For at least the last few generations it was assumed that a college education was the ticket to success in life. Parents encouraged their children to strive for that college degree. But, like all assumptions, it’s a good idea to examine them periodically.

       A provocative article in USA Today by Patrick Welsh, a high school English Teacher does just that. And, what he found could provoke some heated discussions. His main concern is that many of the kids you enter college have no chance at earning a bachelor’s degree. He points to cases where 70% of students entering college drop out. His wonders if colleges are admitting students that they don’t expect to succeed solely to grow their schools and make more money.

       That’s the type of thing that’s almost impossible to prove, but sure looks like it could be true. More students means more professors and clerical workers. It means bigger paychecks for the administrator’s, too. It also means more clout in the community and with every one the school does business with.

       Unless I miss my guess, none of those administrators will have their pay reduced if too many students drop out. Nor will they bear any responsibility if students end up with debts that are much too big for their income level. In fact, they won’t have to face the problem since student debt doesn’t require payments until the student leaves school.

       Studies show that the average graduate has more than $23,000 in debts (NY Times). Which is a lot of debt for someone who might be making $30k per year or less. But, debt is especially nasty for students who don’t complete a degree. Their income potential and ability to repay student loans is even less.

       Now I’m not saying that everyone should avoid college. Far from it. Based on what I see many, many jobs will require continuous education. It will become very difficult to find a job where you don’t need to continue learning.

       But, I expect college to change in the next decade. The idea of devoting full time to college and attending classes in person will gradually give way to a different approach. One that’s not nearly so expensive. One that doesn’t require as many professors and ivy covered buildings. A continuing education model that will take what we need from colleges and blend that with an internet world. A new paradigm that will be much, much more affordable for students (yes, you can call it more frugal!).

       In the meantime, don’t be surprised to see an explosion of college debt defaults. There’s a little more than $600 billion in federal education loans outstanding (FinAid.org) and $45 billion are in default (7.5%). It’s almost impossible to get relief on student loans. Generally even declaring bankruptcy doesn’t make them go away. So the former students will drag these loans around. For some the choice will be between food/shelter or paying their loans. Guess which choice will win out.

       So should you plan on going to college? Well, maybe. If you know what you want to do and going to college is the only way to do it. But, for many people, the idea of going to college just so you can say that you went is becoming a very expensive luxury. A luxury that you might pay for the rest of your life.

       Keep on Stretching those Dollars!

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       Gary Foreman is the publisher of The Dollar Stretcher.com, a website dedicated to frugal living. Click here for more information about how to find money for college.

Related Articles at Provident Planning:

1. Debt Is Not Evil
2. Lower Your Taxes: Deduct Your Student Loan Interest
3. You Don’t Need to Be an Expert to Be Successful
4. How to Get Out of Debt: Step 6 – Make a Plan to Pay Off Your Debt
5. Weekend Reading – 02/26/2010

How Long Do You Have?

       When it comes to choosing an investment option, you need to consider your time horizon – how long you have until you need the money. This is true of any financial goal. The longer you have, the more risk you can afford to take (and the higher your return might be). Once you know your time horizon, you can start considering your investment options.

Cash – Time Horizon: 0 – 5 Days

       Think cash is king? Not when it comes to savings options. Cash may seem like the safest option, but you’ll lose money to inflation. The only reason you should have your down payment in cash is because you need it within a week. Though I wouldn’t walk into a closing with that much cash! A checking account is the equivalent of cash because it usually yields no interest, so just take a check instead.

High-Yield Online Savings Accounts – Time Horizon: 5 Days – 2 Years

       I skipped regular savings accounts because the interest they offer is pitiful compared to high-yield online savings accounts (like ING Direct). High-yield savings accounts offer a decent short-term interest rate and are backed by FDIC insurance. This means they’re risk free up to the insurance limits. If you have less than two years until you need the money, this could be your best option.

Certificates of Deposit (CDs) – Time Horizon: 2 Years – 5 Years

       CDs are a good option if you have a longer time horizon because they’ll let you lock in a fixed rate for a specific number of years. There are three problems here though. First, there is often a minimum purchase amount for CDs – usually $1,000. Since you can’t add on to a CD you already own, you’ll have to buy a new one every time you have the money.

       Second, CDs can take some managing if you don’t keep them all at the same bank. If you’re chasing the highest rates, you’ll probably have to utilize several different banks. This means having several accounts in different places – and that’s not necessarily a good thing.

       And third, putting your money in a CD means it is locked up. You generally can’t get to it early without penalties. This is why I recommend using a high-yield online savings account if you’ve got less than two years. You can pull your money out of there at any time with no penalty.

       If CDs don’t sound like something you’d want to try, I’d recommend looking at short-term government bond mutual funds. Vanguard offers VSGBX and VFISX which both have an investment minimum of $3,000. However, you can make additional investments of only $100 (or $50 if you use automatic deposits) after that point. You can avoid the $20 service fee by signing up for electronic delivery of your statements and other documents. These funds are quite stable and low risk while generally offering slightly higher rates than CDs.

Intermediate-Term Bond Funds – Time Horizon: 5 Years – 10 Years

       Intermediate-term bond mutual funds offer slightly higher returns than the other options but with slightly more risk. You should only consider them if you have five to ten years until you’ll be buying your home. Again, Vanguard is a good choice here. The same minimums apply, but you’ll want to look at funds with the ticker symbols VIPSX, VBIIX, VFITX, VFICX, or VBMFX. You won’t get stellar returns with these options, but they’ll pay you more than enough to beat the other choices and keep up with inflation.

Conservative Stock/Bond Portfolio – Time Horizon: 10 Years – 20 Years

       If you have a good long time until you’ll be buying a house, consider looking at a conservative mix of stocks and bonds for your savings. A good target would be 20-30% in stocks and 70-80% in bonds. A mix like this will give you a reasonable chance of outperforming other options for your savings, but your longer time horizon will decrease the risk of losing money. If you need help figuring out how you should allocate your investments, check out my free portfolio allocation calculator.

Moderate Stock/Bond Portfolio – Time Horizon: 20 Years +

       Finally, if you’re not planning to buy a home for at least twenty years or more, you might consider using a moderate mix of stocks and bonds. In this case, somewhere between 40-60% in stocks and 40-60% in bonds would be a reasonable choice. Again, the long time horizon will help ensure you minimize your chances of losing money, but the more aggressive investment choices will give you the chance of higher profits. See the above link to my free calculator if you’d like to see what a sample portfolio would look like.

Your Thoughts

       What savings options would you use and why? What advice would you give to those who are saving for a house? Share your thoughts in the comments below!

Related Articles at Provident Planning:

1. Investing Basics: What Is a Bond?
2. How to Invest for Retirement: A Diversified Investment Portfolio
3. Investing Basics: What Is a Mutual Fund?
4. How Long is Long Term?
5. Investing Basics: What Is a Security?

• Step 1 – Declare War on Your Debt
• Step 2 – Stop Increasing Your Debt
• Step 3 – Create a Budget & Stick to It
• Step 4 – Find Ways to Cut Back & Earn More
• Step 5 – Build a Starter Emergency Fund
• Step 6 – Make a Plan to Pay Off Your Debt
• Step 7 – Focus on Paying Off Your Debt
• Step 8 – Celebrate Milestones

Step 9 – Top Off Your Emergency Fund

       You’ve reached your final milestone. You’ve paid off your debts. Congratulations!!! Enjoy the moment and celebrate the fact that you’ve come so far. You’ve accomplished your goal and you should be joyful.

       But if you want to avoid sinking into debt again, you’re going to have to apply everything you’ve learned along the way and take a couple extra steps to protect yourself. The last two parts of this series will deal with the follow-through.

       After paying off your debt, your next goal should be to bolster your savings so that no emergency will force you into debt again. In Step 5, you built a starter emergency fund that equaled one month’s worth of your living expenses. Now it’s time to top off that fund depending on your circumstances.

       To figure out how much you should have in your emergency fund, think of it in terms of levels of risk. Some people have a very stable situation and may not need as large of a fund. Others will have much more risk in their situation and should consider saving more. These are not hard and fast rules. They’re simply a guideline to help you think about what works for your situation.

Level 1: Three Months of Living Expenses

       Once you’ve got your debt under control, your next emergency fund goal should be three months worth of living expenses. This gives you a large enough cushion to withstand a job loss if you can find another job quickly. It will also help you cover car repairs, some medical bills, and other small to medium sized emergencies. If you’re married and you both have stable jobs, you might feel comfortable stopping here. If you’re single, married with one income, self-employed, or have an unstable job, you’ll want to keep going.

Level 2: Six Months of Living Expenses

       An emergency fund with six months worth of living expenses should be large enough for most people. You’ll have plenty of time to find a new job in most scenarios. However, you might want a larger emergency fund if the economy looks bleak or if you are single or married with one income and you have an unstable job or you are self-employed. In those cases, I’d recommend going for a larger emergency fund.

Level 3: Twelve Months of Living Expenses

       If you’re self-employed or have an unstable job and you rely on only one income, you’re going to want to play it safe and save up twelve months of living expenses in your emergency fund. This will help you make it through rough patches in your career when profits are down or you lose your job. This would also be a great idea if you or your children have medical needs that require large payments at unpredictable intervals.

Adjust for Your Situation

       If you feel that your situation doesn’t fall into one of these specific categories, then use these as guidelines and save what you feel you’ll need. This guide should help most people get close to the right-sized emergency fund for them. Don’t get discouraged if you feel like it’s a lot. Attack this goal in small steps and you’ll quickly make progress. If you have questions, just leave them in the comments and I’ll try to help!

       This series is almost finished! In the last step, I’m going to talk about a couple others things you should consider to help you stay out of debt. This isn’t to say you’ll never use debt again. But the next time you do, it will be a conscious choice based on good and sound reasons. Make sure you’ve signed up for free updates to Provident Planning so you don’t miss out on this important last step! Plus, I’ll be bundling this series with helpful resources and calculators in the future. It’ll be a valuable guide for getting out of debt. If you’ve signed up for free updates, you’ll be sure to see it as soon as it’s available.

       Have you topped off your emergency fund yet? How long did it take, and how did you do it? What level did you choose and why? Let me know in the comments below!


       P.S. Here are some other articles about emergency funds if you’d like to read more:

• Should a Christian Have an Emergency Fund?
• You Need an Emergency Fund
• Where to Keep Your Emergency Fund
• How to Build Up Your Emergency Fund
• When Should You Use Your Emergency Fund?

Related Articles at Provident Planning:

1. Emergency Fund – How Much Is Enough?
2. How to Get Out of Debt: Step 5 – Build a Starter Emergency Fund
3. You Need an Emergency Fund
4. When Should You Use Your Emergency Fund?
5. How to Get Out of Debt: Step 7 – Focus on Paying Off Your Debt

       Five Cent Nickel, another personal finance blogger, created a nice graphical explanation of these changes using the Federal Reserve’s sample statement. I thought it might be useful if you’ve been wondering about these changes. The information that FCN provides also includes some of the other changes that came with the Credit CARD Act.

       Do you like these changes and the new format? Do you think it will help people pay off their credit cards faster, or will people who pay the minimum payment keep on ignoring their situation? Share your thoughts in the comments!

Related Articles at Provident Planning:

1. The Credit CARD Act – A Summary
2. Being Wise with Your Credit Card
3. How to Get Out of Debt: Step 6 – Make a Plan to Pay Off Your Debt
4. Weekend Reading – 08/07/09
5. Qualifying and Applying for VA Loans

What Are VA Loans?

       If you’re an active member of the United States military or a veteran of one of the armed forces branches, chances are good that you automatically qualify for a mortgage loan underwritten by the Department of Veterans Affairs. These loans are designed specifically with armed forces members in mind and their primary goal is to ensure that nearly every service member who wants to own a home can do so, regardless of the area in which they choose to live. To this end, the VA underwrites mortgage loans for service members up to a certain dollar amount (which varies widely depending on the cost of living in the chosen area).

Benefits of VA Loans

Benefits of selecting a VA loan over a traditional mortgage are numerous and include:

• Less Stringent Credit Requirements. VA Loans were designed to help borrowers who may not otherwise qualify for a home loan and, to that end, don’t have the strict credit requirements that many other mortgage loan programs do. Borrowers with a less than favorable credit report, those with little credit history, or even those who have declared bankruptcy in the past but have maintained excellent credit since can all qualify for a VA loan.

       

• Less Cash at Closing. Many loans require up to 20% of the purchase price as a down payment, due on the day the loan is closed. Unfortunately, borrowers also need to bring the closing costs that same day, which can often amount to as much as $8,000. In today’s economic climate, coming up with that much cash just isn’t feasible for many buyers, and the VA understands that. VA loans offer low (3%) and zero down payment options and allow borrowers to roll the closing costs into the loan amortization.

       

• Competitive Interest Rates and Loan Products. While the VA prides itself on offering an opportunity to service members who have had trouble in the past applying for a loan, it does so while offering highly competitive loan products. The interest rate a VA loan borrower can expect to pay closely mirrors the rate a traditional loan program would give a borrower with excellent credit and a large down payment. In addition, the VA offers several adjustable and fixed loan products to fit every lifestyle.

Qualifying for a VA Loan

       Perhaps best of all, the qualification process for a VA loan is a reasonably easy one and made to be as user friendly as possible. You’ll be able to work with your local lender or bank for the entire process since the VA’s role in the loan is simply to provide a guaranty to the bank to lower the risk of your loan. You must meet the following criteria and provide documentation to your lender and the VA.

• You served 181 days during peacetime (Active Duty)
• You served 90 days during war time (Active Duty)
• You served 6 years in the Reserves or National Guard
• You are the spouse of a service member who was killed in the line of duty.
• You can document two years of steady employment, or can provide an explanation as to why two years of employment could not be obtained.
• You have a total debt to income ratio of less than 41%, after taking the potential home loan into consideration. If your debt to income ratio is greater than 41%, you’ll need to have excellent credit to support the high ratio.

How to Learn More about VA Loans

       Qualifying veterans and active duty service members have absolutely nothing to lose by using the VA loan program instead of a traditional mortgage service. The rates are exceptional, the loan products are competitive, and the process is easier and less expensive than most other options on the market today. Visit your local lender for more information on the program or to get the current loan limits for your area. Alternatively, you can go to www.va.gov or call your local branch of the Department of Veterans Affairs for more information.

Related Articles at Provident Planning:

1. When Is a Mortgage Refinance a Smart Move?
2. The Mortgage Interest Deduction: It’s Not as Good as You Think
3. How Big of a Mortgage Can I Afford?
4. Lower Your Taxes: Contribute to a Traditional IRA
5. The Value of a Mortgage Refinance