Money Management

Here’s how your child can go to college without incurring debt. 

As a parent, you want to give your child the best possible education. But paying for it can be daunting. Since 2000, the cost of tuition has increased by 178% and the cost of college textbooks is up 162%. The cost of education for a public four-year in-state institution is over $100,000, and those attending private nonprofit universities will pay close to $220,000 over four years.

To help pay these costs, financial guru and best-selling author Dave Ramsey has some great tips on how to save for your child’s education. Let’s take a look at his advice so you can start saving today!

Baby steps

Before you do anything, Dave Ramsey recommends starting with an emergency fund, paying off your debt, and saving for retirement before saving for college tuition. When it comes to an emergency fund, he suggests having three to six months of living expenses saved up in case of job loss or medical emergencies. This is important because it will ensure that you don’t have to dip into the funds you are saving for your child’s education if something unexpected comes up.

Ramsey also says to pay off all debts using the debt snowball method. Begin by jotting down all your outstanding debts, leaving out your mortgage. Arrange them from the smallest to the largest balance, without considering the interest rates. Then, focus on making minimum payments for everything, except the smallest debt — that’s the one to pay off first. Once it’s wiped out, switch that payment to the second smallest debt while maintaining minimum payments for the rest. The next step is to invest 15% of your household income for retirement in a 401(k) or IRA account.

Educational Savings Account (ESA) or Coverdell

Once you’ve successfully tackled these steps, Ramsey advises either setting up a 529 plan, an educational savings account, or a trust (UTMA/UGMA). A Coverdell ESA is similar to a Roth IRA in that the money grows tax-free and qualified distributions are tax-free. You can contribute up to $2,000 (after tax) per year, per child. Money in an ESA can be used for college, K-12, vocational schools, and items such as textbooks and school supplies.

The benefit is that you have a wide range of investment options and your money grows tax-free. But, your contributions are limited to $2,000 per year, you must be within the income limit to qualify, and the funds must be used by the beneficiary by age 30.

529 plans

A 529 plan is a tax-free savings account that is specifically designed for educational expenses. The money in this account grows tax free, and when it’s used for school tuition and other approved expenses, withdrawals are also tax free. Some 529 plans allow you to transfer the funds to other family members.

The benefits of a 529 plan are that the cap on contributions is higher (varies by state but can be up to $300,000), the money grows tax-free, and typically there are no income limits or age restrictions. But the funds must be used for educational purposes and if you contribute more than $17,000 in 2023, you will be subject to the gift tax.

UTMA or UGMA

UTMA and UGMA stand for the Uniform Transfer to Minors Act and the Uniform Gift to Minors Act. These acts were established by U.S. law as a way of providing minors with a legally secure option for saving money or being gifted assets. When a parent establishes an UTMA or UGMA account, they are creating a legal trust that allows them to contribute money on behalf of their children prior to them becoming adults.

This can help kids build some financial stability during their formative years and allow them to access the funds when they turn 18 or 21 years old. It also allows parents to shift any responsibility for large gift taxes onto themselves once their child reaches adulthood. The benefits are that the funds can be used for anything and there are tax advantages for the contributor. However, the beneficiary has full control of the funds and can do what they wish with it, gains may be taxed every year, and the beneficiary can’t be changed after being selected.

Saving for your child’s education doesn’t have to be scary or overwhelming! Following Dave Ramsey’s guidelines will help ensure that you are making smart decisions with your money and your budget, while still providing the best possible educational opportunities for your kid(s). Ramsey says to first start with his recommended baby steps, then look into setting up a 529, Coverdell, or trust. With these tips in mind, you’ll be well on your way to giving your kids the brightest future possible!

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The electric vehicle tax credit can be lucrative, but there are some important rules. 

An electric vehicle tax credit can save you as much as $7,500. It is one of the most lucrative credits in the United States tax code and can have a big impact when it’s time to file your taxes. But there’s a lot more to the story than just the headline number. Here’s a rundown of how much the credit can be for new and used EVs, and the important rules and requirements you need to know about before you start shopping.

The clean vehicle tax credit for new EVs

As mentioned, the clean vehicle credit is worth as much as $7,500 for new electric vehicle purchases in 2023. But in order to qualify, you and your vehicle will need to meet certain criteria.

First, the credit is income-restricted. In order to qualify, your modified adjusted gross income (MAGI or modified AGI) cannot exceed these limits:

$300,000 for couples filing a joint tax return$225,000 for head of household filers$150,000 for single filers and all others

The vehicle must also meet certain criteria, such as having a battery pack with capacity of at least seven kilowatt hours, and a gross vehicle weight rating (GVWR) of less than 14,000 pounds. Plug-in hybrids can qualify, but they need to meet this battery pack requirement. It also needs to have its final assembly in North America, although it does not have to be made by an American company.

There were two very significant changes to the clean vehicle credit for the 2023 tax year. First, there is no longer a maximum number of cars each manufacturer can sell that qualify for the credit. And second, there is now a maximum manufacturer’s suggested retail price (MSRP) of $80,000 for vans, SUVs, and trucks, or $55,000 for other vehicles (including sedans). So, some popular EV models, such as the Lucid Air or Tesla Model S automatically will not qualify for the credit.

I won’t go too deep into the details of how the credit is calculated, but the short version is that most people who meet the criteria discussed in this section and buy a fully electric vehicle that was assembled in the United States will qualify for the full $7,500 credit. Some plug-in hybrids will get a lower credit because of their battery pack capacity, and the credit will eventually depend on where battery components were made.

Used electric vehicles might be eligible

Another big change to the clean vehicle credit for the 2023 tax year is that used electric vehicles can be eligible for a credit for the first time ever. The used EV version of the credit is capped at 30% of the sale price of the vehicle, or $4,000, whichever is less. However, the criteria and limitations for the used EV credit are even more restrictive than the credit for new EVs:

Your income (modified AGI) must be below $150,000 if married filing jointly, $112,500 if you file as head of household, or $75,000 if you use any other filing status. These are half the limits to get a credit for a new EV.The vehicle must be from at least two model years earlier than when it is bought.The vehicle must be purchased from a dealer.The sale price of the vehicle must be $25,000 or less (this is likely to be the most limiting factor in practice).

Don’t forget about state incentives

In addition to the federal tax credit for clean vehicles, many states have their own tax incentives. For example, Colorado offers credits ranging from $2,000 to $8,000 for purchases of electric vehicles, Massachusetts offers credits of as much as $3,500 on electric vehicles with purchase prices under $55,000, and New York offers rebates of as much as $2,000, just to name a few. So, be sure to check if your state has any tax benefits you might qualify for.

The bottom line

The short answer is that an electric vehicle tax credit can add as much as $7,500 to your tax refund, or more if your state has its own tax incentives. But as we’ve seen, just because you buy an electric vehicle does not mean you’ll get it — so be sure you and the vehicle you purchase qualify for a credit if that’s a factor in your vehicle-buying decision process.

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It saves me a lot of mental anguish. 

One important financial lesson my parents taught me early on was to always have money in savings for emergencies. Unfortunately, a recent SecureSave survey found that 67% of Americans do not have money in the bank to cover an unplanned $400 expense. But I make a point to keep enough cash in my savings account to not only pay for about a year’s worth of bills, but also, cover some home or car repairs.

The reason I err on the side of having extra savings is multifold. First, I’m self-employed. My income streams could be cut at any time, and if that happens, I won’t be eligible for unemployment benefits. So I need extra money in savings in case something like that happens.

Also, I don’t have family I can turn to for financial support. So if my income were to shrink or disappear, I’d be extremely reliant on my savings during that time.

But even though I’ve built a nice amount of savings, I really, really hate having to dip into it. And that’s why I make a point to keep extra money in my checking account.

A system that works well for me

The money in my checking account basically earns no interest, so I don’t like to keep too much extra cash in there. Rather, what I do is make a point to keep about an extra $1,000 in my checking account at a minimum beyond what my monthly bills cost. That way, I’m not losing out on too much interest, but I also have a little cushion in case I’m stuck footing the bill for a home or auto repair.

Now you may be thinking, “If you have all that money in savings, why not dip into it?” But the reason has to do with the fact that tapping my savings bothers me, whereas for some reason, taking an extra withdrawal from my checking account does not.

In my mind, the money in my checking account isn’t really mine — it’s all earmarked to pay bills. Some of those bills may not be immediate, but that’s what the money is there for.

Even though my savings are earmarked for emergencies, I tend to consider that money mine. And I don’t like to let it go.

In fact, I actually have a separate savings account with money for vacations. That’s another account I don’t mind withdrawing from. But since it bothers me to take money out of my emergency fund, I try not to do so unless, well, I’m hit with an emergency. And padding my checking account allows me to access some money when I need it without feeling as bad about it.

A smart move to make if your checking and savings accounts are at separate banks

I happen to hold a checking account and savings account at the same bank, which means I can generally transfer money from one to another instantly. But if you have your checking account at one bank and your savings account at another, then it really does pay to keep extra cash in your checking account in case you run into a jam.

It might take several days for a transfer from your savings account to go through. And if you need to write a check or swipe your debit card before then, you could run into trouble.

But of course if you’re like me and hate seeing money leave your savings account, that’s reason enough to pad your checking account, too.

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It was a lesson learned the hard way. 

My family and I were ready to adopt a dog in early 2020, when the pandemic hit. Since the world was shutting down and you could barely buy toilet paper at that point, we decided to hold off a few months until things settled a bit.

By September, we were ready to take the plunge. And through a local animal rescue, we found Champ, our 70 some odd–pound lab mix whose favorite activities include barking up a storm, burying bones in random corners of the house, and taking up two-thirds of the bed, leaving me and my husband to cram ourselves into the corner.

Because Champ had been bounced around a lot, once we adopted him, we wanted to focus our efforts on making him feel safe and secure. And since he was fairly young and had gotten a clean bill of health, we weren’t in such a rush to buy pet insurance for him.

That was a huge mistake, though. And it cost us $3,000 — and counting.

Waiting didn’t pay off

My husband and I knew we wanted to buy pet insurance, but it just wasn’t a top priority while we were helping Champ settle in. But then the poor guy started limping, and pretty soon, he was diagnosed with arthritis.

His condition, however, had the potential to go hand-in-hand with malformed joints, our vet warned us. So she recommended further testing to make sure surgery wasn’t required.

Since we didn’t have pet insurance, we had to shell out about $3,000 for that testing. Thankfully, we had the money in a savings account, but it was still a large amount to pay up.

Thankfully, Champ didn’t end up needing surgery. But he does need anti-inflammatory medicine on a daily basis. He also needs regular blood work to make sure the meds aren’t messing with his kidneys and other organs.

Meanwhile, my husband and I have since gotten pet insurance for Champ. But since we didn’t do that before he got diagnosed, we’re now on the hook for hundreds of dollars in bills for medication and blood work every year, since our policy, like most, doesn’t cover pre-existing conditions. And that expense could’ve largely been prevented if we’d gotten our insurance earlier on.

A mistake you don’t want to repeat

Adopting Champ was one of the best decisions my husband and I have ever made. Putting off pet insurance was one of the worst. If you’re adopting a pet, don’t wait to get insurance. But don’t just get any insurance — choose the right one.

Progressive reports that the average annual cost of pet insurance is about $300 to $870 for a large-breed dog. Interestingly, the average annual insurance cost for a medium dog is about $385 to $1,107. For small dogs, it’s $251 to $699.

Clearly, these are big ranges. But that’s because different types of pet insurance offer varying benefits and levels of coverage. You may not necessarily need the most expensive tier, though. In many cases, a policy that protects you from the astronomical costs of accidents and illnesses will suffice.

And to be clear, it’s not just dogs that need pet insurance. If you’re adopting a cat, you should get a policy, too. Progressive estimates the average annual cost of pet insurance for cats at about $169 to $462.

In fact, if you’re looking to adopt a pet but haven’t found one yet, the time to start researching insurance options is now. That’s another mistake my husband and I made — we realized we’d already dropped the ball on pet insurance, and so we rushed to buy it before other health conditions of Champ’s made themselves known.

Thankfully, several years later, he’s yet to have been diagnosed with another condition. And we’ve been pretty happy with our pet insurance company thus far. But we also didn’t do the level of research we normally would, and that’s totally on us.

It’s never easy to own up to a big financial mistake — especially when your job is to write about personal finance and help people avoid such blunders. But I’d rather share this mistake so that other pet owners can learn from it. Owning a pet is a big undertaking in its own right. You don’t need the stress of costly and potentially avoidable medical bills to pile on.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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