Physicians who start early can supply their child with a number of ways to fund their college education.
I just started funding Mini's 529 this year with the goal of maxing out the first two years at $14,000 each. I'm a front-loader in all things I deem worthwhile: studying, investing, or building businesses. Since Mini could be heading to college in nine years (if she doesn't decide to take a sabbatical from school to run a business venture), the investment that will be truly impactful and fruitful will be the money that gets to grow in the stock market for the longest.
If I max out in 2016 and 2017, the principal of $28,000 can grow for about seven or eight years, which means, based on the rule of 72 (plus an assumed annualized return of roughly 8-10%), that $28,000 could roughly double by the year 2025, when Mini starts college.
Ok, so that's $56,000 for her college—not a whole lot, considering some financial advisors are encouraging the attending radiologists in my residency programs to save more than half a million dollars for each of their kids' college expenses. (I wholeheartedly disagree with advisors who recommend saving that much for each kid’s four years of college, and think that it's likely an Asset Under Management motivation on the advisor's part. But that's a discussion for another post).
So, optimistically, Mini will get $56,000 for college from the 529 plan I started this year. What else is she going to do to ensure she emerges from college debt free?
I decided that the biggest gift I can give Mini is getting her educated and debt free after her bachelor's degree.
• If she's anything like her mom, she will work a job or two, or three, or seven... just kidding. While I, in fact, did work seven jobs simultaneously for a few semesters in college, I do not think it is a healthy practice. Mini can work one, or, at most, two jobs, but not seven.
• If she's nerdy like her dad or mom or aunt or grandfather, she can tutor and make a killing. I started out charging $10 per hour for tutoring at age 16. By the time I was 28, I was charging up to $400 per hour. In college, I charged anywhere between $20-$200 per hour to help others achieve academic excellence and further master my fund of knowledge.
• If she’s a jock like her dad (who was a near-Olympic-level rower at an Ivy League University), and she learns to negotiate with college financial aid offices, she'll likely get a full-ride sports scholarship.
Insert Mini Wise Money in place of the doctor. Mini is way ahead of DWM, because she is learning at the tender age of 8 that money works for her; she doesn't work for money.
If she continues the business ventures she has started as a mere 8- and 9-year-old, Mini's money will work for her like no tomorrow (money invested doesn't take a vacation, doesn't get sick, doesn't sleep). Mini's current money-making ventures include:
• “Walkie Doggie.” When business blooms a little, Mini will hire help and take a cut from each dog-walker/pet-sitter. Mini will be in Hawaii scuba-diving with her parents while her diligent employees walk 10 times the number of neighborhood dogs Mini could walk on her own.
• Freelance Art. Mini has been selling originals and replicas of her artwork (though DWM wants to hold on to most of Mini's originals), ranging from painting, to sculpture, to photography. She will continue to apply herself, as she's naturally inclined to art. Nicely, the money follows when one does what she's good at.
The newest art modality Mini has added to her repertoire. Coincidentally, a twentysomething YouTube artist has become a multi-millionaire from her popular instructional YouTube videos and associated products. If Mini can draw like this self-made young millionaire YouTube artist at the age of 8, given Mini’s adventurous, fearless, entrepreneurial spirit, the sky will be the limit :)
• Investment. Mini has saved 95% of her gift money and has been investing in her mother, Dr. Wise Money, getting a 10% guaranteed return at DWM's bank. As DWM and Mini discussed adjusting down the guaranteed interest rate to a more realistic range of 2-3%, Mini decided that she will buy a couple shares of a few companies she likes and hold her shares to see a long-term gain. Mini has no desire to be a day-trader; in her own words, “It's too much work and the money is not guaranteed for the hard work.”
• Summer camp business. DWM is starting a highly sophisticated summer camp for kids around Mini's age, to start in the summer of 2017. Mini and Mini's dad will be DWM's business partner. By the time Mini starts college, she will have (helped) run the summer camp for nine summers. She will likely take over ownership of the business from DWM by then. This operation will likely bring Mini tens of thousands of dollars each summer after she pays her workers.
Mini will take advantage of the “time value of money” and “cash is king” principles. She will borrow money from credit card companies at 0 to negative interest rates to fund her education, while putting her cash flow where she can make the most tax-efficient return (like in index funds in her Roth IRA, for example).
• For everything, there’s credit cards.
DWM's credit card. DWM currently has a $250,000 credit limit on her credit cards combined. It would not be implausible to charge all of Mini's college expenses on DWM's credit, if it makes sense. Free flights to Hawaii, 5-30% cash back, lots of gift cards for dining, entertainment, and pretty much you can think of under the sun.
Mini Wise Money's credit cards. Like I said before, if you don't stretch or work out your credit/borrowing muscles, they ain't gonna grow. DWM has plans to provide Mini with a monstrously high credit score and large credit limits by her early 20s (setting her up to purchase homes left and right as soon as she gets her first good-paying job, which may or may not be after college given that Mini has her money working for her at the tender age of 8).
Instead of going to the Bank of Mommy and Daddy for college money, Mini will have her own bank :) She's learned early to be on the right, money-making side of banking, leveraging the time value of money for, rather than against, herself.
• Though it’s a last resort, DWM can always step in and pay a bit of Mini's college with her paycheck :) DWM can afford to pay cash for Mini's college expenses, as by the time Mini starts college, DWM will have already achieved financial independence (2023) for two years, meaning all of DWM's income after 2023 won’t be necessary for living, but cream on the top. Since DWM doesn’t plan to retire at age 40 (even though she could at 38), DWM will have plenty of cash flow to make the green papers rain, for a worthwhile cause: Mini's education.
If it makes sense, Mini can also take out student loans (ie, federally subsidized student loans for undergraduate education, where the student loan has a 0% interest rate while student is enrolled in school full time). Upon graduation, when the student loan starts charging 6+%, Mini can look into refinancing with banks, pay off the debt with her own savings in a brokerage account, or pay it off with 0% interest credit cards. And of course, if necessary, there's mom Dr. Wise Money to help.
How will your kiddo pay for his/her college?
Are you saving like crazy for them? (As you can tell, I don't think you need to. Better save for your retirement first.)
Did you know even doctor's kids can get full-ride scholarship to small, pricey, private colleges? Knowing what you are worth is an incredibly important skill.
Please share your experiences and insights below.