Exclusive Interview: Carl Richards, New York Times Columnist, Certified Financial Planner and Author
Posted By Carrie Wiley on April 16, 2015 at 12:28 pm
New York Times Columnist and Financial Planner Carl Richards Talks Mental Accounting, Open Conversations and 529 Plans
A few weeks ago, GoodCall was given the opportunity to chat with financial planner, author and New York Times columnist Carl Richards. Carl, who is the Director of Investor Education at the BAM ALLIANCE, is also the brains behind the weekly Sketch Guy column in The New York Times, as well as the author of the popular books The One-Page Financial Plan and The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. A University of Utah alum, Carl has founded multiple asset and capital management companies and is also an accomplished speaker.
GoodCall’s Carrie Wiley talked to Carl about 529 plans, paying for college, and financial advice for parents and students:
Carrie: We know that college savings plans have long been considered the best way to save for college due to the tax benefits that come along with them. However, a recent study released in 2012 found that less than 3% of families are actually investing in 529 plans. Why do you think that so few people are investing in these types of plans?
Carl: I think there are a few parts to this. First one is that 529 plans are often very confusing to people. I think there’s still a huge opportunity to educate people about the benefits of using these plans. Once parents figure out that they want to use a 529 plan, then they have to figure out which one. For example- and this isn’t because I live there, but- many people think that Utah has the best 529 plans in the country. And so a lot of people wonder if they can purchase a Utah plan. The answer is yes, but you also need to understand the tax benefits that come along with plans in your state versus plans offered in another. And the last part of this is that sometimes people really just don’t have the money. It really doesn’t matter what kind of tax break you are going to get if you don’t have any money to save.
Carrie: We often hear that it’s never too early or too late to start saving for college. But do you think there is an ideal time to start saving for your children’s college education?
Carl: Parents should start investing as soon as they recognize they have a need. So when you know that you have a kid that you want to go to college. However there’s a step that comes even before that that so many couples forget about. I’ve found, specifically with couples, that the conversation about how they want to pay for college goes widely undiscussed. I see it often in my practice where I will ask, “How do you want to pay for college” and it will be the first time they’ve talked about it. And oftentimes amongst couples there’s a lot of divergence in values too. For example, one spouse may think that since they paid their way through school, the child should pay their own way, while the other one may think, “My parents paid for my college education and I want to do the same for my children”. So the first step is to have that important conversation very early on.
Carrie: Are 529 plans always the best investment vehicle for college?
Carl: There’s another benefit to 529 plans beyond the tax benefits, and that is the idea of “mental accounting” benefits. For example, you and your spouse could try and replicate a 529 plan by opening an account you intend to use for little Johnny’s college fund. But if you need that money before it comes time to send Johnny to college, what’s going to stop you really from spending it on something else? 529s have this little benefit that if you put the money in a 529 for Johnny’s college- that’s exactly what you’re going to use it for. So there is something almost a little sacred about a 529 plan, because it truly designates that money for the purpose of college saving. So the mental accounting benefit is really valuable because there is less of a chance you are going to spend it on something else.
Carrie: Do you have any advice for parents struggling to save enough for both retirement and college?
Carl: It really just depends. Here’s what I can tell you- the most important thing is to have honest conversations about what is most important to you. You need to establish your set of goals and then you make the challenging trade-offs that need to be made to accomplish those goals. And to be honest, there is no spreadsheet out there that can give you an optimized plan for balancing your savings, it just has to be what feels right. For example, maybe for a couple years you focus on retirement savings and then reprioritize down the road when you want to focus more on college savings. Or it could be the opposite.
Carrie: It sounds like a big piece of advice from you is to have honest conversations with the people that are impacted by these decisions – not just between parents but also between parents and kids, is that correct?
Carl: Absolutely. We had a discussion with our daughter, we told her: “We have enough money to cover any of the state universities, but if you want to go somewhere else we need to come up with another plan. We’re here to help you with that, but we want you to be a part of this discussion with us.” And after hearing that, she used that as a factor in making her decision. It was really cool to see her work through that process of “I really want to go here, but I don’t know if it’s worth it, so I’ll choose this instead.”
Carrie: We’ve heard that some people shy away from 529 plans for the fear that if their child doesn’t go to college, they will end up having to pay a lot of money to withdraw their funds from the plan. Do participants have other options for spending that money if they don’t end up needing it for college?
Carl: First, you should understand what “qualified education expenses” are. You can use 529 plan funds to pay for qualified education expenses which include more than just tuition – for example, room and board and books. The other thing to know is that you can change the designated beneficiary. So if you have one child that got a full ride and doesn’t need the money, and along comes your next child who is ready to go to college, you can use it for their education. I’ve seen cases even where the participants have changed the beneficiary to their grandchild, which is really neat. It creates a sort of perpetual education fund that can be passed down from generation to generation.
Carl Richards is a CERTIFIED FINANCIAL PLANNER™ and the director of investor education for the BAM ALLIANCE, a community of over 130 independent wealth management firms throughout the United States. He is the creator of the weekly Sketch Guy column in the The New York Times, and is a columnist for Morningstar Advisor. Carl has also been featured on Marketplace Money, Oprah.com and Forbes.com. In addition, Carl has become a frequent keynote speaker at financial planning conferences and visual learning events around the world. Through his simple sketches, Carl makes complex financial concepts easy to understand. His second book, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money (March 2015, Portfolio), uses these sketches to cut through the complexity people associate with financial decisions. It’s a practical how-to based on many of the principles in his first book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money (Portfolio/Penguin). Carl’s art appeared in a solo show at the Kimball Art Center, in Park City, Utah. Other showings include The Parson’s Gallery in New York, The Shultz Museum, and an upcoming exhibit at the Mansion House in London. His commissioned work is on display in businesses and educational institutions across the country. He lives with his family in Park City, Utah.