How Much Do Other Parents Help Pay For College Tuition?

Posted on May 14, 2017 // 23 Comments

captuition

As the school year ends, I am reminded that my children are another year closer to college. I still remember paying off my own $30,000 in student loan debt, and now I am worried about saving up for their tuition. While I still maintain that parents should secure their own retirement needs before worrying about their kid’s college bill, what if you are doing okay and want to help out?

A Priceonomics survey of over 1,400 college graduates between the ages of 25 and 54 found on average that people graduated college initially with roughly $40,000 in student loan debt and currently still maintain a balance of roughly $30,000.

Of these college graduates, how many people receive financial help from their parents? How much assistance did they get? Here are the results.

whopays

The survey also asked questions about gender, race, and the extent to which debt hindered their ability to cover daily expenses, save for retirement, or start a small business. The article focused on the differences, but overall I saw more similarities than differences. In all the cases, between 50% and 71% of people felt that their student loan debt hindered them in all three scenarios.

There are many (terrifying) projections about how much college will cost in 2035. I’ve seen numbers over $100,000 per year for private tuition/housing and $50,000 per year for public tuition/housing in today’s dollars. However, according to this survey only 9% of parents paid for most and 11% paid for half of their kid’s tuition. 80% of parents either paid nothing or “a little”. It’s hard to reconcile these two stats. Are students in 2035 really going to graduate with $100,000 of debt? Something is going to have to give.

Filed Under: Career, College & Education //

Grit, Early Retirement, and Financial Freedom

Posted on October 23, 2016 // Leave a Comment

grit0

I joined the bandwagon and finished reading Grit: The Power of Passion and Perseverance by Angela Duckworth. (It’s not like I could just give up in the middle…) You’ve probably heard of this NYT bestseller. Either the book, the MacArthur fellow author, or the research discussed has been profiled in nearly every major media outlet. This makes sense due to its broad appeal, from dating/marriage to professional/career to parenting.

Instead of a traditional book review, I’ll try to relate the major conclusions from the book to the pursuit of financial indepedence and retiring early (FIRE).

Grit is both perseverance and passion. Perseverance is the act of trying or continuing to do something, even if it is difficult. Passion is a strong interest that aligns with your values, beliefs, and self-identity. This second part is sometimes overlooked or dismissed. You need both determination and direction. Sometimes it takes time to develop a passion, but nobody works doggedly on something they don’t love.

One test for passion is to ask yourself – Are you excited about the minutiae? I’m not sure how many people find themselves lost in though about withdrawal rate statistics, IRS publications on tax strategies, or optimal asset allocation. 🙂

Grit predicts success more reliably than talent. Research has also shown that talent is not correlated with grit. Talent is certainly still important. However, grit is just as, if not more important, than talent when it comes to success. While grit alone won’t make you an Olympic athlete, talent alone certainly won’t get you there either. When people idolize the idea of natural talent, it lets them off the hook in terms of achievement. “I couldn’t do that because I wasn’t innately talented enough, so it’s not my fault.”

Effort counts twice. Instead of the theory that talent produces achievement, Duckworth presents this alternative model.

Talent x Effort = Skill

Skill x Effort = Achievement

Talent is how quickly we can improve our skill. But you still need to apply effort to build that skill. Think of skills like cooking, throwing a football, writing, coding, or mathematical analysis. Next, effort makes that skill productive. You need effort again to become a successful chef with multiple restaurants, a quarterback with a record number of touchdown passes, an author of several books, or an engineer that designed important products. Effort counts twice.

Now, in terms of financial freedom, I would say the closest analogue to skill is income. To increase your net worth, you need to first make money. Your talents may or may not naturally align to making money. Applying effort with your talent creates income. Next, it’s not what you make, it’s what you keep. That takes saving, which is a different kind of effort. Thus, we can rewrite the equations as follows:

Talent x Effort (Working) = Income

Income x Effort (Saving) = Financial Freedom

Researcher Catharine Cox analyzed high-achieving historical figures and came to the conclusion that “high but not the highest intelligence, combined with the greatest degree of persistence will achieve greater eminence than the highest degree of intelligence with somewhat less persistence.” Perhaps we could also extend this to say a high (above-average) income but not the highest income combined with more grit is better than the highest income and less grit.

Enthusiasm is common. Endurance is rare. Nearly everyone thinks the idea of financial independence is great. Who wouldn’t want that? Only a fraction of people actually follow through with it. I really liked this quote from the book… “A high level of achievement is often an accretion of mundane acts.”

Goal hierarchies. Set a top level goal first, which lets you develop sub-goals, which leads to specific actions. Don’t spend your limited time on other unrelated and/or conflicting sub-goals. If a related sub-goal is not working, replace it with something different. Here’s a figure taken from a US Army whitepaper on Grit [pdf]:

grit_er1

Now, financial freedom may not be your top-level goal. But it might be related if you aren’t able to work on your top-level goal because you’re working 40 hours a week to pay the mortgage.

In any case, I think this diagram does a good job illustrating the concept that there are many ways to get closer to FIRE. You could advance in your career and grow your salary. You could build up a collection of rental units. You could move into a smaller house with a shorter commute. You could buy index funds. You could max out your 401(k). You could buy dividend stocks or REITs. You could create websites that create semi-passive income. If one way doesn’t work, you can try another.

You can improve your grittiness. Your grit isn’t fixed. Here are some ways you can get better:

  • Explore different interests. A passion doesn’t just appear instantly. Read some different perspectives. See which one fits you. Some people focus on entrepreneurship and starting a successful business (make more money). Some focus on frugality and controlling household expenses (spend less money). Some focus on investing (make the difference grow faster).
  • Deliberate practice. You should force yourself outside your comfort zone. It should be at least a little hard! Focus on your weaknesses, try to improve, get feedback, try to improve some more. Acquire a habit of discipline.
  • Focus on a higher purpose. Cultivate meaning. To reach FIRE, you need a good job that you find worth doing. You need purpose. If you don’t like your job, try to reflect on your existing work can help society. Are you a bricklayer, or someone building a school to teach children or a church to serve God? Alternatively, change or alter your work to match your own interests and values.
  • Find a good role model or mentor. Someone you can talk to and get constant feedback from is best, but sometimes you have to settle for books or blog authors. Ideally, they should also inspire hope.
  • Use group conformity and the power of culture to your benefit. Merge your goals with your self-identity. Join local groups or online forums with people with similar interests. Each has a different culture, be it Early Retirement Forums or Mr. Money Mustache Forums or Bogleheads.

Bottom line: When people think of early retirement, they often think of the 20-year-old Silicon Valley entrepreneur, a big inheritance, or the lottery ticket winner. This focuses on luck and talent – things you can’t control – and thus thinking you’ll never be able to do it yourself. In most cases, achieving financial freedom requires a lot of mundane acts over many years. Over time, you develop working skills that create an above-average income. Then you develop saving skills that create a large net worth. Luck and talent still matter, but you really need grit – the combination of perseverance and passion. The good news is that grit is something you can control and improve.

For more on this topic, take her Grit Scale test and also watch her TED Talk.

Filed Under: Book Reviews, Career, Retirement //

Open Enrollment Season: Maximizing Your Employee Benefits

Posted on September 12, 2016 // 10 Comments

maxbenAs open enrollment season is around the corner, Morningstar offered up an 10-minute video interview with Christine Benz discussing tips on maximizing your employee benefits. (Is it just me, or does open enrollment too often seem to be a game of “Guess What Benefits We Trimmed This Year?”)

Here are the five topics that were discussed:

  • Health Savings Accounts (HSAs). The tax advantages can be better than a Traditional or Roth IRA. Contributions are effectively tax-deductible (you put in pre-tax money), the money can compound for decades tax-free, and even your withdrawals are tax-free when put towards qualified healthcare expenses. However, you have to be enrolled in a qualified high-deductible health plan, which means this works best if you are “healthy and wealthy” meaning you don’t really have big healthcare expenses and you have enough cash that you don’t need to use your HSA money now.
  • Free and/or discounted investment advice with your 401(k) plan. You may be eligible for customized investment advice, or at the very least you should compare your personal rate of return with the performance of your target date mutual fund option.
  • Employer-sponsored disability insurance. It may be both easier to qualify for and cheaper to buy disability insurance through your employer rather than with your own individual insurance plan.
  • Tax-savings perks like commuter benefit programs or dependent-care programs. There are often smaller side-programs that can be helpful.
  • Student loan repayment assistance programs. These are not very common, but are growing in popularity.

These five areas are fine suggestions, although you may prefer to buy your own portable disability insurance. First of all, it may not be cheaper to go with your broad employer plan. In addition, if you switch jobs for any reason, you might lose your disability insurance at the same time. Finally, specialized workers can purchase riders that will pay out as long as you can no longer perform your specific occupation (as opposed to any lower-paying job). However, in my experience it is easy to put this off, so getting some employer-sponsored disability insurance can be a good first step.

Filed Under: Career //

7 Essential Money Questions from The New York Times

Posted on September 6, 2016 // 4 Comments

green_questionThe NY Times has a new essay called 7 Essential Money Questions Sure to Start a Conversation:

What follows are the seven best queries that I could find that tend to stop people cold and get them to open up about whatever money they have and the emotions that wrap themselves around their personal finances.

I found myself answering them in my head, so I figured why not share my answers.

What lessons about money did you learn from your parents?

I would say that I remember frugality being a part of everyday life growing up. We would live in apartments and duplexes, while some of my friends would live in big houses. We rarely ate in restaurants, except on birthdays when I got to go to Olive Garden or Red Lobster. I remember being scolded when I used a paper towel for a task that could have been done with a cloth towel. I was taught to use no more than a dab of shampoo. To this day, I have a visceral dislike of wasting food.

Another thing that stuck with me was that my dad worked hard at a career that he enjoyed, but he could have made more money elsewhere. I didn’t like that he seemed to work all the time, but at least he seemed passionate about what he was doing. Together, I feel like I have combined these characteristics. If you can control your spending, you can be more flexible in your work situation.

What does the word “money” conjure up for you?

Well, for starters money means survival. Food, housing, and personal safety. I am a conservative person that enjoys a feeling of security. By making clear what is need vs. want, I can be confident that I have enough in the bank to “survive” for a very long time.

Above that, money means freedom. Freedom to quit a job with management that cares about short-term profits or metrics more than long-term value or people. Forget you money. Freedom to have more kids without worrying.

How many children would you like to have when you retire?

Three. This is such a personal choice. What’s worse, with fertility problems and adoption hurdles you may not even be given a choice.

How do you think your children feel about that?

I think they’ll be fine. They may have to share clothes, books, toys, and later vehicles. They’ll have to share rooms. Every kid doesn’t need their own room… What’s wrong with bunk beds? I hope they appreciate having siblings.

Raising kids is both so more much difficult and enjoyable than I thought it would be. I used to idealize some ideal “future with kids”. Nowadays, instead of long-term planning, I just try to enjoy the process. Every day usually has a few precious moments and a few difficult ones that test our patience.

Tell me about your financial situation when you first met.

My wife and I met when we were both 18 years old and freshmen in college. Her parents had taken out home equity loans to help fund her education. My parents were also paying for a good chunk of my education, and in addition I was accruing what would end up being $30,000 in student loans. We both had part-time jobs (that’s actually how we met, while I was on the job). Our combined net worth was negative.

What are the most important things in your life?

Family, then friends, then community.

What does the prospect of retirement look like to you?

Here’s my ideal “early retirement” weekday from roughly age 40-60. Wake up early. Prepare kids and send off to school. Work at any job that I enjoy until noon. Eat lunch with spouse and run any errands. Pick up kids and play with/teach/chauffeur them. Have the time and energy to be present with them. Cook at home and eat dinner as a family. Put kids to bed. Read. Go to bed early-ish. On weekends, add in hiking, sports, backyard cookouts, festivals, etc. Travel together as a family for 3-6 weeks at a time in the summer.

Filed Under: Career, Family, Frugal Living //

Infographic: Income vs. Cost-of-Living For All 50 States

Posted on August 14, 2016 // 4 Comments

The NY Times has an article called What $100 Can Buy, State by State. You know I can’t resist a good 50-state infographic. The first chart is basically a cost-of-living comparison. The findings shouldn’t be too surprising.

nyt_100buy1

  • Stuff and services cost the most in District of Columbia, Hawaii, New York, New Jersey, California, and Maryland.
  • Stuff and services cost the least in Mississippi, Arkansas, Alabama, South Dakota, and Kentucky.

You would expect the states with higher cost-of-living to also have higher incomes. But the correlation isn’t always perfect. I found the second chart to be more interesting, as they adjusted for incomes. Some places had low-to-average income and high prices, while some states had average-to-high incomes and low prices.

nyt_100buy2

  • The states where per capita incomes have the most purchasing power were North Dakota, Connecticut, District of Columbia, Wyoming, Massachusetts, and Nebraska.
  • The states where per capita incomes have the least purchasing power were Utah, New Mexico, Arizona, Idaho, and Hawaii.
Filed Under: Career, Frugal Living //

Lifetime Allocation Pie Chart: Learning, Earning, and Returning

Posted on July 21, 2016 // 5 Comments

You always see pie charts used to illustrate asset allocation for portfolios. Stocks, bonds, commodities, real estate, etc. How about a pie chart for deciding how to allocate your lifetime:

life_aa

This was one of the “life lessons” provided by entrepreneur Tristan Walker in his Bloomberg profile:

Spend the first third of your life learning, the second earning, and the third returning. I try to shorten earning so I can maximize returning.

Your time on earth is a finite resource. Let’s say you put your life expectancy at 84 years. That works out to:

  • From birth until 28 years old, you are Learning. You are building up your knowledge, skills, and experience. You are building human capital.
  • From 28 to 56 years old, you are Earning. You are converting your human capital to traditional capital – money!
  • From 56 onwards, you are Returning. Once you have enough, it is your turn to give back to your community.

Learning isn’t always done in school. For example, many people will tell you that in your early years, you should take on risks before you develop too many other responsibilities. Start a business, switch careers, or travel the world. Don’t worry about the money in your 20s; your basic food and shelter expenses can be barebones. Invest your time into yourself.

Along the same lines, you won’t stop learning completely at 28 years old, but your focus and priorities may change. As I get close to 40, I feel the growing pressure of providing security for my kids and the pressure of caring for aging parents. In practical terms, you’ll need to invest more of your time into making money. Well, I might change that to earning money and then saving a big chunk of it.

Then one day, hopefully sooner than later, you can move on to giving back in a way that aligns with your personal philosophies. Invest your time towards helping your family, friends, the local community, and the world.

This is a related concept to the Earn, Save, Grow, Preserve lifecyle.

Filed Under: Career, Family, Frugal Living, Retirement //

Infographic: The Best Paying Job In Each State, Relative To National Average

Posted on July 13, 2016 // 3 Comments

Business Insider mined data from the Bureau of Labor Statistics and compared the state average salary and the national average salary for each job occupation. The single occupation with the largest percent difference is listed in the infographic below:

bi_jobpay

The income numbers are not adjusted for cost-of-living, but as that would apply to all jobs, you are still looking at the greatest outlier and thus some interesting outcomes. For example:

  • The average annual salary for welders and cutters in Alaska is roughly $72,000. That’s 80% more than the national average of $40,000.
  • The average annual salary for tile and marble setters in Massachusetts is roughly $75,000. That’s 70% more than the national average of $44,000.
  • The average annual salary for physical therapists in Nevada is roughly $128,000. That’s 52% more than the national average of $84,000.
  • The average annual salary for judicial law clerks in New York is roughly $111,000. That’s 104% more than the national average of $54,000.

I’m sure there are some economic (or “freakonomic”) explanations for some of these variations. It would also be interesting to run the same numbers for the worst paying job in each state, relative the national average.

Filed Under: Career //

Owning a McDonald’s Franchise: Purchase Cost vs. Annual Profit

Posted on October 19, 2015 // 20 Comments

mcfranchise_logoDespite their negative media attention, the McDonald’s franchise that I drive past every day is packed all the time. I rarely eat there (especially since my diet bet), but I used to think to myself that if I were going to buy a franchise, I’d buy a McDonald’s. My impression was always that McDonald’s were always pretty clean with consistent food (even if you consider it consistently unhealthy), while Burger King’s were often dirty with inconsistent food.

A common knock against purchasing a franchise is that you are “buying a job”. A recent Businessweek article broke down the gross sales, gross profits, and net profits of the average McDonald’s franchise in the US. I found the numbers very interesting:

mcfranchise_income

Average annual profit per franchise: $150,000 a year, roughly. Okay, but how much does this franchise cost? From the official McDonald’s franchise website:

Initial Costs
$45,000 Initial Fee paid to McDonald’s

Equipment and Pre-Opening Costs
Typically these costs range from $944,352 to $2,172,045. The size of the restaurant facility, area of the country, pre-opening expenses, inventory, selection of kitchen equipment, signage, and style of decor and landscaping will affect new restaurant costs. These costs are paid to suppliers.

Average cost of new franchise: At least $1 million roughly, with a minimum of $500,000 in cash and non-borrowed resources. Other sources state $750,000 minimum in liquid assets. You must be able to cover 40% of the costs of a new franchise location. You must be able to pay cash for at least 25% of the cost of an existing franchise, with the rest financed over at most 7 years.

Average hours of work per week as an owner/operator? I could not find reliable statistics, but here is an excerpt from a Reddit AMA from a businessperson from New Zealand who has owned a total of three McDonald’s franchises and recently sold the last one.

How much work was required of you per week on average? If my goal were to own one McDonalds and do the minimum amount of work possible, while also running it well, how low do you think I could get that weekly number of hours? And what would I be doing in that time?

I would work 9am – 5pm, 6 days a week. Mostly I’m at my office sorting problems remotely from there. I liked to pop down to my couple stores at least a couple times a day and check on them – make sure they’re clean, and to check on the Restaurant Manager about any issues. Typically I used to work hard for 4-6 hours a day, with the rest out in the stores just checking on them.

Exit / Selling price? One would imagine that if your franchise is doing well and churning out good numbers, someone else would readily buy it. If your business is struggling, then both your annual income and total business value will drop. The same Reddit user above reported selling for “just above” NZ $1.4 million, or US $916,000. I’m a bit confused by the purchase price, but it appears that he paid NZ $550,000 via business loan, 12 years ago.

In the end, owning a McDonald’s franchise is still a business which means you take on risk for potentially significant gains or losses. But if you spend 40 hours a week and only keep tabs on one location, it might really feel like you bought a job. These statistics help explain why most franchisees own multiple locations; Businessweek says the average is six.

Filed Under: Career, Entrepreneurial, Investing //

Annual Income by College Major Ranked by Quartile and Percentile

Posted on May 27, 2015 // 5 Comments

Here’s another article about the relationship between college majors and future earnings. But this WSJ article at least looks beyond just providing the median wage and helps you visualize the spread between the 25th and 75th percentiles for each major:

wsjcollegerank

There is also an interactive chart embedded in the WSJ article. For example, I could sort to find the top 10 majors according to their 25th percentile wage, imagining more of a worst-case scenario that just assuming I’ll get the median income or higher. Here are a few more nuggets that may surprise you:

Graduates of architecture programs may have higher salaries than teachers, as the latest paper shows, but the February report noted that they’re also likely to see unemployment rates twice those of education majors.

[…] just choosing a major in science, technology, engineering or mathematics, known as the STEM fields, doesn’t secure a hefty paycheck. Mr. Carnevale’s team found that biology majors have median annual wages of $56,000 over their careers from age 25 to 59, or about one-third less than physicists.

Yet once biologists finish graduate programs—and more than half of them do—their median annual earnings jump to $96,000, roughly on par with physicists who have advanced degrees.

There are also wide ranges in salaries for specific majors. The top 25% of earners who majored in finance can expect annual earnings of more than $100,000, while the bottom quartile may bring in just about $50,000 a year.

[…] lifetime earnings for economics majors at the 90th percentile are nearly triple those at the 10th, reflecting the range of destinations for such experts in government and the private sector.

I support the notion that prospective income shouldn’t be the only consideration in choosing a career, as I’ve tried working in decent-paying fields that don’t interest me and it just didn’t work out. However, money remains a factor and I like to have an idea of what the stats are.

Here’s another thing to consider: early retirement in under 20 years requires a 50% savings rate. Such a savings ratio is much more likely if you make twice the overall median salary with median spending (make $120k household income, spend $60k) as opposed to a median salary and half-of-median spending (make $60k household, spend $30k). Someone could start working at 21, retire by 40, and spend the rest of their life doing whatever job or activity they wanted to. Semi-retirement is another option.

Filed Under: Career, College & Education //

Top 1% of Income at Age 30 = $135,000 a Year

Posted on November 16, 2014 // 1 Comment

I’ve never been into the whole 1% politicized debate, but Derek Thompson at The Atlantic has put out another chart that just begs for a glance.

The richest percentile of Americans makes many hundreds of thousands of dollars a year. So how could a $135,000 salary make you a one-percenter? If you’re 31 or younger, that figure puts you ahead of 99 percent of your age group.

Here’s what salary it takes to be in the top 1% (red) and 0.1% (blue) of wage and salary income, separated by age bracket.

top1age

Okay, so some people I know apparently were in the top 1%e at age 30. But as the author points out, the really rich don’t make their money from earned income, they make it from investment income. In other words, their money is doing the working, not them. However, that all likely started with someone (perhaps them, but perhaps a father or grandmother) deciding not to spend their salary on consumer goods and instead putting it towards an income-producing asset.

Remember kids, it’s not what you make that matters, it’s what you save! 😉

Filed Under: Career, Investing //

Math Skills + Social Skills = Higher Earnings $$$

Posted on September 29, 2014 // Leave a Comment

Here’s one for the tiger moms and overachiever parents. From a recent post on the Harvard Business Review blog:

A recent paper from UCSB found that the return on being good at math has gone up over the last few decades, as has the return on having high social skills (some combination of leadership, communication, and other interpersonal skills). But, the paper argues, the return on the two skills together has risen even faster. […]

The analysis found that while math scores, sports, leadership roles, and college education were all associated with higher earnings over the 1979-1999 period, the trend over time in the earnings premium was strongest among those who were both good at math and engaged in high school sports or leadership activities. In other words, it pays to be a sociable math whiz, more so today than thirty years ago.

mathsocial

I suppose it’s interesting to see this supported by data, but my guess is that most STEM professionals would agree that interpersonal skills are just as important as technical skills today. Lots of people are strong technically. To really make the bucks you have to become a manager of people, and you can’t do that if you don’t have good interpersonal skills. I’m sure there are exceptions for start-up geniuses, but again those are exceptions and not the rule.

Math club and team sports it is for my girls!

Filed Under: Career //

Anthony Bourdain Quality of Life Quote

Posted on September 26, 2014 // 2 Comments

Good background and interview with writer/chef/professional traveler Anthony Bourdain in this Fast Company article. His TV show Parts Unknown is one of the few that I watch and the new season starts again soon. I especially enjoyed and am aligned with this quote about his lifestyle:

The one thing these projects all have in common? Bourdain enjoys them. “I’m not looking to rule the world,” he says. “I’m not looking to create a permanent brand. It’s a quality-of-life issue with me. Am I having fun? Am I surrounded by people I like? Are we proud of what we’re doing? Do we have anything to regret when we look in the mirror tomorrow? Those things are huge to me.”

His style is not for everyone’s tastes, but at least he keeps it his style.

Filed Under: Career //
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