Hello and happy holidays! Today I’m excited to feature a post full of practical and useful money management tips from my friend and colleague Willa Chalmers!

Tis the time for new years resolutions. My resolution last year was to exercise every day. But I kept the goal small, I only committed to breaking a sweat every day which could be accomplished by a brisk walk or a full hour-long workout. As most of us know, developing a habit takes time but after the first few months, it got easier and easier. So much so that I do it now without thinking about it - like brushing my teeth.

This year, I am rebooting my commitment to share money management tips with friends and family. My friends who know me, know that I am SUPER passionate about helping people obtain financial independence.  Over the years I’ve gotten a lot of questions from friends and family and have enjoyed helping others reach their financial goals. For the record, I am not a professional tax accountant, financial advisor, or legal counsel.  Please consume the information here with caution. I just love the subject and doing the research.  So ask me questions and I’ll find you the answer so you don’t have to.

Let’s get started.

“Avoid crazy at all costs”

Famous quote from Charlie Munger, a longtime business partner and friend of my idol, Warren Buffet. 

Here are some crazy things to avoid:

• Leave money on the table. If your employer offers a 401K, max out the yearly contribution ($23,000 in 2024 or $30,500 for 50 and over). This does double good, helps you bring down your taxable income and your employer will do some level of matching, aka free money! 

• Throw money away. Pay off all high-interest debt as soon as possible (anything above 10% I would consider to be high interest) where you are paying more in interest than actually bringing down 

• Forget about tax-advantaged accounts. If you can, put money away in IRA contributions and after-tax contributions which can be an additional $41,500 (more if you’re 50+) to put towards your future. Tax-Advantaged just means that you are either putting in money tax-free or taking out money tax-free using the Roth IRA (depending on your income) or Traditional IRA.

• Avoid money conversations: Do you know how much you spend monthly? On eating out? How many repeated charges do you have? Figure out how much you spend vs make. This can be a daunting exercise for many people because it requires you to be very honest with yourself and the answer may scare you. But the sooner you do this, the sooner you can start making changes.  There are lots of apps that help you do this now and they all work the same, just pick a free one!

Kids & Finances

Lately, I’ve been getting a lot of questions about financial education for kids. So each newsletter I’ll be featuring a spotlight section for parents. This month, I’m gonna discuss 529s!

Why you should consider contributing to a 529 savings plan

• Solid returns: Let's say you put away $100 a month for 18 years, assuming a (conservative) 5% nominal annualized growth, you’ll have roughly $35,400 at the end of 18 years. That's a $14,000 return on your investment. But that's not all – you’re also avoiding upwards of 18% through federal and state tax savings on that growth for any eligible expenditure through a 529. 

• Tax deductions: This benefit varies by state (so check yours) but many states offer a state tax deduction on your annual contribution. Unfortunately, CA does not. 

• Note: If your state does not offer any tax benefits, there is no advantage for opening a home state-sponsored 529 vs some other state's 529 plan. Often opening one with your existing broker makes it easier to track and manage but there is no significant reason to prefer one broker over another.  Other things to consider are the investment options and low expense ratios, good luck!

• Use it and don’t lose it: If you oversave and have funds left over, you can gift the money to grandkids, nephews, myself, etc. It is a great estate planning tool if you find yourself lucky enough with extra money in your 529.

• Use it, don’t lose it and a built-in IRA oh my!: A great feature of the 529 is the IRA conversion. You can roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary's Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income. What a nice way to set up your child with a headstart towards financial independence. 

Avoid crazy

• Even a little now is better than starting late: It's never too late to start investing, but you are missing out on the beauty of compounding. If you start in year 9, you’ll earn about $3,000 at the same 5% growth rate as opposed to the $14,000 over 18 years. 

• Leave room for flexibility: Be on the lookout for the maximum contribution limit for your state - especially if you think there's any possibility that you either move out of your state (from a non-tax deductible state into one with deductions), or your state changes their laws to allow for tax deductions on contributions. 

This sounds too easy, what am I missing?

• Laws change: Eighteen years is a long time and laws around 529s could change over such a long horizon (e.g., steeper withdrawal penalties, etc.). And we’ve already seen changes, but lucky for us, they’re all for the better – K-12 expenses, including private schools and Roth, etc. 

• It is complicated: There are a lot of rules. You have to look carefully at the state’s plans, particularly about what is deemed as qualified or non-qualified, what tax needs to be paid for withdrawals on federal or state, etc. (It is even more complicated if you move states within the 18 years, see above). 

• You can’t price optionality: Not everything comes down to dollars and cents. There is value in security, stability and a cost to stress and lack of flexibility. These are very individual and personal decisions. I myself have chosen not to fully fund my 529 for my two boys. I opened the account primarily so that we, and other family members can choose to gift small amounts towards their education. Instead, we primarily invest in other areas for their future, even if it means we’re paying taxes for that optionality and that's worth it to us.

Questions and Answers

Please send your financial questions or topics to willa.chalmers@gmail.com for next month’s email!