This week I was surprised to learn that April is Financial Literacy Month. I almost didn't believe it, so I googled it and WOW. Check out this list of observational events coming up in April. There are some serious and important topics, as well as some head scratchers - like Soft Pretzel, Canine Fitness, Soy Foods and Fresh Celery months.
However, my focus is obviously on Financial Literacy. Many of my prior posts on this blog have dealt with the topic and it will always be an issue near and dear to me. One of the earliest pieces I wrote was explaining how I prepared to save for my three kids and their college tuitions. So I thought I’d bring it back with a small update at the end.
Originally Posted as a blog on Ramp Capital LLC’s website July 7th, 2019
This weekend marked a major financial milestone for me as a parent. I made my first college tuition payment. One semester down, seven to go—and that’s just kid number one. Two years remaining before kid number two begins college. Two years after that, kid number three begins.
I thought that this event would be the cause of much stress. And while it wasn’t fun watching your savings deplete, it did become a sense of pride to know that my hard work and decision making was paying off. Then, today, I read a post by my friend Josh Brown titled “How I Invest My Own Money” and it inspired me to write down some thoughts.
I think it’s always great to hear how savings have benefited real people. All stories can be learning experiences. When I was 21 and just starting on Wall Street, the best advice I ever received was to max out my 401k. I took 10% of my weekly check and put it away religiously. The company matched my investment and the process began. I was young and put it all into stocks ($SPY mainly). I rarely looked at it and didn’t change my allocations until decades later. Maybe foolish on my part but I got lucky. Now, I’m in an age-based portfolio.
While the 401k is more about my eventual livelihood, parenthood changes how you view your life and your savings. I was blessed with a small amount of college debt and I vowed not to strap my kids with the burden of overwhelming debt. I took two routes to save for them.
The first route is my favorite. I’ll never forget walking by the Fidelity on Broadway and going through their material. If you invested $1,000 in fund X it would be worth $5,000 in ten years. Or reading stories in Smart Money and Barron’s about if you put $1,000 in the $MSFT IPO it would be worth $100,000 now.
I wanted to put that to the test for my kids.
Each kid was given a specific cash amount to be put into one stock. Kid number one—born in 2000—got a few hundred shares of Coke ($KO). If Warren Buffett owns it, then I’m riding his coattails. He’s up well over 100% and this will help with schooling. When kid number two was born in 2003, everything in my world was Disney ($DIS) at the time, so we were all in. She got a few hundred shares of $DIS and is up over 300%. Lastly, kid number three—born in 2005. I thought outside of the box with this one. We got him an odd lot of Google ($GOOGL). Holy hell has this worked out well. He’d mock the other two kids if he knew.
This is great, but was it the most economical? The capital gains tax wipes out a good chunk, but who am I to complain about a nice profit. Thankfully, this wasn’t my only avenue of savings for them. But, it was fun and makes for a good story.
The smartest thing I ever did for them was contributing to a 529 plan. I use the NY state plan which gives you the choice of three age-based portfolios. I used the option that automatically changes the amount of risk they take on as they get older. I started putting away all of the gift money they received from relatives and friends from life events like baptism, birthdays, and communions. This was a nice early start.
Then we contributed a fixed amount on a monthly basis. We survived the financial crisis because of the dollar-cost averaging. In fact, it was the one time I actually employed a BTFD strategy. I remember telling my wife to put extra money away for them now. So we moved some assets around with the attitude that if things never bounced back they wouldn’t be going to college anyway. I was half-joking, but it did feel like the end of the world at the time.
The latest scare was the selloff last December. My biggest fear was being months away from that first college payment only to see the market tank right before I realize the gains. Thankfully, this is where the age-based strategy paid off. The loss was minimal for kid number one. Sure, we missed this latest run-up, but it was worth it for the peace of mind.
Now for the big payout. The money that I invested in the plan over the last 14-18 years has grown without any tax ramifications because I am using it towards their education. All three have seen increases of over 100%. The money I put away was able to grow and equate to free semesters on its own. So, while I’m sad to see this day come and the kids move one, I’m happy that I was able to provide for them in an extremely efficient way.
This, by no means, is meant to be a humblebrag—as I know timing and luck also play big roles in everything we do in life. I think I had a good combination and over time most people can too.
There have been some cool developments worth mentioning since the original publishing of this blog post…
Josh Brown, who inspired the post, expanded his original post and wrote a book with some great contributors from all aspects of the financial world. The book - How I Invest My Money - takes a deep and personal look at how other people within the industry save and invest their money. If you even remotely liked my post, then his book is a must read.
My youngest learned that he owned shares of Google. Now he claims I love him best and, predictably, he mocks his older siblings.
The market experienced an historical correction and my age-based 529 approach helped us weather that storm. College payments start for kid #2 shortly and are here for the next 6+ years (4 semesters down and 20 to go).