Your Investing Life: Going back to school
August 15, 2014
Deciding to go back to school is a big decision. Whether you're interested in learning new skills or specifically focused on advancing your career, being a student can impact everything from your schedule to your finances. Preparation is key—both in your financial life and in your academic life—so take a moment to review these investing "CliffsNotes" to help you brush up on the basics.
Keep learning, keep saving
Benjamin Franklin said, "An investment in knowledge pays the best interest." He was right. When you broaden your education, you're "investing" in yourself for the long term.
Keep thinking long term. While it may be tempting to put your long-term financial goals, like saving for retirement, on the back burner while you're attending (and paying for) school, keep investing. Although you may have to cut back the amount you save, continuing to set aside a portion of your income for the future can help boost your savings over the long term and make it easier to maintain the habit.
Take a crash course in compounding
Here's a simple math lesson to demonstrate the "power of compounding"—when your investment earnings generate additional earnings over time.
Consider these two scenarios. In the first, you start saving $25 a week for 9 years but then stop. You contribute $11,700 to your account, and if it earns 6% a year, you have about $26,750 at the end of 18 years.
In the second, you wait 9 years before you start saving, and then you save the same $25 a week for 9 years. Again, you contribute $11,700—but even if your money earns 6% a year, you end up with only about $15,800.
So what's the objective of this lesson? Start saving for your long-term goals! If you have earned income while you're attending school, you can save for retirement in an employer's retirement plan or an IRA. If you're married and have no income, your working spouse can contribute to a spousal IRA on your behalf—up to $5,500 ($6,500 if you're age 50 or older) for 2014.
"Greater savings today will enable you to reap greater financial rewards in retirement," said Maria Bruno, a senior investment analyst with Vanguard. "If you can, prioritize saving for retirement. You can take a loan to fund your education or buy a house or a car, but in retirement—which could last 30 years or more—you'll need to rely heavily on your savings."
Consider your financial future as you choose your field of study
In addition to pursuing a field of study that interests you, consider the job opportunities and future income potential in your chosen field. To help you make a well-informed decision about where to go to school and what to study, check out collegemeasures.org.
Many schools offer job placement assistance, so you can explore potential job options before your studies are complete. And if you're working while going to school, check with your employer's HR department to talk about the advancement opportunities that may be available once you complete your course of study.
If you're pursuing your studies full-time, factor in the cost of being out of the workforce for a certain period of time—and make sure your financial prospects for the future outweigh the immediate costs of school and unemployment.
Find the best ways to pay
There are many ways to pay for higher education. 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).
- Consider moving the money you'll use for tuition into a conservative investment to reduce the risk that your assets will decline in value with market swings. And remember: Be cautious about using your retirement savings for education costs. You'll not only miss out on the potential for tax-deferred growth, you'll also open yourself up to potential tax penalties if you withdraw the money before you reach age 59½.
- Apply for federal financial aid on the Free Application for Federal Student Aid (FAFSA) website, and while you're there, access helpful financial aid tools and calculators. If you're looking for scholarship opportunities to defray out-of-pocket expenses, check out the Federal Student Aid Office.
- Understand the stipulations of your employer's tuition reimbursement program. There may be a sliding scale for tuition reimbursement depending on your final grade or a requirement to stay with your employer for a set number of years after you receive a reimbursement. (But even if your employer is picking up some of the tab for your education, you may still be able to save on your taxes. For details, check out IRS Publication 970.)
Factor in a 529 college savings plan
529 college savings plans aren't just for kids. Need an overview? Here are a few 529 facts that may surprise you:
- You can change the beneficiary of a 529 plan to any eligible family member of the original beneficiary. This means that if you already have money in a 529 plan and your beneficiary doesn't need it, you may be able to use the money for your own higher-education expenses. And the reverse is also true—if you're saving for yourself and don't need the money, you can change the beneficiary to someone in your family.
- You can start saving now—it's not too late! If you're planning to go back to school or you're already in school, consider opening your own 529 account. You can receive federal tax benefits, like tax-deferred growth, on the money you save and tax-free withdrawals for higher-education expenses. Your home state may even offer additional tax breaks. Bonus: You can continue to save even while you're attending school.
- You're in control. You can choose your investment options based on your own time frame and feelings about risk. Most 529 plans offer conservative investment options that can complement even a short time frame.
"When you're in the market for a 529 plan, there are a few factors to consider," said Daniel Reyes, head of our Education Savings Group. "Although you can invest in any state's 529 plan—regardless of where you live or where your child goes to school—see if your state offers a plan first because you may get additional tax incentives. Also, consider the plan's initial minimum investment, fees, and investing options."
- 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.
- When taking withdrawals from an IRA or employer's retirement plan before age 59½ , you may have to pay ordinary income tax plus a 10% federal penalty tax.
- 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.