College savings: What's the best investment plan?

College savings can be tricky, because some come with a tax penalty if too much is put away. A Roth IRA for your child, to be used for educational purposes, can be a good college savings option. Question 6 in this week's mailbag. 

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Emergency fund storage
2. A design for life
3. Exercise on the cheap
4. Parenting blogs
5. Not caring about future
6. Other savings beyond 529s
7. Communicating about college savings
8. Sharing child tasks
9. Cash in wallet
10. Book suggestions

Like much of America, I’m watching the Presidential debate (as I work on this post) and I’m reading Twitter reactions to the debate.

The one thing that strikes me is that many people have already decided who the “winner” of the debate is before ever watching it, and there’s no possible way the other guy can make a good point. It comes off like people rooting for their favorite sports team, but it goes on to the point where people seem to imply that the other guy is genuinely evil.

There are two people up on that stage. Both of them have worked their entire lives to get to that point. They’re both human beings who have made some mistakes along the way, but they’ve both got a lot of talent and they both have given a lot of that talent to government and other public use.

Neither one of them is evil. Neither one of them is talking about ideas that are evil. They’re just people with different ideas and different ways of presenting themselves.

Whenever I hear someone say or imply that one or the other of the candidates “hates America” or is evil or invokes one of the many code words for “bad person” that people like to use (you can usually tell by how they use the word), it makes me sympathize for that candidate.

Even more, I lose a lot of respect for the person sharing such nonsense.

Q1: Emergency fund storage
My husband and I are very close to having 5-6 months living expenses saved in our emergency fund. We currently keep our emergency fund in our savings account at our local credit union. I think the purpose of an emergency fund is to have the money within arm’s reach in case of a financial emergency. However, it seems like a “waste” having that much money just sitting in our savings account earning very little (0.05%) interest. Do you have any suggestions for where to house our emergency fund? I would like this money to do some work for us, earning interest, while we have it. However, I also understand that it needs to be accessible (without any penalties) if we ever need it. 
- Emma

The problem is that earning a significant return on your money involves some risk.

For example, you could put that money in an investment account and have that money in stocks. In a broad-based index fund, you could reasonably earn an average of 8% a year on that investment, and you could pull the money out whenever you like.

The problem is the word “average.” You’ll have years where you gain 20% and other years where you lose 40%. It averages out over a very long period to a 7% to 8% return.

Of course, when you need that fund, you might be in the middle of one of those 40% down years, which means that the money you need might not be there at all.

For a reasonably small emergency fund – say, three months of living expenses – the drawbacks of putting your money at risk aren’t worth the benefits of the relatively small return you’d earn on it.

Q2: A design for life
My oldest son who is now 19 is obsessed with articles about how doing thing X will improve your income. If he sees an article that says having a beard will earn you $20 less per year, he won’t have a beard. He models almost everything in his life after these trends. This seems like a weird anti-rebellion to me and I don’t think it’s healthy. What do you think?
- Geoff

I think it’s good that he wants to improve himself, but I think the standards for it are perhaps misplaced.

It seems to me that he’s a prime candidate for reading the book The Millionaire Next Door, which actually spells out the life practices and habits of people with a healthy net worth.

He’ll probably be surprised at what they actually do. They tend to be frugal and rather modest in their possessions, for one.

Q3: Exercise on the cheap
Aside from running, do you know of any exercise routines that don’t involve joining a gym or buying a bunch of exercise equipment? I want to stay in shape but we just can’t afford the gym membership right now.
- Leon

I highly recommend the book You Are Your Own Gym by Mark Lauren, which focuses entirely on bodyweight exercises – ones where you use the weight of your own body to get in better shape.

There’s very little equipment used in the book, and what equipment is used is often found around the house – things like a sturdy chair.

The exercises are straightforward, but they provide a pretty intense workout.

Q4: Parenting blogs
You’ve mentioned in the past that you read a selection of parenting blogs. Which can you recommend for a future first-time mother?
- Jane

There are a lot of good parenting blogs out there. The key is to browse a lot of them until you find one that matches the tone you like and balances entertainment and advice in a way that really clicks with you.

A few of my faves include Mom 101, Motherlode, Parent Hacks, Dadcentric, and Geek Dad.

If those don’t meet your needs, explore the links you find on those sites to discover many other great parenting blogs.

Q5: Not caring about future
I’ve read your blog for months and what I’ve noticed is that almost all of your advice relies on caring about the future. The problem is I just don’t care much at all. I’m a 35 year old single guy. I haven’t dated for more than a decade and have zero interest in having a family. If something bad happens to me, I’ll just drop out of life. So why care about anything beyond the next motnh or so?
- Marcus

What don’t you like about your life right now? What could 25 year old Marcus or 30 year old Marcus done differently to cause those things to have less impact on your life today?

In five years, you’ll be looking back at 35 year old Marcus and asking yourself why he didn’t do some of the things he could have done to make your life better.

If you don’t work today to head off the bad things that can affect your life tomorrow, all you’re doing is guaranteeing that tomorrow isn’t going to be a whole lot of fun.

Q6: Other savings beyond 529s
One of our priorities is to pay for our kids’ college educations so that they can avoid taking out student loans. We also want our kids to have as many options as possible when it comes to education and not to be limited by financial constraints. Thus, we’re talking about having to save up to several hundreds of thousands of dollars per kid (we have two very young kids and will probably have one or two more) even after scholarships and grants.

We’re aggressively funding 529 accounts for our kids but know that if we end up saving too much we will get hit with a 10% penalty for any income that doesn’t get used for education. Thus, it doesn’t seem smart to use 529s as the sole savings vehicle.

What would you recommend we use as a secondary savings vehicle here that might allow for some tax benefits if the funds don’t get used for education? We don’t qualify for a Roth and in any event we won’t be close to being 59.5 years old by the time our kids go to college. 
- Sean

Does your child qualify for a Roth for themselves? If they earn income in any fashion (even young children can earn money from modeling or acting or other things), they can put that money into their own Roth, which can then be used for educational purposes.

The catch, of course, is that the Roth belongs to the child, which means they can do whatever they want with it in the long run.

If I were you, though, I would just put it in an unrestricted investment account in their name. This gives them the most flexibility later on in life, which seems to be what you want given your 529 concerns.

Sean has a second question related to this one.

Q7: Communicating about college savings
Secondly, what do you think we should communicate to our kids about these college savings funds, if anything? I think they should understand that we have saved for their educations but I don’t think we should disclose dollar amounts (so that they can stay hungry for scholarships, etc.). Thoughts?
- Steve

There’s a balance here.

In my own situation, I didn’t even bother to seriously apply for schools I could have been admitted to because I was under the belief that my parents had nothing saved for me (which was actually the truth).

I think you can be vague about the amount, but if you can support any of their ambitions, you need to make it very clear to them that they can make it work if they want to apply to MIT or Harvard.

Q8: Sharing child tasks
I keep seeing the same sets of parents at many things that I take my own children to, like dropping them off at preschool or goig to soccer practice. It seems to me like it would make sense for us to find ways to share these efforts, but I don’t know how to get the ball rolling.
- Margie

It’s difficult to do this if you don’t have a relationship already built with those parents.

My suggestion is to build a social connection with some of them first. Invite some of them over to dinner at your home so your children can play together and you can get to know each other better. Ideally, they’ll reciprocate later on.

When you’ve built a connection, then suggest a sharing arrangement where you split the responsibilities for pick-ups and drop-offs.

We’ve done this with some of our neighbors with wonderful time savings for both of us.

Q9: Cash in wallet
How much cash should I be keeping in my wallet? It seems risky to carry too much (robbers or losing the wallet) or too little (caught without cash in a pinch).
- Joe

The simplest answer is to keep what you’re comfortable with. Some people feel better with more and others with less.

If you feel like you’re carrying too little, you’re probably carrying too little. If you feel like you’re carrying too much, you’re probably carrying too much.

I usually try to have $50 in cash nearby when I’m out and about.

Q10: Book suggestions
I was wondering if you had any suggestions for suspense/thriller authors or titles for me to read.
- Ronald

“Suspense/thriller” is a pretty broad category.

You might like psychological thrillers like Before I Go to Sleep by S. J. Watson.

You might like technology-filled suspenseful novels with great action scenes like REAMDE by Neal Stephenson.

I had more fun reading Ian Fleming’s Bond novels (like On Her Majesty’s Secret Service) when I was in my early twenties than almost anything I can think of in the category you describe.

Perhaps one of these options will give you something to work on.