Forget the 529. We’re funding flexibility

Smart Pills

Parenting can be a little overwhelming.  You’ve got to take care of them now.  You feed them, clothe them, keep them from stuffing their face down the return air vent and eating thumbtacks.  At the same time, you’ve got to prepare for your kid’s future.  As parents, we have the daunting task of making sure our kid comes out the other side of adulthood as a successful member of society.  My wife and I are feeling the pressure and we’ve only got one.

So, the first thing on the checklist is to open up a 529 college savings account, right?  We’ve gotta pile money into a 529 from birth to age 18.  After all, data shows college grads are more successful (See this article from U.S. News and World Report and many others).  Opening up a college savings account is what most financial advisors say we should do.

But my wife and I decided not to take the 529 route.  We’ve chosen a different path.  We are far from experts, but I thought I’d share some of our reasons anyways:

Investing more in our son now

What if you took all the money you would normally put in a 529 and commit to using that money as your child is growing up instead?  Joshua Sheats of Radical Personal Finance talks about this in his podcast episode,  Why This Financial Planner Refuses to Save Money for His Kids’ College.

Set money aside to spend on boosting early childhood education instead of earmarking it for college.  Or spend it on nurturing a talent or a particular interest your kid may be developing.  What could your kid accomplish with this kind of early investment?  What if, instead of wasting time and money trying to find himself in college, he had already experienced enough by that time to know exactly what he wanted to do for the rest of his life?

Of course, this strategy requires commitment and self-control.  One of the big advantages of a 529 is the set-it-and-forget-it nature of the plan.  Left outside the boundaries of the 529, it may be too tempting to grab that money for other things.  But I’d still like to try Sheats’ strategy.  He makes a great argument for it.

Setting money aside for school or start-up

The degree.  That little piece of paper with the cool calligraphy.  It is still valuable.  But for how long?

Companies like Google have already stopped using degrees as a prerequisite for hiring, because they believe it simply doesn’t predict how well a candidate will do at the company.  Skills matter more than degrees at Google.  Skills can be learned outside of college.  Grit matters more than grades at Google.  Grit can only be developed by failing then getting back up and trying again.  In many ways college is set up to punish failure.

Will a degree matter at all in the workforce by the time our son graduates high school in 15 years?  I honestly can’t say for sure.  Even if it does, will our son choose the right career path that won’t be obsolete five years later?  He’ll have to be nimble, that much I know.  Why lock up money in a 529 that takes away flexibility?

Instead of a 529, my wife and I have started to fund a brokerage account for our son.  We invest most of his savings in the Vanguard Total Stock Market ETF (VTI).  This money could be used for college, but it could also be used for a variety of other things, including starting a business.  He could start a dozen little businesses with the amount of money a four-year degree is expected to cost in 2030.  There’s just no substitute for trying and failing until you get it right.

Online learning and beyond

I believe online learning will dramatically drive down the cost of education overall.  It is already starting to happen.  The World Wide Web has made it easier than ever to educate yourself and you can build knowledge and skills á-la-carte-style for just a few hundred bucks at a time.

Online learning marketplaces like Udemy offer classes in just about anything.  I didn’t find underwater basket-weaving, but underwater photography is offered for $19.  With this kind of learning, it’s much easier to be flexible with your career.  It’s much easier to stomach being outsourced, downsized or made obsolete by some software breakthrough.

I can only imagine what learning will look like when my son is 18.  What if in the future, you can learn things by swallowing a pill?  This is the crazy shit I think about.

It’s not that far-fetched, really.  They’ve already designed a way to put little robots in a pill in order to help cure diseases.  It’s not a great leap to think that you could use little robots in a pill to deliver knowledge directly to those busy little synapses in your brain.

Okay.  Forget pills.  Let’s step back a bit.  What about artificial intelligence, augmented reality and the internet of everything?

It’s easy to see where we’re headed.  We will be online all the time.  As long as the internet remains relatively free, we’ll have the full database of human knowledge at our fingertips and artificial intelligence to help us sort through it.  Couple that with an augmented reality overlay in our contact lenses where solutions appear as virtual objects right in front of us and learning becomes incredibly fast.

I’m not saying there will be no need for education in these scenarios.  It’ll just be much faster to get the knowledge you need and it should be much cheaper as technology advances.  Now the only question is, Will your 529 pay for your smart pills and connected contact lenses?  Or will you use your Health Savings Account?

What about the tax advantages?

We’re not really impressed with the so-called tax advantages of a 529 either.  Like a Roth IRA, the money you put into a 529 has already been taxed, so there’s no upfront tax benefit.  However, at least with a Roth you have the option to take the principal out of your account at any time for any reason without penalty.  You just can’t touch the capital gains.

A 529 treats principal and capital gains as the same thing.  You are penalized for any non-qualified distribution of any of the money that’s in that account.

The money in a 529 plan is still allowed to grow tax-free.  But the fact that there are no tax benefits up front and you can’t get the principal out if you need it for anything besides what the government decides is education is a huge downside for us.

Add that to the fact that our state, Minnesota, is one of the few states in the country that doesn’t offer state tax incentives for 529 plans.  I’m not sure we would take advantage even if it did, but that’s worth mentioning too.

There are just too many question marks around the future of education for us to invest in a 529 plan.  We’re just not willing to lock up a chunk of money and give up other opportunities for a higher-ed system that seems outdated.  We want to give our son as many options as possible with any money we’re able to save up for him.  After all, flexibility is so valuable in this fast-changing world.

I am not an investment advisor.  These are my opinions.  Please do your own research before deciding what to do with your money.  

follow me on Twitter @cabbageblog

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14 comments

  1. Honestly I think the reasons wealthy families and their children get even wealthier is because they send their children to college, help them invest, send them to investment camps (this a real thing!); while the middle and working classes tell their kids to take out loans and do college on their own.

    Middle class and working class kids end up scrambling for scholarships, working unskilled crap jobs for years, and really what does an 18 year old know about life?

    I am totally doing a 529, but I’m telling my future kids (I don’t have kids now but probably will), that after college they are on their own. It’s up to them to make it with the advantages they were given. I’ll pay for a wedding. Maybe give a loan if they want to start a business.

    I’m also going to teach them how to save, invest, give to charity, etc. from the time they are very young and can understand, and have motor skills, etc.

    I want to give my children opportunities and the world, but I don’t want to cripple them by overdoing it because I’ve seen the difference where wealthy people totally overdo it, and others balance it out without producing spoiled trust fund babies.

    I haven’t listened to the podcast yet but it honestly really bothers me that he doesn’t want to pay for college.

    P.S. I don’t think you have to go to college to find yourself. I took a free workshop, volunteered at events, and talked to people in different industries to see what their careers were like. There are a lot of frugal things you can do to find yourself in the real world without college.

    I think college is for an education and career.

    Liked by 1 person

  2. Thanks for commenting, Lila! I don’t disagree, education is the key to getting ahead. The question is, what will education really look like in 15 years? I don’t think it will look anything like the higher-ed system we have now. I guess that’s my biggest point in writing this post. There’s a lot more flexibility to be had in other accounts other than 529 plans.

    I do encourage anyone to listen to Joshua Sheats’ podcasts. He’s got great points. His point of view may be radical (it is radical personal finance after all), but I was just struck by his point that we tend to discount early childhood education now in favor of focusing on saving for college later. It comes pretty late in the podcast, so if you want to skip ahead. I just thought it was such a great point that money spent on our children’s development early on can be a huge investment that may pay off much more than being able to send them to even the best Ivy League school later on (my words and clumsy paraphrase, not his).

    Thanks for reading and thanks again for the comment!

    Adam

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  3. A classic debate about what to do for your child. When my child was born last year I opened up a regular custodial account in his name and stared him off with a group of dividend stocks. I plan to continually add to his account and reinvest all dividends automatically. I did not want to open an account that had “strings attached.” This way we can grow a diversified dividend income portfolio that ideally will provide an ever increasing passive income stream. Here are some posts I wrote with his current portfolio http://divhut.com/?s=baby+divhut

    Liked by 1 person

  4. That’s my big thing with the 529 accounts, the “strings”. It’s awesome that you set up a dividend growth portfolio for you kid. I’ll enjoy following your progress. We just went with VTI for our son for the most part and a couple stocks like Disney and Deere for fun. I’m with you on the industrials. They’ve been beaten down quite a bit and if you have a long time-horizon, they should pay off nicely. Thanks for reading!

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  5. Great post!
    Very well said. I don’t have any children, but I’m totally with you on this post. I think flexibility and early development would definitely be more beneficial in the long run.

    And like you said, there’s no guarantee that a degree will lead to a better career. So many kids just waste their parents money in school anyways. I think it would be a lot more meaningful to support/encourage them to pursue things they are passionate about early on in life.

    Also, experience is by far the greatest teacher, especially nowadays. I studied business marketing in school and the course was soooooo outdated and behind the social media movement. I’ve learned so much more online.

    All the technological changes over the next 10-to-20 years will be crazy. VR, robo-advisors, and autonomous cars. Who knows what the work force will look like. I think it’s amazing how forward thinking you are and it sounds like you’re a great parent.

    Liked by 1 person

    • Thanks, Graham! I appreciate the kind words. It’s both fun and even a little scary to think about what the future might hold. I’m typing this to you from a computer that fits in the palm of my hand on a virtual keyboard that shows up on a touchscreen that’s more sensitive to touch than I could’ve ever imagined a decade ago connected to the vast majority of the knowledge of the world traveling through the middle of Minnesota at 75 MPH. I have no clue what 2 decades will bring.

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  6. I agree that things are changing fast, and a traditional degree is losing value compared to the cost. We have 5 little kids at home, and I want them to have options. Start a business, learn how they want to learn, or build passive income. We focus more on learning to work hard, invest, spend wisely and give generously. I think the biggest challenge for the upcoming generation is a lack of work ethic, not educational barriers. The information is out there, and it’s cheap. People just have to want it.

    Liked by 1 person

  7. I don’t have any little people relying on me… not yet, anyway! But I think the important thing is properly considering all your options and making the decision you feel is best, bast on your situation and what you know. It’s much worse to follow conventional advice “just because”.

    Great work writing a blog whilst bringing up a child- I sometimes get entrusted with my nieces, and my life becomes a whirlwind for a few hours!

    Liked by 1 person

    • Oh man. You’re giving me too much credit. But thanks 🙂 My son is the easiest to take care of and my wife is TREMENDOUS support. Plus, I just use a free theme from WordPress and post once a week. I haven’t even written a proper “about me” page (I have to get on that). Pretty lazy really.

      This is really just a fun outlet for me. And I’m finding out this is one of the best things about blogging… Having conversations with like-minded people from around the world.

      Great comment on the article too. That’s really what it’s all about, challenging the “norms” and doing what’s right for you. Thanks again!

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  8. Gulp! We’ve got 529s for our twins! I like your thought process on this, CC. We may at some point scale it back and put some contributions into a taxable fund instead, for flexibility. I do like the tax advantage of the 529 but it’s not a huge difference maker.
    I would argue that college education is still worth strong consideration, even if the curriculum and methods are dated. A nice little post on Free Money Finance cited some compelling stats…

    Liked by 1 person

    • That just shows you’re an awesome parent, Cubert! Trying to set your children up for the best future possible.

      I agree, post-secondary education will always be important. I just think the college “degree” part will fade into the background. I see the future being more about a-la-carte certifications to be much more flexible with the fast-changing dynamics of the workforce. Also, I think it’ll be much cheaper than we expect, because the information needed will be much more readily available from a wide array of resources (supply/demand). Our kids won’t need to search for it behind the red brick walls of a university underneath a pile of throw-away curriculum that has nothing to do with what we want to study.

      That said, I think 529s will flex with the times and cover a wider and wider range of education options (maybe even the under-water basket-weaving pills eventually 😉 They probably already cover more than I give them credit for.

      I love this kind of discussion, Cubert. Thanks for reading and commenting!

      Liked by 1 person

  9. […] Some of you might think I’m being a bad parent by struggling with the idea of funding my children’s 529 plans. Most people I talk to and most everything I read online tell me it’s a no-brainer. It’s not that I’d rather blow that money on myself. I just struggle with whether that’s the truly the best vehicle for saving for their future. Are there other ways I can use that money to better enrich their lives or set them up better? Sounds like Crispy Cabbage (what a name!) thinks about it as well in Forget The 529, We’re Funding Flexibility. […]

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