Floor 48: Saving for College

Baby DebtFreeJD is 6 months old.  Perfect time to start saving for his college education.

Future college graduate?

Future college graduate?

Due to Mr. DebtFreeJD’s job we will (fingers crossed!) receive a pretty hefty discount on college tuition.  HOWEVER!  The estimated cost of four years at a public university in 2030 is $200,000+.  That’s more than I paid to go to law school.  Wowzers.

If we start putting money in an account for Baby DebtFreeJD’s college education now, we can take advantage of compound interest . . . aka the most powerful force in the universe.  Mr. DebtFreeJD and I both got lots of help from our parents in going to our (expensive) colleges, and it’s important to us to be able to do the same for Baby DebtFreeJD.

I investigated the various possibilities for savings for college.  In my mind, the serious* contenders were:

  • A Uniform Transfers To Minors Act (“UTMA”) Account
  • A 529 Plan

The UTMA Account

An UTMA account is pretty flexible.  You can open one at your local bank or at a huge organization like Vanguard.  It can hold pretty much any asset – cash, stocks, bonds, etc.  The asset is held for your kid until he or she turns the age of majority in your state (that varies by state – usually 18 or 21).  Once your kid is legally an adult, the money is permanently transferred to him or her.  You don’t have any control over it.  Put another way, if your kid wants to spend the money on booze and fast cars instead of tuition, there’s nothing you can do to stop him or her.**

The real downside to an UTMA account (in my opinion) is the way taxes work.  Under the federal “kiddie tax,” the first $1,000 of earnings on the account are tax free.  The second $1,000 are taxed at the kid’s tax rate (usually pretty low).  But, any earnings above $2,100 are taxed at the parents’ rate.

Plus, having money in an UTMA account can have financial aid consequences.  The money in an UTMA account (at least right now) is considered a child’s asset for financial aid purposes.  By contrast, a 529 account is a parent’s asset.  Colleges expect students to use all their own assets to pay for college, but are more lenient with parental assets.

The 529 Plan

This is named after a particular section of the tax code.  It is a program established by a state or educational institution in which an individual investor can make contributions for the ” purpose of meeting the qualified higher education expenses of the designated beneficiary of the account.”***  In other words, it’s more limited than an UTMA account.  The money must be used for a “qualified higher educational expense.”  The IRS has explained what expenses qualify.  These include:

  • Tuition and fees
  • Books
  • Room and board (for students who are at least half-time)
  • A computer

You can see a complete list here.

On the plus side, returns on your investments in a 529 plan grow tax free.****  Some states also let you deduct contributions to the plans from your state income taxes.  A few (including ours!) even offer a small “scholarship” if you enroll in their state plan when your child is very young.

For me, that clinched it.  We decided to open up a 529 plan in my name, listing Baby DebtFreeJD as the beneficiary.  Then, after further research, we opened two 529 plans.

The Vanguard Plan

The first plan we opened up was at Vanguard.  I love Vanguard, and have our taxable account, my retirement account, and my IRA there.  I used the money we got from various generous friends and family members after Baby DebtFreeJD’s birth to make our contributions to that 529 account.  I researched the fee expense ratios for each of the available funds.  While normally my default would be to invest in a total stock market index (especially with such a long time horizon), the lowest fee expense ratio Vanguard offered was in something called the “Aggressive Growth Portfolio.”  The fund is invested 60% in the Vanguard Institutional Total Stock Market Index Fund and 40% in the Vanguard Total International Stock Index Fund.  Seems totally reasonable, especially since international stocks are now on sale!

Our State Plan

The second plan we opened up is run through our state.  There, the lowest fee option was in a total US Equity Index.  Perfect!  We put 100% of our initial deposit into that.  In addition, I set up the account to automatically deduct $100/month out of our checking account.  I also filled out the needed paper work to get the matching “scholarship” contribution from our state, which amounts to $250.

Our state allows us to deduct up to $10,000 for joint fillers from our income taxes.  I don’t think we’ll be contributing that much, at least at first, but we will remember to deduct our contributions come tax time next year!

In Closing

We’ll want to rethink our asset allocation as Baby DebtFreeJD gets closer to college.  However, I feel great that with 17 years or so left to go, we’ve started saving for one of the biggest and best future expenses he’ll have – a quality college education.

Dog DebtFreeJD Using Her Dog Biscuit Extortion Expression

Dog DebtFreeJD Is Already Fully Educated.  No need to save for college for her!

*Obviously, we could have just put money in a bank account, but that is clearly dumb.

**Other than hopefully having instilled values that buying new and fancy cars is a stupid use of money and that booze is best in moderation!

***Some states or educational institutions also offer “prepaid” tuition where you start paying tuition for a state school in the 529 plan.  We wanted more flexibility than that.

****Caveat:  Investment returns are definitely not taxable for federal income tax purposes.  I ¿think? some states vary on this point, but ours definitely does not tax returns in its 529 plan.

DISCLAIMER: NOT LEGAL ADVICE, NOT FINANCIAL ADVICE.  I FOUND ALL OF THIS OUT THROUGH GOOGLE, AND CERTAINLY COULD BE 100% WRONG. ALSO THINGS COULD HAVE CHANGED SINCE POSTING THIS.

Floor 47: Return to Work

Here is the thing about going back to work as a lawyer with a baby.

It.

Is.

Hard.

I mean, so is the rest of life, so you kind of just have to suck it up, but still.  We didn’t get one of those magical unicorn babies who sleep through the night at 2 months.  Or 4 months.  Or now.  My job is trying to be good, but being a litigator at law firm just involves a lot of crazy.  So I am very very tired, and there are always work emails.  That’s really the sum of my complaints these days.  Not enough sleep.  Too many emails.

Thank goodness for Mr. DebtFreeJD, who is holding us all together.  And DogDebtFreeJD, of course.  The family that gets licked by the world’s best dog together, stays together.

So.

While I wouldn’t trade these past few months for anything, I find myself adrift.  Baby DebtFreeJD is the best thing.  I like the substance of my job, but it sure would be easier if I were mom to a five-year old and not a five-month old.

We’ve got a house, a kid, and a dog.

Seems like a totally reasonable* time to ask:

What do I want to be when I grow up?

Maybe that’s one of those questions that does not have an answer.  Also, I’m sure you could live a perfectly happy life taking things as they come.  But resigning myself to drifting in a rowboat without using the oars is not really me.

So that’s the next project.  I’ve paid off my loans.  We’re financially secure enough that I don’t HAVE to be any one particular thing.  I’ve achieved what I’ve been working for since I was a teenager.  I’m a lawyer.  We own a lovely house in a quiet suburban neighborhood.  I’ve got a wonderful husband, a sweet baby boy, a snuggly dog.  The future is pretty bright.  But still . . . what do I want to do with my professional life?  I just don’t know.  In 2016, I’m going to try to figure it out.

*Sarcasm alert.

Floor 46: How to Know If You’re Doing It Right

As I have learned recently, there are lots of books and articles out there about parenting.  They all have one thing in common: there is a RIGHT way and a WRONG way to parent.

DogDebtFreeJD always does fluffliness perfectly.

DogDebtFreeJD always does fluffliness perfectly.

For example, there are some people out there who are totally opposed to letting your baby hang out in a Pack’N’Play all day.  This is supposed to be isolating to the baby, bad for the mother-baby bond, cause a flat head*, and increase digestive issues.  According to anti-Pack’N’Play contingent, it is much better for your baby to be carried around during the day in a sling.

However, for every proponent of carrying your baby around in a sling, it appears there is an equally passionate Anti-Sling-Ian.  “Bad for night-time sleep!” “Your baby will never become independent!” “Dangerous – baby could suffocate!”

In the face of this (and other similar fights), the DebtFreeJD household has adopted the following test for good parenting:

If the baby is happy and healthy, you’re doing it right.

Plus an important corollary:

Every baby is different, so there’s as many ways to have a happy and healthy baby as there are babies.

BabyDebtFreeJD, for example, likes to nurse stretched across my belly.  He prefers to snooze in his baby carrier during the day.  And he doesn’t like hats.**

In short, I’ve got an “ends” rather than a “means” test for good parenting: I think I’m doing it right when BabyDebtFreeJD is happily eating, napping, and going through Costco diapers at a terrifyingly fast rate, and doing it wrong when he’s screaming so loud in the middle of Stop&Shop that little old ladies stop to offer unsolicited advice on how to calm him down.

I feel as if personal finance is like parenting.  Everyone has an opinion on how to do it.  And there’s a lot of books and articles that claim there is a RIGHT WAY and a WRONG WAY.

For example, some people might think spending the last year aggressively paying off my law school loans was WRONG.  If we’d invested that money in the stock market, we’d be a lot richer.  If we’d put a bigger chunk of it into retirement savings, we’d have paid less in taxes.  Etc. etc. etc.

That’s all true.  However, having one financial goal gave us lots of motivation to actually pay off the loans.  I don’t know that we would have had the same kind of discipline regarding our budget if we were investing money in the stock market or trying to optimize our retirement accounts.  Plus, I’m naturally risk-adverse.***  There was no way to know what would happen with the stock market when we started paying off my loans.  By contrast, killing the loans was a guaranteed win.

My test for “good” personal finance – like my test for good parenting – is results-oriented:

If you are saving enough that you don’t have to worry about the future, but are still enjoying the present, you’re doing it right.

In my opinion, there are two big financial pitfalls out there.  The first (more common) problem is failing to save enough so that you are unprepared for an emergency/retirement/kids going off to college/etc.  The second is being so miserly that you’re not actually enjoying your money in the present.  Of course, you don’t have to spend lots of money to enjoy yourself.  The Frugalwoods are a great example.  Our own strategy was that we kept living like graduate students even after we got real jobs – so Chinese takeout feels luxurious and we don’t feel deprived by not eating at four-star French restaurants.****

Everyone’s going to be different in how they achieve the balance between saving for the future and enjoying the present, and so I think there’s a lot of ways to do personal finance “right.” Basically, if you’ve got enough in the bank account to sleep soundly at night, and you have enough little luxuries that you feel rich (even if you’re most definitely not), I think you’ve got it figured out.  Everything else – retirement savings strategies, your Starbucks budget – is just coloring in between the lines you’ve drawn correctly.

BabyDebtFreeJD and DogDebtFreeJD display happiness in napping.

BabyDebtFreeJD and DogDebtFreeJD display doing napping right.

*The flat head thing might be true, but is temporary.

** Unfortunately, he’s fighting a losing battle on the hat front.  That’s an area where we prioritize healthy baby over happy baby.

***In other words, I’m a lawyer.

****Confession: I actually like take-out pizza more than fine dining.  Something about very fancy restaurants (and I’ve been to a few with my job) gives me the heebbie-jeebies.  There are exceptions, but that’s my general rule.

Floor 45: No Fancy Bar Trip

As many of the readers of this blog will know, this past week was BAR EXAM* week.

I don’t think sitting for the bar exam was fun for anyone.  I walked out so convinced I had failed that Mr. DebtFreeJD had to talk me out of canceling my results.  Good thing he did, too.

There’s a tradition among law school graduates of taking a fancy bar trip to an exotic location after sitting for the bar.

Instead of shelling out thousands of dollars to travel abroad, after I sat for the bar, Mr. DebtFreeJD and I went to visit his aunt and uncle on the Jersey shore for a few days.

We were so happy we did.  First, Mr. DebtFreeJD’s aunt and uncle are fabulous.  It’s always a ton of fun to visit them.  It’s great to go swimming on the shore, the food’s great, and the company even better.

Plus, I spent about 90% of the first 72 hours after the bar exam asleep.** I would have felt pretty stupid doing that in a European hotel.

There’s a pretty good case for going on an expensive bar trip.  It’s the last opportunity a lot of people have to take a three- or four-week vacation.  It’s a great way to celebrate being done with law school and a stressful test.

I think the case against is even better.

First, when I just graduated from law school, I had no money.  It is possible to take out money to cover you during the bar exam.  Some people I know took out a bar loan, and then used the money to fly to the tropics.  Borrowing money in July to fund a fancy vacation in August is not crazy if you are starting a BigLaw job in September. *** However, a vacation you have to pay interest on just was not appealing to me.

Second, if you are a recent law school graduate who has just taken the bar exam, you are probably exhausted.  The August after the bar exam is done is a time for:

  1. Sleep (lots and lots of sleep)
  2. Eating healthy food (after probably months of munching late-night fried foods during study sessions and copious consumption of adult beverages in the days before graduation)
  3. Exercise (see #2)
  4. Seeing family members and friends you haven’t seen at all during the crazy of bar exam study
  5. Generally being as low-key as possible

I think those things are harder to do while touring Thailand or visiting 15 European countries in 15 days.  Going on a vacation from which you’ll need a vacation is a terrible idea when you are sleep deprived, probably a little burnt-out, and about to start your first job as a lawyer in a couple of weeks.

Third, after just graduating from law school, I needed time to THINK.  As in, I spend a whole chunk of time lying on the couch and processing the fact that I’d graduated, was about to start my first legal job, etc. etc. etc.  (Plus various personal things like “Holy #%@ I’m getting married in a few months!!!)

My gripe with a fancy bar trip is really two-fold.  First, it’s expensive, and when you are not earning a pay check, things should be cheap.  Second, after the bar exam, you need low-key R&R.  And I think that’s much easier to accomplish on your own couch than during an elephant tour of southern Africa,

 

* Imagine ominous music playing here.

**The other 10% was spent eating.  Some people eat when they’re stressed.  I’m the opposite – I’m not hungry when stressed, and then eat like a boa constrictor once the stressful event is over.

***Under any other circumstances, it IS crazy.  I’m sorry, but them’s the facts.

 

 

Floor 44: Breastfeeding?

I’m breastfeeding BabyDebtFreeJD.

I’m not doing it because it’s cheaper.

However, I was curious – how  do the numbers add up?

Tummy Time

DogDebtFreeJD and I keep a careful eye on BabyDebtFreeJD during tummy time!

Using a middle-of-the-price range formula, formula feeding will cost about $2,000 over the first year of a baby’s life.  Formula is one area where Mr. DebtFreeJD and I would spring for the best on the market – so I would estimate it would cost us more . . . although how much more?  Not sure, but let’s say $3,000 for the year.

So, it’s expensive to formula feed!

How much does it cost to breastfeed?  Nothing, you might say?

Wrong!

There are a lot of potential costs associated with breastfeeding.

Things you can spend money on include:

  • A pump.  Cost: $0.  Insurance covered this for me.
  • Milk storage bags. Cost: $14 for 100 from Amazon.
  • Bottles.  Cost: $0.  A kind friend bought these for us off our registry.
  • Lansinoh cream or the equivalent.  Cost: $0.  Luckily, I have not needed to use any creams or ointments yet.
  • Nursing bras.  Cost: $0.  My old bras work just fine for breastfeeding.  (I understand that this is not an option for more . . . uh . . . endowed ladies.)
  • Special nursing shirts or dresses.  Cost: $0.  See above.  What I own already, especially looser shirts, or button-down shirts, work just fine – but so do my old tank tops and t-shirts.*  A side benefit of breastfeeding: you lose weight fast!  So I fit into my old shirts within days after BabyDebtFreeJD was born.
  • Nursing pads:  First pack of washable pads: $10.  Second pack (after DogDebtFreeJD stole several out of the laundry basket and hid them): $0, bought with a gift card.
  • A breastfeeding pillow, like this one.  Cost: $2.  I picked one up used at a garage sale.  Which is good, because Baby DebtFreeJD hates it, and will only nurse on it if he’s too tired to notice I’m not supporting him with my hands.
  • A nursing cover for breastfeeding in public.  Cost: $15.  I have seen people use a scarf or a cloth diaper, but I usually need two hands to wrangle BabyDebtFreeJD when nursing under a blanket, and so we bought one that ties around my neck on Amazon.

In short, breastfeeding is much cheaper than formula feeding.  However, as with anything else, there are ways to breastfeed expensively, very cheaply, or somewhere in between. I fall on the “in-between” part of the scale: I bought things new when it made my life easier (nursing cover) or they weren’t available used (milk storage bags).  I didn’t buy things when I didn’t need them (e.g., special nursing bras or clothes).  I bought them used when possible (e.g., nursing pillow I saw driving by a local garage sale).  There’s also a lot of luck involved – I was able to nurse BabyDebtFreeJD without needing to supplement with formula, and we *knock on wood* haven’t had complications that would requiring purchasing medicine or special ointments.

This mirror was another generous gift.  Here, Baby DebtFreeJD is admiring his stylish duds.

This mirror was another generous gift. Here, Baby DebtFreeJD is admiring his stylish duds.

And, of course, the bottles came off our registry from a generous friend of the family. The generosity of friends and family makes having a new baby easier in SO many ways: people have sent presents, brought dinners, made supportive phone calls, and come for visits (thanks especially MomDebtFreeJD and Mom-In-Law DebtFreeJD for staying with us for a couple of weeks)!

Last, but certainly not least, breastfeeding BabyDebtFreeJD would be a lot harder if it weren’t for generous paid maternity leave.  I’ll be home for a little under four months, which gives us lots of time to establish breastfeeding and gives me time to pump and store breast milk for when I return to work.  Without paid maternity leave, breastfeeding could be prohibitively expensive – because the cost would be equal to all the paychecks I’d be losing while I was home feeding BabyDebtFreeJD every time he is hungry.  And he is hungry approximately 2304958761 times a day.

A rare period in which BabyDebtFreeJD is not ravenous.

A rare period in which BabyDebtFreeJD is not ravenous.  The excellent chair was a hand-me-down!

*Not to get too graphic, but I just pull up the tighter tops, rather than pulling the neckline down.

Article on Test for Discharging Student Loan Debt

The New York Times has an article today on the  most-commonly used test for discharging student loans during bankruptcy.  That test, called the Brunner test (after the eponymous case), has three prongs:

  1.  “[T]he debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans”;
  2. “[A]dditional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans”; and
  3. “The debtor has made good faith efforts to repay the loans.”**

In other words, the debtor must show she can’t maintain a minimal standard of living, that state of affairs will persist, and she has made a good faith effort to repay her loans.  She must meet all three prongs to prove her student loans are causing an undue hardship, which is the standard for discharging them under the bankruptcy code.

Although this test is widely-used, the article notes that it isn’t binding in all courts – so some judges use a different test.  Other judges have criticized it, including legal luminary Judge Easterbrook.*  Interestingly, when the test was adopted, student loans were dischargeable during bankruptcy after a waiting period.  Today, that avenue for discharging student loans doesn’t exist.  Congress got rid of it in 1998.  The only way to discharge loans is to satisfy the Brunner test.  That’s made some people question whether the Brunner test is now too strict, since there’s no other safety valve for borrowers who can’t repay their school loans.

Overall, the article is certainly worth a read.  The snippet I found most interesting:

In 2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50 percent of their annual income, compared with 5.4 percent in 2005.

To me, this statistic indicates that in the last ten years, student loan debt has become a major factor in bankruptcies.  And, somewhat terrifyingly, it means that 16% of bankruptcy filers are doing so knowing that they can’t discharge a debt that is eating up over half their income!

*Judge Easterbrook is a renowned conservative judge on the Seventh Circuit.

** Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir.1987).

 

Disclaimer: THIS IS NOT LEGAL ADVICE!!!!  I’m not a bankruptcy lawyer, and I don’t litigate student loans lawsuits, or anything related.  In sum: #1 I couldn’t offer competent legal advice on this even if I wanted to and #2 I don’t want to and am not offering legal advice.  Lawyer hat is off, blogger hat is on. So don’t rely on anything I say in these columns to make decisions about your own life – but DO think of these as conversation starters on interesting topics.

 

 

Floor 43: Create Options

Law firms are not always reasonable places to work.

Don’t get me wrong . . . I like mine.  I like the people and the work.  The hours are (mostly) reasonable.  Compared to my friends who work in BigLaw in DC, NYC or LA, things are very very civilized.

However, occasionally stuff gets crazy.

Case in point: the day I went into labor.  I got to work at 8:30 am, worked until 7pm, got home, ate an enormous dinner prepared by Mr. DebtFreeJD,* hopped back on the computer, finished a brief at 11 pm, and went to bed.  One hour later, my water broke.  I emailed off the brief, went to the hospital, and delivered a baby at 9:15 am the next morning.

This was actually totally OK.  The brief was interesting, it was a pro bono case, and if I had said “I’m nine months pregnant, and someone else needs to do this,” the firm would have worked it out. It was my choice to be working right up until practically the second I went to the hospital.  It made for a crazy experience in which I spent much of my time in active labor in the hospital still dressed in my work clothes.** But ultimately, I was the one who decided what crazy and how much I was going to deal with.

However, if I had no choice in the matter — for example, if I was working for some crazy partner who insisted that I stay up until the wee hours of the morning while enormously pregnant drafting a contract — that would not have been OK.  I would have been furious, and resented that person forever, and it might have even colored the whole having-a-baby-process.

In short, having options made all the difference.

Getting rid of debt opens up a lot of options.  In my opinion, that’s a great reason to do it.  Even if everything stays exactly the same, knowing I have those options is a really big thing psychologically. Feeling trapped in a project — or a job — you hate is awful.  Feeling trapped can make even a job you like into an unpleasant experience.  And with a lot of law school debt, it’s easy to feel trapped.  So I’m looking forward to removing that ball and chain!

*Thank goodness – I needed those calories during labor!

**One of the nurses told me I was the most stylish laboring person they’d ever had at 3 o’clock in the morning.  I couldn’t really talk in full sentences at that point, so I could’t communicate that I was wearing a dress that my secretary*** had bought me at a garage sale after being totally horrified that I refused to buy any real maternity clothes to wear to work.

***I think I have mentioned that my secretary is the most wonderful person on the planet . . . and if I haven’t . . . she’s the most wonderful person on the planet.

Floor 42: Costco!

Mr. DebtFreeJD and I love Costco with the zeal of the newly-converted.  The samples!  The churros after the checkout lanes!  The huge amounts of food! Every time we go to Costco, I am stunned once more by how much food there is, and how cheap it is.

Our Costco strategy is simple: we walk methodically through each of the food aisles (skipping the TV, clothes, and other assorted junk from China aisles), and try to buy only what we will actually eat.  Obviously, buying food in bulk is pointless unless you actually consume it.  For us, that includes:

  • Maple syrup.  We eat pancakes every Sunday, and probably make up the cost of our membership on savings through buying Kirkland-brand grade A maple syrup alone.
  •  Peanut butter.  DogDebtFreeJD = a little spoiled.*  We eat the peanut butter too, of course, but a lot of it goes into DogDebtFreeJD.
  • Coffee.  We are not coffee snobs.  In fact, we can’t tell the difference between the “good” stuff and the “not-so-good” stuff.  My absolute favorite brew of coffee is Dunkin’ Doughnuts Hazelnut with cream, drunk while answering emails first thing in the morning or driving to work.**  Failing that, Costco coffee is just fine.
  • Avocados.  E.g., proto-guacamole.
  • Beer.  Enough said.  Cheese.  Same.  Chocolate.  Same.  Just kidding.  We don’t buy Costco-sized sweets.  I want to return to my pre-pregnancy weight, and buying all new pants for Mr. DebtFreeJD would not be cost-effective.
  • Fresh blueberries, raspberries, grapes, etc. etc.  Even though I’m no longer pregnant, the fruit cravings have not decreased.
  • Frozen fruit for smoothies.
  • Frozen shrimp/salmon.  For when we are feeling like cooking an adult dinner.
  • Frozen veggie buggers.  For when we are not feeling like cooking an adult dinner.

Recently, I have been contemplating whether to buy an Executive Membership.  Annual cost is $110, as opposed to the $55 cost of a regular membership.  The Executive Membership comes with 2% cash back, meaning we’d have to spend $2,750 annually, or $230 monthly to be worth it.

In the past, we haven’t spent that much.  However, now we will.  Because DIAPERS.

Meeting

DogDebtFreeJD and BabyDebtFreeJD meet each other!

* Any spoiling is due to the fact that she is the most wonderful dog on the planet.  (No offense to you other dog owners out there).

**When I was still driving to work.  No more!