So what do you consider “fair” when it comes to providing equally for your children’s college costs? Here are a few choices:

• save the same total $ but not for the same amount of time. For example, you could invest $1,000 for each child, but one child might be 5 and the other one 3. Therefore the 3 year old’s college fund will have more time to grow.
• invest the same amount for the same duration, and let market fluctuations and investment gains fall where they may. If you choose to invest $1,000 for each child, then invest that amount when the kids are the same age (i.e age 5, or age 0 for example).
• give each the same total dollars starting with the first year of college. If one account has more money in it you would need to switch beneficiaries once the appropriate amount had been spent from the larger 529 plan.
• split based on schooling needs? What if one child wants to be a doctor and another wants to major in philosophy. There’s nothing wrong with studying philosophy, but clearly one child will need more assistance will educational funding than the other. Some people do this when it comes to leaving an estate as well. Some children are simply more responsible and prepared to handle an inheritance than others. Ironically the kids that are more responsible probably are the ones that don’t need the inheritance in the first place!
• perhaps you agree to fund a certain number of years of school, regardless of the school? This could create an incentive the frugal child to go to 4 years of community college for the same cost as one year at Stanford.

Thoughts?

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Do you make most of your food from scratch, or do you buy prepacked meal or components? I’m blessed in that I like cooking, and although I don’t make anything terribly difficult or exotic I don’t mind spending time in the kitchen.

I’m much more of picky eater than my wife is, mostly because I need to eat clean foods and know what is in my foods to feel good. As my wife and I have try to squeeze every penny out of our grocery budget we’ve discovered that it’s very easy to make a lot of the products we used to buy in the stores. The other point worth considering is that we’re all creatures of habit. You may want a little more variety and we do, but my wife and I eat about the save 10 meals over and over. Find ways to reduce the costs, and potentially time, of making those meals and you’ll feel like you’re printing money in the basement.

A few of the key savings drivers in our menus included:

• oatmeal. I love Quaker oatmeal, and their new Simple Harvest products are fantastic. But they’re also expensive, and I don’t need all of that sugar. Buy bulk quick-cook oats and you’ll save a bundle if you eat oatmeal regularly. You could even by ORGANIC oatmeal for about $1/lb, which is much less than any prepacked single serve oatmeal products. By the way you’ll also be saving the planet, because all of the tiny extra plastic packages have to go to a landfill somewhere.
• bread products. It’s pretty easy to make your own pizza crusts, muffins, biscuits, bread sticks
• cheese, sandwich bread, milk. I shop at Sam’s Club to get the best price on these items, but check your local prices to ensure you’re buying at the best store. A price list will help with this.
• skip the pop-tarts and candy bars, and have a piece of fruit instead. Anything that contains something pre-made or contains a package in another package is going to be EXPENSIVE. Think about it! A manufacturer is giving you a pop-tart, which has to be manufactured, inside of a foil bag, which is then placed inside a fancy cardboard box. That’s bound to be more expensive than growing some apples and driving them to a farmers market.

You can save quite a bit of time preparing meals as well if the meals you eat can be frozen. We freeze lasagna (which takes forever to prepare), soups, and make multiple batches of things we eat daily like scrambled eggs (just microwave them with some cheese and they taste good as new). Meatballs are also a great choice for the freezer.

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Making such a decision is easier at certain points in life, like upon graduation from college or upon getting married for example. An alternative approach would be to make a plan to relocate after a certain period of time, like after achieving X years of expreience in a given industry.

I would assume some of the most common reasons for staying in one area of the country might include:

• Being close to family
• All of your friends still live in city X
• You enjoy living in city X
• You can’t find a job anywhere outside of city X

Although I can understand wanting to live close to friends and family, I would challenge you to think about the benefits to YOUR family if you could provide the following by moving to a less expensive locale:

• an affordable home for your family that costs less than $200M
• a paid-for education for all of your children (b/c you could save a lot more if you didn’t have a $400k mortgage)
• better healthcare and less car payments…

I can also relate to wanting an exciting job after college. I lived in Indiana my entire life until I graduated from schoool, and as an eager young-adult I decided to take a job as a consultant with a custom software development firm that required 100% travel. Talk about spreading my wings! I had a great time working at a job I loved, clocking tons of hours and seeing what it was like to live in most of the big east coast cities. Over a six year period I lived in Providence, Richmond, Miami Beach, NYC, White Plains NY, and Philadelphia.

Eventually though, when it was time to scale back the hours and travelling, I focused my search on locations that met my needs AND was cost effective. I was able to get everything I wanted in Texas (affordable housing, close to a big city, down to earth neighbors, numerous job opportunities, etc.). Although it’s true that the south can be a less expensive to east or west coast locales, there are affordable across the U.S. if you’re willing to search a little.

Life is all about choices. If your willing to move you can open up financial opportunities that may never be available to you or your family otherwise.

If you would consider moving to a lower-cost state, please do your research thoroughly. Figure out exactly how much you think you will save, and then verify your numbers and assumptions. It’s easy to see lower house prices, for example, and think your new locale is a great idea. But did you consider the higher state income taxes, or higher state sales taxes, or higher real estate taxes? Be sure to do the research before spending the money to move! You might also want to consider renting for a year or two after moving in order to get your bearings and take your time house hunting.

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Clear enough? People argue this point from a variety of angles, and I’m the first to admit that tithing on net income would be a lot easier than on gross income. It’s just too bad that the “net income” approach isn’t Biblical.

Proverbs 3:9-10 says:

9 Honor the LORD with your wealth,
with the firstfruits of all your crops;

10 then your barns will be filled to overflowing,
and your vats will brim over with new wine.

It doesn’t say “Honor the LORD with your wealth, with the firstfruits minus taxes, employment costs, transportation costs, 401k investments, medical insurance premiums, and group legal plans.” God provided all of your income, not just the 10% He asks for in the tithe. Net income can be manipulated (just try reading a company’s annual report), and by the time you get down to the bottom line you can make that number be anything you want it to be.

Here’s another consideration. Randy Acorn, author of “Money, Possessions, and Eternity“, believes “firstfruits” refers to all of God’s provisions including: insurance, health benefits, and all company-provided perks. And you thought tithing on “gross earnings” was too much. Consider tithing on the value of your medical and insurance benefits!

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Your situation and desire to manage your own finances will differ from mine, but having a professional help you develop a complete financial plan does have some major benefits (assuming you find a good adviser):

• a financial adviser will help you review and develop a complete financial plan. Insurance, wills, estate plans (if necessary), investments, college savings, etc.
• an adviser can help you succeed in areas where you are weak. If you get scared with market tumbles or need someone with more discipline and experience, a financial adviser can be extremely beneficial.
• some advisers can help advise you on major purchases as well, and some may even offer to negotiate for you on things like cars.
• an adviser will monitor your portfolio and financial plan, and will provide guidance along the way. Many of us are so busy with our lives that we rarely take the time to review our financial progress and decisions regularly enough.
• an adviser will save you time. In many ways you’ll be exchanging time for money, like all things from a service-based industry. You’ll be paying someone to help you make decisions and keep track of your progress regularly.

Can you do all of these things on your own? Absolutely. But it will take some time, effort, and money. You don’t need to watch the market daily or know the difference between alpha and beta to be a successful investor. But it does help to read a few books and learn a few things. Actually reading a few books will help you get more value out of a professional adviser too! And there are a lot of areas more complicated (and more dull) than investing when it comes to your financial plan. Life insurance. Medicare/Medicaid. Social Security rules. Rule 72t early withdrawals from qualified retirement accounts. Tax and estate planning strategies. AB Trusts. The list is endless.

The choice comes down to whether having an adviser is worth it to you. And what is the cost? It depends on how the adviser is compensated. I would personally go with a fee-only financial adviser, so that I wouldn’t have to worry that his/her advise was biased towards high-commission products. I would also choose an adviser that would only give advice, but that would not make trades for me or have direct access to my accounts, but that’s just me. Most fee-only financial adviser charge anywhere from 1-2% of the assets under management, and some are truly on an hourly rate ($100-$250/hr I’ve been told). Over the years the resource I’ve seen recommended the most is the Garrett Financial Planning Network. I’ve never used or contacted them, but that is where I would start.

Another choice I would consider making would be working with a financial planner from Vanguard. I have the utmost respect for Vanguard, and I know they have numerous Certified Financial Planners (CFP’s) on staff. I think they even offer free annual planning services if you have enough assets at Vanguard ($500,000 to $1MM+ I think).

On a related note, I highly recommend having a “financial adviser” even if it’s not a professional. My financial adviser is my wife. She’s not as knowledgeable as a professional money manager, but she does have discernment and common sense. I’ve found that discussing financial choices and thoughts with her is always beneficial. You might also consider finding a man or woman you respect from your local church and asking them for advise when making major decisions. A fresh set of eyes and ideas can be quite helpful.

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Ron uses two personal financial ratios when working with clients. The first he calls the “propensity to borrow”, and it’s calculated by dividing your assets by your liabilities. For example, if you only have a mortgage and own $200,000 on a house worth $250,000, your ratio is 200/250 = 0.8. This means that you’re 80% more likely to borrow than to save up for a purchase. Likewise once you’re debt free your ratio will be zero.

Your Propensity to Borrow ratio is an easy way to track your progress to become debt free in my opinion because it takes into account asset value growth or loss, debt repayments, and new debt. Some people have goals other than being completely debt free (including their home), and therefore tracking their total level of debt isn’t very useful. By tracking this metric over time you can see if your debt load and investment returns are moving you in the correct direction.

The second ratio is called the Propensity To Accumulate, and as you might have already guessed it’s calculated as net worth divided by years of work. If you’re net worth is $75,000 and you’ve been working 16 years then on average you’ve been accumulating 75,000/16 = $4,687/year. Not bad!

As your investments (hopefully) continue to grow and compound, so this metric will continue to improve rapidly the further out into the future we go. If fact your last few years before retirement will probably be worth more financially than your first five or ten years of savings! This metric is useful simply because it shows you how much progress you’ve made financially during your working lifetime. The number might be good or bad, but at least know you have an annual target that will indicate an improvement or decline in your financial well-being.

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What is “deferred compensation?”

Deferred compensation (DC, which is my acronym, not an industry standard) is an arrangement where and employee (or business owner) defers some of their income until a specified date. According to some definitions retirement accounts, pensions, and some life insurance policies would be considered deferred compensation. What I’m most interested in discussing today, however, is the choice of deferring some of your regular income through a deferred compensation (DC) program.

“Qualified” versus “Non-Qualified” Deferred Compensation Plans

“Qualified” plans meet IRS guidelines that can be rather strict, including non-discrimination requirements, limited employer contributions, and additional reporting requirements. “Non-qualified” DC plans also exist, and they are considered “non-qualified” because the don’t meet the IRS guidelines to be “qualified”. Employers miss out on tax deductions in non-qualified plans until the employees’ funds are actually paid out, and the benefits to the employee could potentially be taxable even if the employee doesn’t take possession of the funds. It appears that non-qualified plans primarily benefit business owners who want to set some business earnings aside.

I’m assuming my plan at work is a qualified plan, and if so such a plan may provide the following benefits:

• tax advantages. Like regular 401k’s, “qualified” DC plans provide a way to defer taxes on income. Taxes would not be due until the money is paid out to you.
• DC can be rolled over into an IRA
• benefits grow tax free
• you can contribute more total dollars to a DC plan than a 401k. By the time I am eligible for this program in my company I’d likely be a “highly compensated employee”, which means I may not be allowed to contribute up to the maximum federal 401k limit (15,500 this year).

What are the downsides? Here are a few I can think of:

• withdrawals are taxed at the ordinary income tax rate, so there are no tax advantages for long term capital gains. Similar to IRA’s and (regular) 401k’s clearly some tax planning would be important when choosing to participate in a DC plan.
• I’m not clear on what kind of investment options are available. If it’s all over-priced (expensed) mutual funds I’m more likely to pass.
• From what I’ve read I believe the deferred compensation is at risk should the company get sued or go out of business. Unlike 401k funds that are yours, deferred compensation is a liability from the company to you and to my knowledge is not safe from lawsuits or business financial troubles.
• It’s unclear to me how withdrawals are made. Do you have to agree to a fixed schedule, or can you decide how much to be “paid” separately each year?

In summary, deferred compensation plans may be a valuable tool should this choice be available to you at some point in your career. Careful planning however is a must, and deciding to participate and how much to contribute will require some work and several assumptions. If you spend less than you earn, then clearly you don’t need all of you income immediately. Therefore in the future it is reasonable to assume that if you life a frugal lifestyle or try to save your raises that you may have quite a bit of additional income to defer. I personally wouldn’t use such a program as the primary component of my savings plan, but it might be worth including it based on your own situation.

Below are a few other ideas I think might be worth investigating if you can use a DC plan. All of these ideas, however, would need to be individualized to your own situation and may require DC plan flexibility that might not be available:

• You could potentially adjust the combination of your deferred compensation and 401k contributions to maximize the company match. I don’t know if there is a match on DC at my firm, and I don’t know if it would be in addition to the (small) 401k match we have or if it would be a swap. My guess is that the match would have to be in addition to the 401k match or that there is no match.
• You could potentially use DC to drop your family income level down low enough so that you could contribute to a Roth IRA. I think the married filing jointly limit is somewhere around $150,000/yr (wouldn’t it be nice if I had that problem!). You may not have an issue with that income limit now, but as your investments grow it’s important to think through decisions now that could give you flexibility if you ever get to that point. I also recognize that in 2010 you’ll be able to convert regular IRA’s to Roth’s regardless of income limitations, but it’s unclear if that capability will remain available forever.
• If you live frugally AND think you’ll be able to control your retirement income then a DC program might be able to save you some on taxes. Similar to withdrawals from an IRA or 401k, if you don’t receive much earned income or interest from your investments during your retirement then any withdrawals would be at a low tax bracket. This would require your retirement income to be flexible though. If your retirement is funded through a monthly pension for example you won’t be able to control your payments from one year to the next. If you sell tax-efficient securities that have appreciated to provide your retirement income, however, you might choose to skip withdrawals for a few years and take DC payments (or regular IRA distributions) as a way to pull money out at a low tax rate.

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• keeping your fingers together when swimming
• continuing to focus on efficient movements, balance, and rotation
• learning to recover while swimming more slowly, so that your body
• controlling your breathing and heart rate

Improving your financial life is also requires training, diligence, and and persistence. And life is more of a marathon than it is a sprint. Therefore persistence is rewarded more than speed or skill in many ways. In order to improve your financial muscle memory, consider working on the following areas:

• being content with what you have
• learning to delay gratification
• spending less than you earn. Every. Single. Month.
• practice sticking with your investment plan, even when you’re scared about the market
• read one or two books a year, every year, in order to learn something that will improve your capability. This could be a book on personal finance, marriage, faith, or skills that can improve your value in the workforce.

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I’m also surprised by how many of my coworkers and friends go on exotic vacations. Going to the Bahamas, Cancun, Hawaii, etc sounds exotic to me. I realize you can go to Cancun and spend a few hundred dollars or several thousand, but I’m still not sure why everyone needs to “get away.”

I’ve decided to take a different approach. I spent a lot of time and effort finding a state, city, and home that I enjoy and I prefer to spend my free time here. I don’t need to travel or go to new places to be happy. I’m happy right here at home. And there are still hundreds of things I haven’t done yet where I live, so if I really must go outside my wife and I can cruise around town and do a few things without having to spend ourselves into the poor house.

And this plan of mine to create a life I enjoy daily isn’t just driven by financial reasoning. I’d be more willing to pay to fly our families in to visit us than I would travel to go see them. My wife, however, isn’t completely on-board with this idea, although I think that once in a while this might be o.k. with her. The simple fact is I enjoy being at home, and my wife will get more time with our family and I can still work during the day (and therefore not “waste” all of my whopping 2 weeks of vacation time a year).

The only thing I haven’t been able to get around, yet, is having to travel to see family. Both my parents and my in-laws live in other states, and my wife and I have agreed to visit one set of parents a year (in general). This year we were lucky enough to see both sets of parents on a single “vacation” (road trip), but I didn’t really consider it a “vacation” because I wasn’t doing much in the way of relaxing (besides spending time with my wife, which I enjoy).

Hopefully we can skip the “traveling” for the next year or two. My wife and I are hoping to expand our family in the near future with a kiddo, and that means family will probably need to visit us.

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Regardless of your preferred frequency for rebalancing you’ll also need to determine how to rebalance. Here are three potential choices:

1. Rebalance by selling securities that have appreciated and use the proceeds to purchase those that have not grown as quickly. This method is only recommended for holdings within qualified retirement accounts. The tax-deferred or tax-free treatment of IRA’s and 401k’s allow you to buy and sell without tax consequences. Therefore you can rebalance without creating a tax drag on your total returns.
2. Use new funds to rebalance. This choice is a good one if you have investments in taxable accounts. It becomes more difficult to use as your investment base grows, because eventually the growth of your investments will be much larger than your annual investment amount. While the opportunity exists, however, this option is usually a good one worth considering.
3. Turn off automatic reinvestment of dividends and interest, and use your portfolio’s cash flow to rebalance. This option can be used by itself or in combination with the method above, and is a good way to maintain your desired asset allocation without have to sell appreciated assets with tax consequences.
4. Give money away from your portfolio. I know, this may seem like an odd idea initially. If you give regularly to your church or other organizations this may be an option for you. Assuming you need to rebalance your after-tax investment accounts, rather than selling some securities and buying others you could choose to give from your appreciated assets. Then use the money from your income (that would have been given away) to purchase the investments needed to rebalance. You’ll need to work with your church or charity to figure out how to make a donation of securities in order to do this in a tax-free manner.

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