Strategies to Saving for a College Education

For most parents, a big priority is trying to make sure that their children succeed in life. Parents want their kids to lead an easier life than they had, and most of them see education, especially a college degree, as the main path to that goal. Unfortunately, families have all kinds of financial demands that often take precedence over college, which can be years down the line. Chris Hiestand, in his L.A. Times article, discusses a few potential strategies to help struggling parents maintain their financial stability while still putting money away for future college costs.

A 529 savings plan is one such method to contribute to future expenses. Most savings plans, including the 529, involve the contribution of after-tax dollars to an account, where the money grows in interest and can be withdrawn, tax-free, to pay for educational expenses. Additionally, $14,000 per year can be given between parties as a tax-free gift. Anything above $14,000 is subject to gift taxes. The best thing about tax-free gifts is that they can be front-loaded up to five years in advance. In other words, a parent can put $70,000 into a 529 account one year, but then won't be able to contribute to the account for the next five years. This can often be better than contributing once per year because it gives the money more time to accrue interest, and since you use after-tax dollars, the contributions can be withdrawn tax-free.

Another option is using a Roth IRA to save for college and retirement at the same time. Once again, Roth IRA contributions are made with after-tax dollars, which means the contributions can be withdrawn without additional taxes or penalties. The Roth IRA is often better than a 529 plan for several reasons. Firstly, the 529 is based on a specific interest rate, while the Roth IRA gives you more flexibility to choose investments and decide how much money is being invested. Additionally, if your child doesn't end up going to college, the money in the Roth IRA fund can still be put toward retirement. Finally, perhaps the greatest advantage, is that the money in a Roth IRA does not count against financial aid while a 529 held by a parent will.

Often, there is no way to pay for college without taking out loans. However, there are smarter ways to get the best bang for your buck in loans. Over 70% of bachelor's degree recipients graduate with debt, and although getting a degree is an investment in the future, the returns on investment can be slow. Some loans allow students and their parents to push off interest and payments until 6 months after graduation, but when the interest finally begins to accrue, it can be at rates of 9% or higher. Many parents decide that it makes more sense refinance their mortgage and use the saved money each month to contribute to schooling. Others tap into their home's equity to pay tuition and fees.

In all, getting a college education is possible. Through a combination of saving, financial aid, and smart loans, a college degree can be affordable to some extent. Smart financial planning can be hard, but in general, getting a college degree is a good investment in yourself or your children, and should pay off in the long run. Financial stress today could be worth it if it means business success in the future.

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Potential Issues Caused by Inflation Indexing

5/29/15 - The national minimum wage was first created by Congress in 1938, under the Fair Labor Standards Act (FLSA). It was developed to protect workers and ensure that they receive some standard level of pay for their hourly labor. The FLSA banned child labor, set a maximum workweek of 44 hours, and made the minimum rate of pay 25 cents per hour. As inflation has made prices for everything else increase, the minimum wage has increased as well, to its current $7.25 per hour. Many states, however, have their own minimum wages, with some as high as $9 or $10 per hour. In a very controversial decision among business owners and economists, the Los Angeles City Council recently started drafting a plan that would raise the minimum wage annually, raising it to $15 by 2020 and even higher in years to come. Tiffany Hsu and Andrew Khouri, in their LA Times article, address the debate over the wage increase, describing the points made on both sides of the argument.

Raising the minimum wage has always been a difficult undertaking. Through this plan, the minimum wage would go up automatically in response to inflation, which would benefit workers. Unfortunately, inflation also makes rent increase, which will make it more difficult for entrepreneurs, especially owners of small businesses, to be able to afford the higher wages. This would force them to either raise prices or lay off workers. However, prices can only go so high before consumers go elsewhere to make their purchases. This will affect the small businesses most drastically since larger businesses have more flexibility to lower prices without losing as much profit. This competition could potentially lead to a clearing of the market, forcing small businesses out.

This procedure, called inflation indexing, seems to be working well for the twenty-or-so localities with their own wage policies, according to UC Berkeley's Institute for Research on Labor and Employment. Inflation indexing allows the wage to respond directly to increases in the cost of living, without the need for intervention by policy-makers. In an ideal sense, indexing would increase the wage in a gradual manner, rather than shocking the system with large spikes. Int his way, businesses could adjust more easily to changing costs and respond accordingly. Still, consumers and business owners are wary.

Richard LoGuercio, the owner of Town & Country Event Rentals, would only have to raise wages for about 100 of his 430 workers under this policy. However, he fears that he will have to raise wages across the board to keep everyone happy. If minimum-wage laborers are receiving $15 or more per hour, everyone else will want to be paid more for their contributions to the business. As wages increase for the lowest-paid level in a company, wages in the higher levels will likely increase proportionally, which would force price increases and contribute to inflation. Thus, raising the minimum wage continuously in response to inflation could turn into an endless cycle of wage increases.

All in all, the major effects of the minimum wage increase will come down to the actions of consumers. Businesses could lay off workers in response to their increasing costs, but in the end, they will have to raise their prices. Consumers are only willing to spend so much before they decide that a product just isn't worth it. So, as long as consumers are willing to spend a few extra dollars per product, the effects of the wage increases may not be so bad.

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Maintenance Issues at California's Refineries Lead to Gasoline Price Increase

5/1/15 - Drivers throughout California have been noticing gas prices climbing swiftly over the past few weeks, and they don't like it. In the last week by itself, prices have gone up by almost 34 cents, 6 cents of which happened over the course of a single day. Is this due to the state of the economy, or to supply-and-demand, or due to something much harder to control? Samantha Masunaga and Andrew Khouri, in their L.A. Times article, conclude that the increasing prices are mainly due to mechanical issues in gasoline refineries around the state.

California's refineries produce most of the gasoline used within the state, since production and delivery of California's “cleaner-burning blend” can be too expensive for out-of-state refineries to consider it economically viable. Furthermore, since the refineries produce as much gasoline as possible, any break in the production chain can cause massive issues throughout the system. Even if one factory would have to close down for repairs, the amount of gasoline in California would fall, making the available gasoline that much more expensive. The system leaves very little room for delays.

Unfortunately, refineries have been forced to stop or lessen production in order to perform maintenance work, whether planned or otherwise. After a February explosion at Exxon Mobil Corp.'s refinery in Torrance as well as some other, minor, issues elsewhere, the supply of gasoline is running low, thus forcing up the prices. Although the oil-refining companies are producing less, they still have contracts that obligate them to provide a certain amount of gasoline to customers, such as gas stations. In order to do this, they are forced to pad their supplies with purchases of gasoline from other refineries.

Many are upset about the price increases mainly due to the shock of it. When the price of a tank of gas increases by $20 to $30 in a month, it is hard to see it coming. To make matters worse, companies that purchase gasoline from other refineries during a time of low production try to keep such transactions secret, so as to not case a “pop” in the market. On the other side of the argument are the average Californians, who use gasoline and want some way to be able to predict when prices will go up. When a company has to purchase gasoline from another refinery, it is pretty obvious that they are having some issue with production.

The average person has had to cut down on certain “unnecessary” expenditures in order to put more money toward filling up the tank. Some have been forced to cut items when grocery shopping, and others have stopped eating out at restaurants. While gasoline prices are still, on average, below what they were this time last year, some areas are feeling far worse effects. A big cause of this, as Khouri and Masunaga point out, is that the market full of secrecy. If people know when companies are planning to purchase large amounts of gasoline from other sources, they will be able to more easily predict fluctuations and therefore plan out their gasoline purchases in a more beneficial manner. Gasoline has almost become like stocks, constantly changing and difficult to predict successfully. That could all change if refineries develop some transparency and give customers a fighting chance.

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