Where to put money now that you'll need in 5 years

[mom929]

Hi all. My son has a small bit of gifts and inheritance (just under $10,000), that he will need in 5 years for college. My other son has cerebral palsy, and I'm on disability due to a brain aneurysm - so we've never been able to save money for him for college in the past.

In the current economy and with the crazy stock market, what should we do with this money? I'm nervous about the stock market, but a 5 year CD is earning nearly nothing right now. Is there another option? Should I take a lower interest rate on a shorter CD and hope that the rates will have gone up when it comes time to renew?

Also, since he is likely to have a chance for financial aid, is it better to keep this money in my name (and pay taxes on it now) or in his name (and have 100% counted against him in figuring his future financial aid package.

Thanks for the ideas.

[sweeps]

As much as I think (hope?) the stock market will recover nicely in 5 years, it's too risky to put money you need in 5 years in stocks.

Check out the 529 plans in your home state (or in other states if the one in your state is no good). There should be a conservative investment option available to you. The money will grow tax-free. And it's possible you get a break on your state income tax. 529 money counts as the parents' assets so it is looked at favorably for financial aid purposes too.

[creditcardfree]

Conservative, as in bonds or money market type account within the 529 account.

I agree with sweeps, stay out of the stock market with this money. This would have been my advise regardless of the current state of the economy. Generally, if you need the money in 5 years or less, don't invest in stocks.

[jIM_Ohio]

Of the $10,000 how much is for use Freshman year?

The money he needs as a Freshman have a 5 year horizon
The money he needs as a senior have a 9 year horizon.

Put 25% into a stock fund for his senior year
Put 50% into a short term bond fund
Put 25% into cash

Each year between now and freshman year sell 1/5 of the short term bond fund to cash.
Within 5 years I would liquidate the entire portion for senior year.

[mom929]

Thanks - hard to know how much will be used for first year

There's no point in planning for senior year if he has to drop out because he doesn't have enough for freshman year. It will all depend on what kind of financial aid he gets, whether he can manage a job at the same time as school and how much of that can go to tuition, etc. Also hard to know what financial position his dad and I will be in by then and how much we can realistically help. Also there's a chance that by senior year his brother will be in some kind of post secondary education (which I assume would help bump up our financial aid as a family if two kids are in school at the same time?)

[jIM_Ohio]

There's no point in planning for senior year if he has to drop out because he doesn't have enough for freshman year. It will all depend on what kind of financial aid he gets, whether he can manage a job at the same time as school and how much of that can go to tuition, etc. Also hard to know what financial position his dad and I will be in by then and how much we can realistically help. Also there's a chance that by senior year his brother will be in some kind of post secondary education (which I assume would help bump up our financial aid as a family if two kids are in school at the same time?)

What good is going to college if you have the money for freshman year only?

I would suggest you look at the money as college x2 years or college x4 years. If you are going to use it for 2 kids, then think college x4 years or college x8 years.

Many reasons-
1) you can grow the money to a higher dollar amount with a longer time horizon.
2) you want to make sure the kids start what they finish. 2k-4k per year might work out at a community college or trade school. After that the kids on "on their own" for education.
3) it is easier to find scholarships once on campus. $500 here, $1000 there type availability. You will also have some tax credits which could get you ~$2000 back in taxes depending on qualifying for the credits.

I would plan for 10k to be used over 4 years ($2500/year) and have your son budget that when he starts looking at schools (or $5k per year for a community college). Add that in to a $2k tax credit per year and you could be looking at $7k available per year (might have to borrow the 2k to get it back 1 year later at tax time).

If son chooses to go to a school which costs 10k per year and he exhausts all the cash for freshman year, how will he go back for years 2-4?

[mom929]

What good is going to college if you have the money for freshman year only?

I would suggest you look at the money as college x2 years or college x4 years. If you are going to use it for 2 kids, then think college x4 years or college x8 years.

Many reasons-
1) you can grow the money to a higher dollar amount with a longer time horizon.
2) you want to make sure the kids start what they finish. 2k-4k per year might work out at a community college or trade school. After that the kids on "on their own" for education.
3) it is easier to find scholarships once on campus. $500 here, $1000 there type availability. You will also have some tax credits which could get you ~$2000 back in taxes depending on qualifying for the credits.

I would plan for 10k to be used over 4 years ($2500/year) and have your son budget that when he starts looking at schools (or $5k per year for a community college). Add that in to a $2k tax credit per year and you could be looking at $7k available per year (might have to borrow the 2k to get it back 1 year later at tax time).

If son chooses to go to a school which costs 10k per year and he exhausts all the cash for freshman year, how will he go back for years 2-4?

Good points jIM. Would you suggest a conservative 529 or another type of fund? Is there a good place where I can research funds? My husband has a 401K from his work and I have one from an old job, but other than those we have not done any investing -- unless you count investing in aneurysm surgeries for me and orthopedic surgeries for my son with CP

[jIM_Ohio]

Before I did 529's (beyond the inheritance), I would make sure your own financial picture was sound- 15-20% of gross salary to retirement, paid for mortgage and overall retirement plan on track.

Because you have health issues, I think this is critical. The most important investment you can make is to NOT be a financial burden on your child in 20 years.

How old are you?
what are your annual expenses?
what is current retirement savings as a multiple/fraction of annual expenses? (For example if you spend 40k each year and have 120k in retirement accounts, you have 3X in retirement accounts). That multiple is the primary trigger to being financially secure.

I prefer to not take risks with education monies. Just prefer to see it grow tax free (some) and be available in 17 years.

If you have 10k, your son's budget is either $2500/year for 4 years or $5000/year for two years. He needs to know this once he reaches HS so he can start making choices. If he wants to attend a 4 year school, he'll need to get scholarships. I would not advertise to him there is "government help"- as banking on the government tends to be a loser's game these days in these times.

[swanson719]

Something else to look at might be an ESA as opposed to a 529.

[yorkinvestmentreport]

Agree with the comments above about staying out of stocks. One area you may want to consider putting a small portion of the money is corporate bonds (investment grade). The yield has historically been pretty close to treasury bonds, however, have widened significantly since the credit crisis began. These have historically been pretty "safe" investments and you can get a decent yield right now.