She gulped. “Uhhh, say that again?”
“$250,000” Chantal replied.
“Just for undergrad?” Julie nervously verified.
“Yes, that’s correct. You’ll need a quarter of a million dollars in 18 years to send that little bundle of joy
to UC Berkeley.”
“But we only have a little more than that saved and we’ve been working and saving for the last 12 years of
our career!”
“I totally get your concern, but don’t worry. Through leveraging the markets and optimizing for taxes,
we’ll get there by putting aside $75,000 today.”
“Okay, well that doesn’t quite as so overwhelming. I’m sure we can make that happen.” Julie replied,
mostly relieved.
A 529 Plan is a great example of applying the Financial Zen Cash F.L.O. Method.
It FOCUSES on LEVERAGE & OPTIMIZATION
As you may know, a 529 Plan is an investment account for college.
You put money in the account and then you invest it.
Investing is the first form of leverage – compound interest.
So you don’t need to add $250,000 today. If you save $75,000, it will grow to $250,000 in 18 years.
As with any form of leverage, the longer the lever the more powerful the force.
With investing, time is the lever. The more time you have, the longer the lever.
So you can save $75,000 today to leverage compound interest over 18 years.
Or you can spend $250,000 in 18 years by not applying leverage.
A 529 Plan is also a great example of another Financial Zen Cash F.L.O. principle – OPTIMIZATION.
As you may also know, all that compound interest you earn (aka investment returns) are tax-free if you
use it for college.
If Julie put $75,000 in a regular, old brokerage account today and it grows to $250,000 in 18 years,
then she’d pay taxes on the $175,000 of gains.
To be precise, Julie would likely pay a 15% capital gains tax. So after she pays Uncle Sam, there’s only
$224,000 left.
Julie would have lost $26,000 because she didn’t use a 529 Plan to optimize for taxes.
FOCUS. LEVERAGE. OPTIMIZE.
So the sooner you save for college, the less you’ll actually have to save because 529 Plans leverages
compound interest and optimizes for taxes.
