Tag Archives: Good Debt

Back to Basics Fun Educational Review – Part Five – Education Planning … The 529 – The Not to 529!

Welcome back to Part Five of our “Back to Basics” series .. we hope you’ve enjoyed the First Four which started with all about “The Emergency Fund” in Part 1 … with Part 2 being “Protection Planning” and Part 3 discussing All about Debt Planning or “The Good the Bad and the Ugly of Debt”, Part 4 Retirement Planning and now we happily bring you Part Five Back to Basics Education Planning!

As a reminder this is a high level Financial Planning Education like overview starting with the basics of and we will continue into advanced topics in order of Planning Importance.  

Did you notice we put Retirement Planning BEFORE Education planning? Do you recall in Part 3 in Debt Planning we said one of the few good debts are educational related debts ….We of course are not advocating Student debt/loans… but they are available in abundance and again not a bad debt. There are not retirement planning loans…. just saying!

Education Planning

Very similar to the most important parts of retirement planning, education planning carries many of the same qualities but with a few caveats:

  1. Start Early and if you do consider a 529 plan due to the tax free compounding features.
  2. With many states giving you a state income tax bracket break for your 529 contributions … making those states a green light to fund a 529 right up to the years a student is about to attend or is even attending –
    1. Planning Strategy– if you are very near the student using the 529, only fund the amount needed to get the deduction on the state level. Those residing in states where there is no state income tax deductions have far less benefits to the late funding/in and out of 529 state deductible contributions.
    2. Second Planning strategy– late funding plans of any type should be in VERY safe almost emergency funds like asset classes since their use will be so fast.
    3. Third Planning strategy– Do not overfund a 529 as if you do there can be stiff tax penalties for non-educational uses.
  3. Think of educational funds as fast use retirement funds, therefore make sure the allocations are very conservative as the child approaches use age.
  4. Make it easy for Grandparents and others to contribute to an Educational fund, we find other generations very frequently help with Educational Funding since they also know the importance, but may be more set in their retirement funds…

Education Costs are Increasing Fast

Not withstanding the above warning of overfunding a 529 plan, understand that higher education costs are rising very quickly as noted here in detail and be sure to plan accordingly … here is our favorite chart on the Growth of Student Loans:

Have a Great “Education Planning” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.



Back to Basics Fun Educational Review – Part Three – Debt and Debt Planning, The Good The Bad and The Ugly

Welcome to Part Three of our fun educational “Back to Basics” series original started here with Part One “The Emergency Fund” and continuing with Part Two, Protection Planning, and now on to Debt and Debt Planning!

The goal of this series is to cover the most important Foundational Financial Planning items in not only order of importance but also order of technical difficulty. Once complete we expect to have a foundational, almost college like course of Financial Planning topics and goals that can be shared all at once in Netflix series drop like format for any that may be in need or interested. Longtime clients will most certainly find a repetition of items we have spoken or written about before but may occasionally uncover a topic that needs addressing due to a change in our situation.

Debt and Debt Planning – The Good the Bad and the Ugly

Debt and Debt Planning is an extremely important topic, ESPECIALLY in today’s buy now and pay later constantly pushed promotional items. But be careful, nothing is for free and one misstep could lead to an unneeded compound interest tragedy….

In a perfect world, no debt of any type may be a desire and many might feel success is reached upon this achievement, but not all debt is bad, and there are likely mandatory times of debt!

Once again, adhering to Part 1, and having a healthy Emergency fund allows control of ones own destiny giving full control of this topic… so let’s jump in!

The Good Debt

Student Debt May Be The Best Debt Someone Can Have

An investment in ones self in the form of higher education … while we can discuss the merits on how enrollment costs have increased rapidly, is generally a very helpful item for the long term and again generally, if career pointed will frequently pay off in the long term.

  • Reflect on what you are incurring the student debt for with watchful eye for help upon completion i.e. Might not be a good idea to incur debt for something you may never use career wise in the future
  • Keep an eye on the total expected amount of debt you may be saddled with upon completion and mind possible less expensive options
  • Watch the terms of the debt, deferred interest, government subsidized, zero interest, low interest
  • Of course try to keep it at a minimal

Residential Mortgage Debt

With long term Mortgage rates (30 year) recently in the 2% -3% range we can argue that Mortgage debt is not bad debt. Cautiously we put Mortgage Debt here in the good, but there is an interest rate that would make it bad debt i.e. An exaggerated example from decades ago of 10%+ would not be good debt.

Tax Benefits of Mortgage Debt can help make the headline rate even lower after tax benefits. But those can come and go as tax laws change.

Most can qualify for WAY WAY more than one should actually have! Our conservative view equation is generally a mortgage of twice annual earnings is a really good place to start, especially for those early in their careers.

Free/Zero Interest Debt is Ok if Handled Properly

Again pointing to our healthy Emergency Fund, Interest Free/Zero debt CAN be ok. Do not take it as an excuse to make an unaffordable purchase!

Watch the terms, as one mistake often carries a huge carry forward of interest, far negating the extra interest one would earn by using the “Free” debt.

Also be careful with a large lump sum payment at the end of a “Free” term… make darn sure we have the funds available and it will not damage our Emergency Funds stash!

The Bad Debt

Interest bearing debt for an item not needed is Bad Debt and borderline Ugly debt. As mentioned earlier, we live in a highly promotional world of “Buy Now, Pay Later” …. Do not bite.

Examples may include what we call Toys, such as extra motorized or floating vehicles, overly expensive devices or equipment and the like.

It is fine to “Treat” ourselves every once in a while, but don’t do it on Bad Debt and don’t mess up your Emergency fund !

The Ugly Debt

Any high interest debt, especially Credit Card type debt.

With interest rates very low on savings rates, having a debt interest rate over mid single digits would be called Bad Debt!

Most of the time this debt occurs is usually attributed to our Part 1 Emergency Fund inadequacy … possibly combined with a “life’s curve ball” unexpected event.

Rates as high as 20% are not common in this swimming pool… please don’t swim here and keeping that emergency fund healthy will keep you out of the water!

Now that we have a good foundation…. next up, Retirement Planning!

Have a Great “Debt Planning” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.