kids COULDN'T live in dorms/apartments, we said we weren't saving for that. I worked all through college and paid my living expenses, and if they want to live on their own, we will certainly support their decision to do so.
Our self-assuredness is a perception of future reality and as time marches on both the perception and the plan will change. We are under no illusions that the future only holds positive things and we certainly expect our share of problems. However, we will continue to only look positively toward the future.
"I'm a great believer in luck, and I find that the harder I work, the more I have of it." - Thomas Jefferson
I am in college at the moment and it is not fair to say that 70-80% of kids "party constantly." There is no way those people would graduate if they partied constantly, and colleges graduate more people than 20-30%. Perhaps the college you went to was more of a "party school" than mine.
ReplyDeleteGrowing up, I never wanted to live away from home, but my college REQUIRES it. They believe that a large part of college is about growing up without mommy and daddy's help. Aside from being responsible for my health, laundry, time management, etc., I have gained a certain confidence that comes from living away from your family. Don't get me wrong, I have always loved being surrounded by family and I still do (in fact I had many separation issues as a child and would refuse to spend the night at friends' houses because I didn't want to be away from my family), but the independence and the confidence I've gained from living at college couldn't have been achieved if I'd lived at home.
However, I also don't think there is anything wrong with your children working to pay for part of their education. Though it is not black and white about whose dollars go to which part of the cost of college, my parents pay my room and board, while my portion goes toward my education. It's easier to value your education if you're paying for it. I know it doesn't really matter, since all the money goes to the same place, but that mindset has helped me when my workload would make it easy to skip class :)
Ben-
ReplyDeleteWisdom may not depend on age - there are of course many, many foolish middle and older aged people - but experience does depend on age. Particularly the experience of raising children depends on age (both the parents' and the children's ages). I also think that, hopefully, wisdom does increase with experience. I would bet that your experiences over the last five or ten years have made you wiser, and your future experiences will probably help you to be wiser in five or ten years than you are now.
Your FAFSA example is a stretch. Did you acutally make five million dollars last year? The FAFSA example I gave applies to the VAST majority of people (middle and upper middle class - those who earn less than the top 5% of Americans). I find it laughable that you are advising me about how the FAFSA works. You haven't even finished paying for your own education let alone paid even one semester of your children's. You are actually making the experience/wisdom point for me! You would be smart to at least consider that you may be living on 26% of your gross income when your kids are in college (I'm kind of surprised you are not living on 26% of your gross already). The experience of all of my friends who have kids in college right now, regardless of how much they have saved, is that they are expected to contribute 33% of their gross income to college. Their savings, investments, and even the amounts they contribute toward their retirement accounts during the college years are also part of the EFC formula. One hundred percent of any money saved in the child's name is expected to go toward tuition. If you have 529 accounts in different children's names, even the amount saved in the other children's names is considered when calculating the EFC.
Actually, there will be a "magical jump" in your living expenses when your children go to college. Even if they live at home, you will need to provide them with transportation and all of its associated costs. Saving for tuition alone won't be enough. I know because I am at that stage in my life. You are at the diapers stage and no doubt have a better grip on that stage of life than I do. You are correct - your perceptions and plans will change.
I'm not really sure how the Thomas Jefferson quote fits in with what you were saying, but it is a nice quote.
Connie,
ReplyDeleteI stated very clearly in my comment, "If, according to the FAFSA, we made 5 million dollars last year, not that we do of course, our kids would need 1.6 million to go to school." I was applying something called reductio ad absurdum to make a point. To use the same device again; should I make a budget based on the possibility that I might become blind in 6 months? Or that I might be a paraplegic by the time Rebekah goes to college? Of course not; because those things are absurdly unlikely to happen to me. Now of course they may, anything is possible, but I base my plan for future considerations on the only thing we can use to predict the future, historic evidence. Based on that, we will easily meet our goals.
To quote you, "The experience of all of my friends who have kids in college right now, regardless of how much they have saved, is that they are expected to contribute 33% of their gross income to college.” So whether we save $200,000 for Bekah, or $0, we should plan on living on 26% of our income based on the experience of you and your friends? Just because, due to “life happening”, you weren’t able to save much for your kids doesn’t mean that we can’t, or that we are naive and inexperienced to think that we can. There are 631 million credit cards in America; two for every man, woman, and child. So obviously, it is IMPOSSIBLE for us to have zero credit cards. Just because the majority of people DO one think, does not mean that others CAN’T do something different.
Since you seem to think that I can’t possibly know what I’m talking about because of both my age and the age of my children, I’ll let men much wiser then both of us fight my battle for me.
The father of modern economics, Adam Smith said, “The real tragedy of the poor is the poverty of their aspirations”. Now what did he mean by that? Adam Smith believed that the reason many people are poor, live paycheck to paycheck, have no savings, etc… is because THEY do not BELIEVE that life can exist otherwise. Four years ago, I would have agreed with you. I was in tons of debt, paying literally 10’s of thousands in interest and debt payments per year while still in college and not making much money. Kate and I found a book, the Total Money Makeover and made the decision to fight no matter how hard it was to fix our lives. Here we are just two and a half years later and we are almost completely out of debt, other than our mortgage.
continued below...
Why is that? Is it because life gave us nothing but financial roses? Far from it. The company I was working for filed for bankruptcy and closed, we both had some expensive health issues, we had two children, vehicles broke down, the massive student loans we had came due after graduation, and on and on and on…
ReplyDeleteSee we believe something that it seems you and most of America don’t believe. You asked me why I added that Thomas Jefferson quote; “I'm a great believer in luck, and I find that the harder I work, the more I have of it." You said, “It's nice to have plans and goals, but your self-assuredness about exactly how your life will go is the stuff of fiction, not reality. Good luck and God bless.” It’s not luck that will determine the course of our future. God, first of all will determine that, but within his plan, our hard work and determination will be the single biggest reason we succeed.
There is a book called Think and Grow Rich that was written about the “formula” Andrew Carnegie used to become one of the world’s first billionaires. Seeing how he had over a billion dollars more than we do, I’m going to defer to his wisdom. Throughout his lifetime, he taught dozens and dozens of men the secret to his success, and others, like Thomas Edison, also followed the same principles (outlined in the book). The answer is as simple as the title itself. THINK of a goal, no matter how difficult, BELIEVE with absolute certainty that you WILL SUCEED, and you will. The reason Edison invented the light bulb wasn’t because we was smart, though he was, or lucky; it was because he REFUSED to give up. He tried 10,000 different filaments in his incandescent bulb before finding the one that worked.
God willing we’ll have a life without a major crisis, but that is wishful thinking. In the end, Kate and I are committed to making whatever sacrifice is necessary; to make sure our kids never go into debt and their college I completely paid for.
Ben-
ReplyDeleteQuoting smart, famous men doesn't make you one of them. We did save money for our kids educations. We did have some really, really bad luck due to my illness and my husband's companies downsizing. We are paying FULL PRICE for two college educations right now and we have a third child who will begin college in two and half years. I can watch people ice skate;, buy good skates, and learn all of the physics behind ice skating, but' until I actually skate, I will have no real idea how to do so.
I really don't care about or need your useless links to economic ideas; I have experience not textbook theories, and I have a couple of financial advisors and a CPA to give me information that is much more thoughtful and knowledgeable than yours. You may have some knowledge about economic theories, you just don't have any real-world, practical experience. YOU HAVEN'T EVEN PAID OFF YOUR OWN COLLEGE! If you had the choice of hiring someone with experience versus hiring someone who could quote rich men or Latin terms, who would you choose? Your obtuseness astounds me!
You and Kate may be committed to making sacrifices for your kids' college educations, but you are going to make sure they complete college on your terms. God forbid that they should have a thought of their own or want to live on their own. It doesn't sound like that is allowed in the Tietje house. It certainly isn't allowed on the blog!
Yes, even if you save $200,000 for Bekah, if you have 10 children - your goal, not mine - you will need more money than you expect. Get over it - you don't know everything and you certainly don't know anything about paying for college. If you did, your's would have been paid for before you had children. I would love to hear your thoughts in 18 years. I won't say "Good Luck" because, as you so ineloquently put it, you don't believe in luck. I will say "God Bless" because you are going to need it.
Okay -- enough. This discussion is over. There is way too much being said that isn't friendly or fair and this is getting out of hand. Everyone has their own set of experiences, knowledge, and beliefs. By no means do we intend to force anyone (including our children) to adhere to ours.
ReplyDeleteIf there are further comments along these lines (arguing about our college savings plans/knowledge/etc.) it will not be posted and this post will be locked from further comments. Time to move on and play nice.
Not trying to start trouble, just genuinely interested. I posted a comment yesterday asking how you came up with the $2,000,000 and explaining how I came up with the numbers I used in my calculation. Could you please post it and explain?
ReplyDeleteI apologize. Your comment was accidentally missed. I've reposted it below.
ReplyDeleteAnonymous said...
Thanks for clarifying.
You said you expected to spend $2,000,000 for college. $2,000,000/10 = $200,000. $200,000/4 = $50,000. That is how I arrived at the numbers that I used. How did you come up with the $2,000,000?
Anonymous,
ReplyDeleteThe $2,000,000 number was based on very rough calculations. Assuming that we continue to have a child every 1.5 years, our current plan, and the rate of tuition inflation stays constant at 7%, we will end up paying just shy of $2,000,000 for all ten children.
Even though Bekah's tuition will be less then $100,000 for 4 years, inflationary pressure will continue to make college more and more expensive to the point where it will cost nearly $300,000 to send the 10th one through college.
Hopefully this answers your question. I didn't want to bore people by including pages of formulas and data.