Question: Thomas in Cleves: My daughter will be starting her freshman year at UC soon. Is there any sort of money advice you can give her since she’ll be living on her own for the first time?
A: First up, if she’ll be working during the school year, we recommend following the 50/30/20 rule: 50% of her take-home pay should go to “needs,” 30% to “wants,” and 20% should be saved. This is a smart rule for adults to use, too!
Second, since she’s probably in a pretty favorable tax bracket, a Roth IRA is her best friend right now. Because even though it doesn’t offer an up-front tax break, it does offer tax-free growth! She can save up to $6,500 this year, or up to however much she earns (whichever is less). Contributions can be taken out anytime, tax-free and penalty-free. Then, when she turns 59 ½, she’ll be able to withdraw earnings tax-free and penalty-free since she will have held the account for more than five years. A Roth IRA is also great to keep using once she gets a job in the “real world.”
And third, a credit card isn’t inherently evil – but it does need to be used responsibly. If she pays off a card in-full and on-time every month it can be a powerful financial tool to build her credit score. And the better her credit score, the better interest rates she’ll get on future car loans and mortgages. Her goal (truthfully, everyone’s goal) should be to be a credit card company’s worst customer. This means being someone who the lender doesn’t make money off of every month in the form of interest payments and/or late fees.
Here’s The Allworth Advice: The sooner your daughter can start practicing sound financial habits, the better off she’ll be throughout the rest of her life.
Q: Doug and Janet from Wyoming: Our daughter is going to be a freshman at Miami. Should we consider tuition insurance? Seems like it could be useful if something happens.
A: Tuition insurance is a financial product that’s definitely gained some steam over the last few years, especially in the wake of the pandemic. In essence, it’s an insurance policy usually offered by a third party that will refund money you’ve paid in tuition, fees, and on-campus housing if your child withdraws from school. According to Consumer Reports, a typical policy costs a couple hundred dollars a year.
But you need to pay attention to the details. Because most policies only cover situations in which your child leaves school for a serious physical or mental health issue – not in cases where a child decides to simply change schools or is expelled. Additionally, it’s important to note that many policies exclude preexisting conditions. You would also want to check to see how much you would actually be reimbursed; policies can vary.
And keep this in mind: Most schools already have some kind of refund policy in place. For example, according to Miami’s website, if a student withdraws from school within the first five days of a term, there is a 100 % refund on tuition and other course fees. From there, it’s a sliding scale depending on how far the withdrawal is into the semester. The Allworth Advice is that, in most cases, tuition insurance is likely unnecessary. But if your daughter has a chronic condition and you’re not sure how she’ll cope with life on campus, it may be worth considering. Just remember to take an extremely close look at the policy terms and details so you know what’s covered – and what’s not.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call 513-469-7500.
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