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.
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