I spent some time practicing my Excel skills this week. I'm the first to admit that my Excel "skills" are totally remedial by b-school standards, but other lawyers--especially the senior ones--seem to think I'm some sort of Excel ninja so I'm doing what I can to keep up appearances. I started out by running a few annuity calculations and setting up some amortization tables.
This reminded me of the MBA core finance midterm that tasked us to calculate how much we should save monthly for a newly born infant to attend college. So I ran those calculations again, assuming tuition and living expenses for one child, born in twelve months, who would attend my alma mater; and, to complete the grim picture, also ran some calculations to check whether my current retirement savings are on track.
The numbers were sobering, but it turns out that accomplishing my big financial goals is within my grasp if I can maintain my current income. What are those big financial goals? To be able, by myself, to buy a modest house, pay for one child to attend daycare and college, retire comfortably and take a couple of vacations along the way. How do I know I can meet these goals? When I had some spare time as a first year associate, I modeled the next forty years of my personal finances and I've updated the model every month since.
It is reassuring to know, in theory, that I am capable of meeting my goals, but maintaining my current salary will be a challenge, if not impossible. This is why I'm trying to make the most of my time on an expat package by socking away extra money each month. This month was a particularly good one: I contributed 12% of my pre-tax income to my 401(k) and 86.5% of my post-tax income to savings and investments. When I have a particularly lonely week, I remind myself how incredibly lucky I am to have this opportunity to build a strong financial foundation.
Speaking of college tuition, do you know someone who started making contributions to a 529 plan before they had any kids? How did that work out for them?
6 comments:
I'm pregnant and I asked my financial advisor about contributing to a 529 before the baby is born. He said that you need to have a number identifying the recipient before you can create it. Maybe you could create one for yourself and then switch it over to the child?
Congratulations Elizabeth! What happy news :)
My understanding is that it's possible to appoint the child as beneficiary once his/her SSN is available. I think the biggest risk would be that if I don't end up with future educational expenses (on mine or another's behalf), I'd have to pay a 10% penalty to withdraw the funds.
We set up a 529, two in fact, when I was pregnant. I was the owner and beneficiary of one, and my husband was the owner and beneficiary of the other. When our daughter was born, we switched her to be the beneficiary of both. (And once we have the theoretical second child, s/he'll be the beneficiary of one of the accounts.) My husband wishes we set up the accounts sooner because he doesn't see the 10% penalty as that significant. But I probably would have given the money to nieces and nephews for school, since if we didn't have kids we would be totally fine financially and wouldn't really need the money.
But one thing to keep in mind is gift tax. When you switch the beneficiary to your child, it is considered a gift. If you start early, you will likely have more than the tax-exempt amount ($14,000 a year, or you can give up to five years at once and spread it out over the next five years).
BTW--I'm just a random person who stumbled on your blog. But I wanted to say that I think what you are doing is awesome, both going to Japan and taking your finances so seriously and working hard to meet your goals. Good luck with everything!
Thanks F&D! This was a helpful comment. I hadn't considered the tax issue at all.
I am so jealous of your financial savvy. I'm just now starting to figure out my goals on debt repayment, etc. It's sobering but also exciting.
Thank you Brittany! Honestly, I don't feel that savvy--I've made a lot of mistakes along the way :) My family doesn't talk about money management at all, so I've found certain personal finance blogs really helpful.
Creating my spreadsheet was a great way of confronting reality and getting a clear (and sobering!) picture of what my financial life would be like at various points in time. It's what convinced me I wanted to make extra debt payments early on when the interest rates on my loans exceed the return I could have otherwise rationally expected to make by investing that money. On that note, there are some debt snowball calculators out there that make it really easy to see the impact of an extra debt payment (e.g., if I don't buy this purse and but the money to my student loans instead, by how much will my debt repayment period be shortened?).
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