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THE BLUE MONEY REPORT.
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The Blue Money Report
"Those who make peaceful revolutions impossible will make violent revolutions inevitable."
~ President John Kennedy
Welcome to the Blue Money Report
Note from the Editor: I want to take a moment to thank all of those folks who have made the first year of the syndicated column so successful. Check us out all month for special features and guest columnists.
Today's Commentary: 01.31.03 The madness I refer to in the title has nothing to do with the impending moves toward war, the ill designed tax plan, or some other financial blunder and mishap that seem to be so plentiful these days, that a writer has a difficult time choosing which story to comment on first. No the madness I am thinking about is still a month away.
I spent a great deal of time in March watching college basketball. I am captivated by the NCAA men's tournament each year and of course my inability to predict who may win. In my world, whomever I place a wager on, is doomed to lose. It has become the family joke. But as look at those fresh faced athletes and their enthusiastic supporters, I wonder if I should be feeling guilty.
I am not saving for my child's college tuition. I can't, and I will tell you why you probably shouldn't either.
First, let me tell you what is available to help you get your child to college. It is what a good financial writer would do. Saving for college for your child was enabled with the addition of section 529 to the tax code. Essentially, this allowed you to save for your child's tuition using a number of options. The options come when you find a state that has the best plan for you. Contrary to popular belief, you do not need invest in the plan in your state, and when your child chooses to go to college, the assets in the plan can be "rolled over" to the state where they are attending. The state runs the plan through money managers, and not all of them offer the above mentioned options.
One of the first things you need to find out from your state is whether the plan can be rolled over to another state. These are non resident issues, and if your kids are anything like mine, your choice will seem the least likely they will pick. The roll over option may be the most important option in the plan.
The chances that your child will not attend a school of higher learning are impossible to predict while they are still using training wheels. So you need to research the transferability of the assets to a sibling who may turn out to be more inclined to take the money and learn.
There are age restrictions involved in some plans, usually insisting that the money be used by age thirty. Let's hope they have decided by then.
The plans themselves have other restrictions that you should consider. The withdrawal of excess money, or unused portions is penalized at the rate of 10%. There are however, tax advantages that might be sizable if you live in a state that has a high rate. Other cost to consider in these plans lie mainly with the mutual fund. You may find that some fund companies charge an enrollment fee along with additional expenses above and beyond the norm. With little in the way of track records for these young plans, the difficulty in choosing becomes even harder.
There is a difference between Educational IRAs and 529 plans. Probably the best way to compare is side by side.
The Educational IRA
Pros: Cons: Section 529 Savings Plans Pros: Cons: The two biggest consideration with either plan is the expense and who owns the money. Ownership is important with regard to financial aid. Which brings me to my argument against this plan of saving.
I agree, some of these plans cost little to begin, and a payroll deduction is probably available. But the money you save must be above and beyond your ability to make your daily ends meet, your ability to save for your own retirement, and your ability to give your child an enriching initial eighteen years prior to college.
The first three of my children graduated from high school but never intended to go on to college. My wife and I provided incredible opportunities for them while they were in high school, but they never saw the argument for higher education as compelling. Sure, they regret it now, but I do not regret keeping that money invested for our future. The last kid at home will, in all likelihood attend college, but will do so through a series of grants and scholarships, and with financial help.
According to FinancialAidOfficer.com, Guidance from the U.S. Department of Education says that your 529 savings account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. This means that your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your account for each academic year. Another consideration, especially for those of us who will apply for financial help for tuition, in a 529 plan, the assets within are deducted for your financial "need" on a dollar for dollar basis. If your prepaid tuition contract pays out $5,000 in tuition benefits this year, you will be considered as having $5,000 less need for financial aid.
The ability for your child to get to college will not be deterred by your inability to save for it. They will graduate (with luck) from those institutions of higher learning with one of two things. Besides the degree, it will either be a modest debt or an enormous debt. A college grad will, according to the statistics, earn about a million dollars more over the course of their working life than someone who has not attended. And there is increasing evidence that the skills to do even mediocre jobs will require some amount of advanced learning.
Sure, you may not be able to send them to an Ivy league school or another private institution, but college, no matter what the costs, is what you bring to it. School your children now. Broaden their horizons. Spend time with them and teach them the world. They will be better adults and will, from an economic standpoint, be able to raise more money for their education through grants and scholarships.
Today's Commentary: 01.28.03
Tonight, the President delivers his State of the Union address. Second in a series of (three) speeches that will discuss with the American people that condition of the world according to George. Not to mean any disrespect for the office, and my apologies for addressing you by first name (the familiarity of first names between the two of us will never come to pass), but please spare us and decide that we don't need to know.
The military uses a phrase when it comes to imformation called "need to know basis". The American people have always felt it was their right to know everything about everything of importance. What I fear most Mr. Bush, comes not from what you might reveal but what you won't reveal.
On the cusp of a war with Iraq, the American people have been joining the global community for a better understanding of the urgency for our aggression in Iraq. The State of the Union address hold a curious handful of possibilities. Rumor has it that the President plans to add no other nation to the "Axis of Evil", and for the sake of those who aren't present and not clapping emphatically, he might even gloss over the specter of looming conflict as if it doesn't exist as anything other than a piece in a huge strategic puzzle.
But all of the hopes and desires by me that he will avoid the issue of the economy and stick with what he seems most adept at will fall by the wayside. He will no doubt tell us that he is standing for all Americans when he offers tax breaks, economic incentives, and the promise that growth will continue in a strong and vibrant economy such as what America is.
Last year when he delivered his first (in a series of three) State of the Union addresses, there were 1.4 million workers who, because they were employed, where unable to stay up late to watch Letterman comment about the speech.
On Thursday of this week, the numbers from the fourth quarter of '02 arrive on the desks of thousands whose job it is to get the news right out, fully assimilated and absorbed. Although the number could be low but not likely to be a negative, it will still show some resistance to the economy getting up and taking so much as a wobbly step. We keep grabbing the economy by the belt, like some turf prone football player who has had the wind knocked out of him. Once it gains its breath, and it has been laying there for darned near three years now, it will need to be helped off the field. Expect last year to average out at 2.8% or 2.9% year over year growth. Hardly playing caliber.
There had been much speculation as to why the market would rally, if it could. My father, a market watcher, suggested that a stock that rises from $1 to $2 can skew even the best of averages. Many of the sweetheart tech names have seen this kind of "resurgence", which means, that most folks can't let go. And we hope that it is the individual investor and not the institutions. Many of those folks have started to find their way back in the market spending some of their cash.
The worrisomeness of this notion was borne out by Merrill Lynch's chief investment strategist, David Bowers, who observed a lowering of the cash percentages currently held by the funds it tracks. While not significant in terms of percentages (from 4.4% to 4.2%) and with a heck of a lot less in terms of real dollars they may have held three years ago, it still shows a group of investors anxious to move markets that are refusing to budge.
But apparently, when something costs a dollar, it is hard for any investor to resist.
We have said here before that there will be little hope for any sort of economic recovery worth noting if companies can find nothing but negativity about Americans, their goals, and the their investments, i.e. their companies, at every turn. Why invest in the world when the very customer you are trying to woo is being turned away by our globalistic actions. Those poor titans gathering at Davos, Switzerland to attend the World Economic Forum have met American companies with icy stares and the prediction that the climate, while not entering into a technological ice age, is not in any condition to begin any sort of spring thaw.
The markets finally fell out of the green and into the red last week, with the Nasdaq joining the group on Monday. Let's face it. The U.S. financials, and I am referring to the dollar also, do not have the same appeal as they once did.
The bond market has found the latest pin to burst the bubble from the mortgage arena. (A double burst?) Due to an ambiguous law passed by Georgia last year and in the works or passed in several other states, the ability for a victim of "predatory lending practices" to seek damages for such transgressions would make it's way all the way up the lending supply line, which according to Barron's, could possibly finds its way to the investor who purchases these debts.
The investor would find themselves in the loop and ultimately liable from their mutual funds choice or their pension plans who purchase home equity based securities structured by lenders or banks. In the go-go days of low mortgage rates and easy money, sub-prime loans, money sold to those with less than stellar credit but willing to pay a higher rate for the opportunity to become a part of the American dream, were offering some heady returns to investors able to take the risk. Worse case scenario, not that passing liability onto investors through some poorly written state law isn't bad enough, create the distinct possbility that the states who have created this piece of legislation will find mortgage money cut-off. Nothing stops the economy of a state, the state of the housing industry, and the ripple effects of these kinds of laws, that the tightening of the purse strings.
All this and investors go running for the shelter of Treasuries, gold and oil. In the thick of the up coming week, the FOMC meet mid-week to discuss rates. Fresh off losing a few friendly bets on Sunday's game, I hesitate to offer a wager against consensus but things will stay the same interest rate-wise. But don't be so sure come April. Mr. Greenspan likes the center stage, and right now, there are just too many players all speaking at the same time. Fed fund futures indicate another easing and you could easily expect that the policy of neutral might be up for rewording. If that does happen, look for the surprise quarter point easing to come soon.
So Mr. Bush, as craft your speech to the nation and to the world, please don't mention the economy. It has much the same effect as any friendly wager I place. I am soon parted with my money.
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