Your Investing Life: Going back to school
September 03, 2013
Whether it's to advance your career or expand your knowledge, you've decided to take the plunge and return to school. One topic worth adding to your learning list: Your investing life. To help you ace this subject, review our simple lesson plan.
Get comfortable with the lingo
As with any subject you study in school, Investing 101 has its own terminology.
Our glossary is a handy place to find definitions for words that sound complicated. For example, when it comes to investing, there are three asset classes: stocks, bonds, and cash investments. Asset allocation just means how your investment holdings are split among the asset classes. And diversification simply means spreading your investments across different asset classes in an attempt to lower your overall investment risk.
Once you learn to speak the language, it's a lot easier to understand and apply the concepts of investing to help you achieve your financial goals.
Your family life. Your work life. Your investing life.
When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.
Keep investing for your future
It can be tempting to stop saving for retirement or other financial goals while you're focused on going to—and paying for—school. But thanks to the power of compounding, it's worth your while to keep at it, even if you need to pull back on the amount you save.
The longer you have to invest (your "time horizon"), the more time you have to receive interest on your original investments, plus any interest, dividends, and capital gains that accumulate. This sum can really add up over the years, like when you're saving for retirement.
As Maria Bruno, a senior investment analyst with Vanguard Investment Strategy Group, said, "You can take a loan for college, you can take a loan for a house, but you can't take a loan for retirement."
So keep saving for retirement, whether you do it through an employer's retirement plan or an IRA. If you're married and not earning a paycheck, you can use a spousal IRA, which lets your working spouse contribute to this type of tax-advantaged account on your behalf—up to $5,000 ($6,000 if you're age 50 or older).
Choose your major with your financial future in mind
Investing your time studying a subject you're passionate about—and that also has good employment and income opportunities—can help improve your job prospects and income over the long term. To review the employment statistics for various majors, check out the report the Georgetown Public Policy Institute publishes annually.
In addition, your school likely offers some placement assistance, so be sure to take advantage of it. And if you're working while going to school, check with your employer's HR department to see what advancement opportunities might be available to you once you complete your course of study.
If you're considering pursuing your studies full-time, factor in the cost of being out of the workforce before you leave your job or delay starting one. Make sure your future career prospects outweigh the costs of leaving your current job as well as the expense of attending school.
Live on a student's budget
With tuition, books and supplies, child care (if you have small children), and commuting or boarding costs, your expenses will go up. If you cut back on the hours you work or decide to leave the workforce entirely, your income will likely go down.
Crafting a sensible budget lets you get a handle on your spending. Sarah Hammer, a senior investment analyst at Vanguard, recommends this method: For each semester, list your expenses in one column and your income in another. If your expenses exceed your income, consider ways to cover the shortfall or find ways to cut back on costs.
Determine your payment options
There are many ways to pay for your schooling. You can draw on personal savings; apply for financial aid, scholarships, or private loans; use education tax credits; or take advantage of your employer's tuition reimbursement program (if available). If you're using personal assets from an investment account, you'll want to shift any money you plan to use for tuition payments into more conservative investments; Ms. Hammer noted that many investors use money market funds for this purpose.
Some things to keep in mind about employer tuition reimbursement programs: Your employer may have some requirements attached to the payments. Some common ones? Maintaining a minimum grade point average or staying with your employer for a set number of years after you receive a reimbursement. The time commitment is one to watch, as you may have to pay back the money you received if you leave your employer before the specified time. If your employer is picking up some of your education tab, you may still be able to save on your taxes. For details, check out IRS Publication 508.
The Free Application for Federal Student Aid (FAFSA) website is a good place to find financial aid tools and it's more than just a resource for applying for federal financial aid. The Federal Student Aid Office also has a section where you can search for scholarship opportunities. If you do end up taking out a student loan, remember to add your monthly loan payment into your post graduation budget forecast.
And remember: Be cautious about using your retirement savings to pay for education costs. You'll not only miss out on the potential for tax-deferred growth, you'll open yourself up to potential tax penalties if you withdraw the money before you reach age 59½.
Consider using a 529 college savings plan
Do you have money in a 529 college savings plan that the account beneficiary isn't going to use? Any family member—not just the person who's named on the account—can use the 529 savings. So if your kids didn't use all the money you saved—maybe they earned scholarships or decided not to go to college—you can use those funds for your own education costs.
If you're planning to go back to school in the future, consider starting your own 529 account. They have federal tax benefits, including tax-deferred savings growth and tax-free withdrawals for higher-education expenses. Your home state may even offer additional tax breaks.
The Vanguard 529 College Savings Plan has expenses and fees among the lowest in the industry, so more of your savings stays in your account working for you. For more information, speak with one of our education specialists at 866-734-4533.
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.
- Diversification does not ensure a profit or protect against a loss.
- When taking withdrawals from an IRA or employer's retirement plan before age 59-1/2, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- The Vanguard 529 cost advantage means that lower expenses can keep more money in your account to help cover future college costs. Industry average fees for direct-sold 529 plans are 0.58% and average fees for The Vanguard 529 College Savings Plan are 0.28%. Source: June 2011 FRC—529 College Savings Quarterly Update.
- For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.