A financial planner would have warned me against it, thankfully it wasn't really their choice (or mine for that matter). My children's combined college fund is currently 8 times my retirement savings. It is more than 5 times my house fund. It is a larger sum than my wife and I make in a year. Looking back on it, I wouldn't have planned it any other way.
This was a choice my mother made. The same mom that had a reputation for being terrible with money most of her life. The mom that showered me, and everyone else with gifts, when she had nothing. The same mom that lived most of her life in credit card debt, squandered multiple gifts and bailouts, and until recently lived paycheck to paycheck. This is a mom that had the vision to make an incredible financial decision, that keeps me responsible, accountable, and motivated, while providing for my children's future and supporting an early retirement. Turns out she is pretty good with money after all.
About a year ago she came into a very large windfall. Members of my family were secretly taking bets about how long until she was in debt again. There were some reasons for initial concern. Within two months of receiving the money she spent half of it on a large house without selling her first one, along with a fancy new car. Went on a European vacation. What she did next was interesting. She was extremely generous with us. Then sold her old house and slowed her spending. Her generosity was incredible, but it came in a way I didn't immediately understand or appreciate. I was thankful don't get me wrong. But the help came in a way that provided mild short term financial relief.
The first thing my mother did was payoff my remaining student loan debt. About $10,000. That freed up $250 per month for me. This allowed me to increase my rent payment $250 a month and relieve some of the financial burden from my wife. We had our second child on the way. We were wondering how we were going to afford quality daycare without dipping into our savings. I had just finished a graduate program which freed up another $500 a month which was being applied to that. So with this help and the $500 not being applied to the graduate program, we had $750 plus cost of living increases to apply to child care. Suddenly it seemed more manageable.
My mother could have given us more money easily. We never asked. We respected it was her money and her choices. We realized we were old enough to take care of our own bills. But at the same time it was difficult not being able to put much away. And I feared a bunch of presents we didn't need, while we were struggling to pay the bills. That had been the way the money had gone in the past. A good chunk of money is being spent that way still. But if the rest of it goes that way it is fine, because of a second action my mom took.
The second generous thing my mother did for us was essentially taking care of college for my two girls. She opened two 529 plans with lump sum deposits in their name. Some of my family members (especially my in-laws) didn't understand this. The money could have been used to buy you a house. Buying a house at that point would have been the worst decision we could have made. My wife and I were both at points in our careers where we were looking to jump jobs. Tying ourselves down to a house would have limited our options. We may have also bought something larger than what we needed. And we then would have had to buy adult furniture. Something that isn't needed with two messy toddlers.
The 529 plans did three things for us.
1. It kept us frugal and ambitious: I wanted to be able to provide my children with a certain standard of life. I needed to achieve a certain salary to get there. At the same time I loved the current role I was in. The financial pressures I felt, gave me an added incentive to move forward with my career and begin investing more money.
2. A better start for my children: I think at one point my wife and I were paying around $1,100 in combined student debt. My children will graduate debt free. They even have the option of working to earn scholarships and applying that money to a house. I'm really going to work to instill the concept of school being work and using their 529 plans as an opportunity to be paid for their efforts.
3. A simpler retirement path: The path to retirement just got a whole lot easier. Step 1: Buy a house. Step 2: Achieve money needed for financial independence. In 17 years my children will both probably be in college. I will be 55 years old. I don't believe, I could think about retirement with a college bill of 80-120k per year hanging over my children. Barring a market disaster my children will have no college debt. I have a third small 529 plan that I started before my mom received her money. I still contribute $25 per month just to keep growing it. This money will be used to help supplement graduate school or something not covered in the initial plan. If it is not needed, I will just let it continue to appreciate and possibly convert it to a 529 for future grandchildren. It's amazing to be able to think about a potential college fund for a grandchild started 25-30 years before they were born.
In conclusion: The gift applied this way, has kept me motivated, frugal, and simplifies things down the road.
Monday, July 10, 2017
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