Dan Cunningham knows something about investing for college. As the father of four kids ranging in age from 7 to 13, he's already preparing for the day when his family will be paying multiple college tuitions simultaneously.
But Cunningham thinks he's got it covered. The Bennington native is founder of One Day in July, a Burlington-based financial advising firm that helps people manage their investments, be they 401(k)s, 529 plans or traditional brokerage accounts. The firm launched last fall and is already managing nearly $40 million in assets. Investors need a minimum of $25,000 to access his services. That might sound like a lot, but many firms require substantially more.
Understandably, Cunningham can't recommend just one flat percentage of income that parents should set aside for their kids' college funds. Those decisions, he says, should be based on a family's financial circumstances.
Nevertheless, he recommends that all parents set aside money every month for higher education. Even if his clients just barely meet that $25,000 minimum, he says, "If people get on the right track, we can help them stay on that track."
KIDS VT: What's the first bit of financial advice you give parents?
DAN CUNNINGHAM: One of the good things about your readers is that they're often reading Kids VT when their kids are little. That's exactly the time they should be thinking about investing for college, with the "magic" of compounding interest [when accrued interest is added to the principal investment]. I actually opened a 529 plan for my daughter the week she was born. Start as soon as possible.
KVT: Can you explain 529 plans?
DC: They're savings plans that allow money to grow in a tax-deferred way, as long as it's withdrawn and spent at a qualifying educational institution. You can choose a plan from any state you want. You don't have to use Vermont's plan. I personally use Utah's plan.
DC: Utah uses extremely low-cost funds and has a lot more options for where you can invest. It doesn't have a tax credit, which Vermont's plan does. But Vermont's plan has about double the fees.
KVT: Do 529 accounts have to be spent on college tuition?
DC: The federal government has expanded the definition to include other expenses such as computers and school supplies. Also, it can be used not just for four-year colleges but also for other training programs, even educational courses for adults.
KVT: Why is it so important to start saving early?
DC: If a family can save $1,000 a month, and do that reliably, at the point the child got into college, that would be worth about $450,000 — and by their senior year it'd be worth about $665,000. That's assuming an 8 percent return. No matter how much a family can afford to set aside, the key thing is to create that discipline and get that money out of your checking account and into an investment plan diligently every month.
KVT: I've read that if parents must choose between investing for their retirement versus their kids' college, they should choose the former because you can borrow money for college. Thoughts?
DC: The problem with borrowing money and using loans for college is that you're losing a lot more money than you think. Not only do you now have to pay interest on those loans, but you're also not making gains on investments. So if you have a 7 percent interest rate on a loan versus earning 8 percent on an investment, you're talking about a difference of 15 percentage points a year.
KVT: Any advice for getting kids "invested" in the practice of saving money?
DC: With my kids, we definitely talk about why we don't spend money on nonessential things. So we don't have cable TV. Here's another example: Growing up in Bennington, I often played basketball with a friend who always bought the latest Nike Air Jordan sneakers. He bought at least six pairs. I calculated that, had he bought shares of Nike instead, today that stock would be worth well over $150,000.
KVT: Any other tricks you use?
DC: I actually simulate a bank for my kids, called Cunningham Bank. I don't want my kids just putting their money in a savings account because they don't really pay much interest. Cunningham Bank pays 6 percent.