Dave Ramsey says: Don't touch that 529 plan

By Dave Ramsey

Published: Tue, July 29, 2014, 6:00 a.m. MDT

 Having more money in your hands isn’t the big answer here. What you both need is a behavior change when it comes to money. My advice is to leave the 529 alone.

Having more money in your hands isn’t the big answer here. What you both need is a behavior change when it comes to money. My advice is to leave the 529 alone.

(Getty Images)

Dear Dave,

My wife and I have $25,000 in credit card debt, $2,500 in medical bills and $89,000 each in student loan debt from when we each got our masters degrees. We make about $100,000 combined. Our son is 6 years old, and we have $18,000 in a 529 plan for him. Should we use that money to pay off debt instead?

— Sean

Dear Sean,

I wouldn’t do that if I were you. You’ll get destroyed with penalties because if you take money out of a 529 for anything other than college, you’ll be taxed at your current tax rate and hit with a 10 percent penalty on the earning's portion of your investment. The other thing is you’ll have this weird feeling that you took money away from your kid.

Technically, it’s your money. You put it there. But when you did, it was in your child’s name. Plus, that doesn’t really solve your problem. You’ve got a ridiculous amount of debt, and that little bit won’t move the needle very much. Having more money in your hands isn’t the big answer here. What you both need is a behavior change when it comes to money.

My advice is to leave the 529 alone. Stop adding to it for the time being. Put any retirement saving you’re currently doing on hold, too. You guys need to start living on a budget, working a debt snowball plan and looking for extra income. Even tutoring would bring in some additional cash. I’ve got a feeling, too, that those master’s degrees can provide you with more money than you’re currently making.

It can be done, Sean, but it’s going to take a lot of hard work and discipline. It may even take four or five years to get this mess cleaned up, but you can’t keep living without a plan.

— Dave

Dear Dave,

Where can I find mutual funds with a 12 percent rate of return?

— Jason

Dear Jason,

There aren’t a lot of them, but they are out there. Currently, there are about 8,000 different mutual funds floating around. You have to get online and do some serious research, or talk with an investing professional with the heart of a teacher, but I own several mutual funds that have an average annual return in excess of 12 percent over the lifetime of the fund.

Now, do they make that every single year? Of course not. The figure I’m talking about is an average. I own one in particular that has done that for about 70 years. But the stock market in general has averaged just under 12 percent a year since its inception. So, yes, with solid research and due diligence on the part of the investor, it is possible to get that as an average annual rate of return.

— Dave

Follow Dave on Twitter at DaveRamsey and on the web at daveramsey.com.

1. sammyg
Springville, UT,
July 28, 2014

Dave is such a genius. Here's what he's really selling you at 12% when he says AVERAGE.

Imagine I say I have an investment that will average you 25% a year for four years. How much would you want to invest? Let's say 100K.

So the first year we have a stock market that gives you a 100% return the first year. Great!
Second year its like 2008 all over again and you lose 50%
Third year we get that 100% return again. Awesome.
Fourth year we lose 50%.

At the end of the year I knock on your door and give you a check for 100k and you say, "What's this? I thought you said I'd get 25% on my money?"

I say, "I did exactly what I promised!"

100% first year
-50% second year
100% third year
-50% fourth year
100% / 4 yrs = 25% avg. per year and you didn't make a penny!

AVERAGE rates of returns mean nothing.

One of the keys to making money is never to lose it in the first place. Avoid risk and avoid debt.

Dave Ramsey says to never gamble with your money yet out of the other corner of his mouth he's pushing people into the stock market.

2. ewatts
Provo, UT,
July 29, 2014

sammyg: Your calculation is wrong.

In the scenario you have given, the average rate of return is 0%, not 25%. When calculating average rate of return over a given period, take the ending dollar amount minus the starting amount, all divided by the beginning amount. In your example, that's 100 - 100 / 100, or 0 / 100 = 0%.

To get 25% over four years, the final amount would have to be something closer to $200k.

Dave is correct that over the long term, the stock market has returned about 12% average. That means that if you had invested $100 30 years ago, the value today would be about $2675. The years that it has gone up has more than offset the years that it has dropped.

3. Floyd Johnson
Broken Arrow, OK,
July 29, 2014

ewatts math is correct.

Dollar cost averaging in index funds. My goal is to match overall economic growth while incurring as few fees as possible.

4. NewAdventures
Cottonwood Heights, UT,
July 29, 2014


I feel bad that you've missed out on great opportunites to make money in the market. For example, I've owned one mutual fund over the past 22 years (since I was 8 years old), and have had a 565% return (as of today). Boy do I love that compounding income return! Those who understand interest make it, those who don't lose it. You holding onto your cash is losing money everyday because of inflation! Now that's a risky bet!

5. Aggie238
Logan, UT,
July 29, 2014

So, sammyg,

Are you then suggesting that we all hide our savings under our mattresses and let inflation eat it away?

Also, as others have noted, your math is incorrect.