In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by recurring Foolish guest Nathan Hamilton to talk about financial fixes that don't involve the most common suggestion: Spend less money. With these moves, you aren't changing your lifestyle -- just how much it costs you to maintain it. Also, they answer a listener's question about what to do with a large leftover balance in a 529 plan, and take a jaunt back through time to find out how a small farming town in Florida grew a bumper crop of Coca-Cola (NYSE:KO) millionaires.
A full transcript follows the video.
This video was recorded on Aug. 29, 2017.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. Hello, Bro!
Robert Brokamp: Hello, Alison!
Southwick: In this week's episode, we're going to count down five ways that you can fix up your finances without denying yourself the little things you love. We're also going to answer your question about what you're going to do with all that extra 529 money, and explore the town of secret Coca-Cola millionaires. All that and more on this week's episode of Motley Fool Answers.
It's time for Answers, Answers. Ernie sent us a card from British Columbia and he writes, "Hopefully you'll answer my question since I sent it to you on a postcard." The answer's yes! "Due to a generous scholarship from the Navy, my son will have a lot of money left in his 529 plan after graduation. Then he will serve in the Navy for at least five years. What can he do with the leftover money in the 529 plan? Thanks, Ernie." Should we get the gratuitous "give the money to us" jokes out of the way?
Brokamp: Yes! Do that Ernie. All right, thanks. Bye. No, I'm just kidding.
Just so we're all clear, a 529 is a savings account for college. You put the money in. You don't get a tax break but it grows tax-free as long as the money is used for qualified higher education expenses.
If you don't use the money for qualified education expenses, the money that you put in actually comes out tax and penalty-free, because it's already been taxed, so you can take that money out and you don't have to worry about it. It's the earnings that will be taxed and then a 10% penalty if it's not used for the qualified higher education expenses.
So, one thing I would say first of all, Ernie, is to make sure that this scholarship covers everything, including room and board. Including books and things like that. If the scholarship doesn't, you can use the 529 for these other expenses.
Also, if you have other kids or other relatives who will be going to college, you can transfer the money to them. It could even be grandparents. It could even be yourself if you want to go back to school. You can transfer the money to another relative.
In your situation, there's even better news, and that is there is an exception to the 10% penalty if someone got a scholarship. So, if someone got a scholarship for $5,000, for example, you could take out $5,000 penalty-free. You're still going to pay taxes on the earnings, but you bypass the penalty. So, a lot of options, there.
And finally I'll also say if it's possible that your son will go to graduate school, you can just leave the money in there and he might tap it later. In fact, if he doesn't, you can just let it grow and he could use it for his own kids, because there's no limit on how long you leave the money in a 529.
Southwick: So many options!
Brokamp: So many options! And, of course, you can give it to us.
Southwick: What would you do if you had a bunch of 529 money just sitting around?
Brokamp: I think I would leave it in there, because we've talked before that I am considering going back to school perhaps one day, and I've read articles about how colleges are actually trying to get in on this a little bit. Like creating classes for the Social Security generation, because they have all this money. Maybe I'll use the 529 to get a degree, and then study abroad. Something like that.
Southwick: Yes, I'll do some air quotes. "Study a broad."
Brokamp: "A broad."
Southwick: So, Nathan Hamilton joins us again in the studio today. Hi, Nathan!
Nathan Hamilton: How's it going?
Southwick: Great! We're happy to have you because you're here to talk about five ways that you can fix your finances without cutting your spending, and there's going to be a little something for everyone. Not every piece of advice is going to apply to every person, but you should be able to get at least one nugget of how to fix up your finances, right?
Hamilton: Yes, and hopefully we can hit every single one.
Brokamp: Every single one of them...
Hamilton: Every single one for one person.
Brokamp: ...will just make your finances awesome.
Southwick: At least one good piece of advice. Let's start with the first one. If you're the kind of person who has an emergency fund and it's making you mad and frustrated because it's just sitting there not earning anything, what's the piece of advice, Nathan?
Hamilton: So, it's pretty straightforward, but it's a matter of looking at an online savings account. Now that's going to vary from a traditional bricks and mortar as you earn more interest, because if you look at the low-yield environment, it's not uncommon to see interest rates at 0.01%, so practically nothing. When you look at it you're losing to inflation.
But with online savings accounts and CDs and so forth, you can look at 100 times that rate. Now it's not going to be the 3%-4% interest rate that we've seen in decades before, but if you compare it to what's out there right now, there's really no reason why your money shouldn't be sitting in some sort of savings account with a higher yield. It's just making your money work for you.
Brokamp: So, for the people who might be nervous about an online bank, they may have questions, first of all, about safety, but also, "With my bricks-and-mortar bank, I just go down the street and get a withdrawal." How do you get your money with an online savings account? Can you use an ATM? Do you make transfers? Can you write checks? How does that work?
Hamilton: It varies by the bank, but some have ATM networks where you can even get ATM-free transactions. Some don't. Some don't even offer ATM cards as a whole, and in those instances, you rely upon transferring money in between banks. So, if you do have a bricks-and-mortar bank, you set up electronic transfers. Those are free across the board. You also can look at wires and so forth, and even snail mail for making deposits.
Brokamp: Got you.
Southwick: And if you're the kind of person who's struggling with credit card debt, Nathan says...
Hamilton: Open a balance-transfer card.
Southwick: And what is a balance-transfer card?
Hamilton: It's a card that offers a promotional 0% interest rate for a certain period of time. And essentially you're trading your high-cost debt for lower-cost debt over that promo period. And really when you look at it, the dollar savings on a $10,000 balance [is] shy of $3,000 if you are, say, taking advantage of a 15-month offer and you pay $300 per month ... vs. not taking advantage of a balance transfer card and paying an 18% interest rate over that same time frame.
So, there's huge savings and when you look at it, you can open a balance-transfer card without paying a fee. Sometimes you'll have to pay a balance-transfer fee. That's one out-of-pocket cost, but normally you're going to be better off saving on the interest charges.
Brokamp: Whenever you talk about credit cards, you're always talking about credit scores and this is something we've talked about in a previous episode. Just to make everyone aware, generally speaking how does that affect your credit [opening more cards and possibly closing another]?
Hamilton: Two things to look at. You've got the longer-term net benefit and then the near-term impacts. So looking at the very near-term impact, when you have a hard inquiry on your credit score, your credit score will generally drop five to 10 points. But looking at that is shortsighted because over the longer term, one factor accounted for in your credit score is called "credit utilization" and it's just looking at the total debt you have divided by your available credit limit. So, when you pay down debt faster, you're going to influence 30% of your FICO score with credit utilization.
So yes, you have the five to 10-point decline in the very near term that fixes itself over the longer term. So, beyond just the dollar savings, there's the credit score benefits.
Southwick: So, maybe you're not struggling with credit card debt, but maybe sometimes you carry a balance on your credit card. Nathan, what should they do?
Hamilton: We all get in that situation occasionally, so request an interest rate reduction. It's surprising how easy it is to do -- to call up your issuer and take five minutes. Research has shown that 69% of people calling up for an interest rate reduction are actually getting it granted, so it's really a no-brainer.
Brokamp: Wow, that's pretty amazing.
Southwick: How much of a reduction are we talking?
Hamilton: I haven't come across research on what that is. You can't tell if it's 1% or 10%; but if you look at the average credit card interest rate for a cash-back card, which are very popular, you're looking at 20.9%. Us, as investors, we look at it and we're like, "If I can earn a 20.9% rate of return every year, we'd throw money after it hand over fist." And that's what banks are earning, so that's at your expense and anything you can do to lower that rate and pay out less interest is going to have a huge impact on your finances. You're not cutting your spending. You're not changing anything by doing that.
Southwick: And the next one's a little controversial, but if you have a credit card or student loan debt and a house, here's an idea.
Hamilton: In some instances, if you do have a high enough student interest rate, you can trade that for a HELOC, a home equity line of credit. We can talk about it a little bit. You're trading unsecured debt for secured debt and, of course, Bro can chime in there. But in some instances, you can actually go from a higher interest rate to a lower interest rate and essentially refinance with a HELOC.
Brokamp: Right. Plus there's the tax benefits because the HELOCs are tax-deductible.
The reason why a home equity loan has a lower rate is because it's backed by collateral and that collateral is...
Hamilton: Your house.
Brokamp: ... your house. If you don't pay it back you could lose the house, so it is somewhat controversial. Some people do the same thing with credit card debt. The rule of thumb on it is if you're paying off debt that was due to a one-time occurrence, like going to school or maybe you had medical expenses, it makes a little bit more sense.
If you're paying off debt because you can't control your spending, then it's definitely not a good idea to exchange that debt for home equity.
Hamilton: And if you're looking at the overall interest rate [before we recorded this here, I checked them out] HELOC rates are right around 4.25%. Student loan rates -- some can be 7%-9% if you go public or private and depending upon the situation.
If you have credit card debt, the case is even more compelling, because there are higher interest rates, but for student loans, you definitely have the opportunity. You can go a traditional refi. You can go with a HELOC. There are options out there.
Brokamp: And certainly other ways to manage your student loan debt that are available -- people deferring debt and things like that -- [are] if you then pay that off with a home equity line of credit, you won't have those options. So you definitely want to think about it before you do it.
Southwick: And our last piece of advice is kind of advice for anyone.
Hamilton: For anyone...
Southwick: All right, what is it?
Hamilton: ...who wants to make their money work harder for them.
Southwick: Ooh, that sounds fantastic. Let's hear it.
Hamilton: So, we're looking at sign-up bonuses, and this is something that's in the near term. It's not an ongoing thing that you can do all the time. But credit card companies are willingly offering sign-up bonuses. So, for people looking at maybe needing some extra money to pay the rent, or pay their grocery bills, or anything like that, there are opportunities where you can stick to your budget and, say, spend $1,000 within a three-month period and get a $200 sign-up bonus with a credit card.
If that matches with your budget -- if you'd normally spend that similar amount -- you don't have to overstretch your finances to get that bonus. If you're not getting incentivized to spend more, it's worthwhile. It's definitely something worth taking advantage of. And as we mentioned before, there are credit score implications to consider as well.
But really, that's money that's available there for you. It's not a game changer. It's not going to take you from being broke to being rich, but it is something incrementally that can improve your finances over time.
Southwick: There you go. Five ways that you can fix up your finances without changing your spending. And wait -- there's more!
Brokamp: There's more?
Southwick: There is more. We actually have a couple of Bro bonus tips or, as Nathan coined before the show ...
Hamilton: Bronus tips.
Hamilton: Do you have some music to cue up with that? That would be great.
Southwick: Rick's thinking about it.
Brokamp: So, we were talking about this and it occurred to me that over the weekend I did something that everyone should do on a regular basis, and that is look at your recurring expenses and see what you are paying for that you never use anymore. And just stop doing that, whether it's a subscription, a membership, or things like that. And for the people who are paying money and you want to keep the service, can you get that lower rate?
I did the classic "call your cable company." I got the bill lowered and I saw that they added an expense a couple of weeks ago. It was one of those things like, "We're going to give this to you for free for a year," [they told us this a year ago] and then it just automatically goes up and you don't really think about it.
I was talking to another Fool today. He said his wife does this every year and they just got their cable bill lowered by 25%.
Southwick: Oh, wow!
Hamilton: Feels good, huh?
Brokamp: Yes, it feels great. So, you should always review your credit card statements and your bank statements for things that you're paying for on a regular basis and evaluate whether you should be continuing to do that and whether there's some room to get that lowered.
And then the other Bronus tip is what are you going to do with all this money you are now saving by following this advice? Well, if you contribute to your traditional retirement account, you will get a tax break. That's immediate savings. Let's say you're in the 25% tax bracket and you contribute $1,000, you've just lowered your tax bill by $250.
But what if you put that $250 in that retirement account? Well, then you've lowered your tax bill by another $62. And if you put that $62 in a retirement account, you lower your tax bill by $15. You keep doing that and you're looking at savings of about $330; not to mention how much that money would be worth 10 or 20 years down the road. So, ultimately that's why you want to save the money -- to save for your future.
Southwick: Nathan, thank you for joining us with your advice.
Hamilton: Absolutely. Glad to be here. And if you'd like to learn more, check out some of our recommendations. You can go to Fool.com/savings or Fool.com/creditcards. We have some recommendations for the best credit cards of 2017 and online savings accounts. You'll find some good information on accounts that we've vetted.
Southwick: Wonderful. Thank you so much for joining us today.
Southwick: Earlier this month we received a message from Eric in Knoxville and he wrote that he's a native Floridian like Bro...
Brokamp: That's right.
Southwick: ...and how his brother had moved to Quincy, Florida, in the Panhandle last year. [His brother] was telling him this story of the Quincy Coca-Cola millionaires and how the money still permeates through the town. It's a fascinating story if you haven't heard it. So, Bro, had you heard it?
Brokamp: I had not, so I began looking into it and I agree. This is actually kind of an interesting story. I will say that like many things that you find on the internet, it's not necessarily all true, so I read tons of articles about this and some of [them] had conflicting information and conflicting numbers, but the kernel of the story is definitely true, and I think it's pretty fascinating.
So, it starts with Coca-Cola. [Coca-Cola] comes public in 1919 in Quincy, Florida, which is now a town of 8,000 people, so it was even smaller back then. It had a banker who had some connection to the company and it's a little unclear of what the connection was, but he was known around town as "Mr. Pat."
When the company came public, he snapped up a bunch of shares, but he also encouraged the people in town to buy as many shares as possible, and basically his premise was regardless of what's going on in the economy and regardless of what's going on in someone's finances, they always find a way to come up with a nickel to buy a Coke, which is how much Coke cost back then.
Southwick: Also because it had cocaine in it, right?
Brokamp: At that point it did not.
Southwick: Sales are helped when you're chock-full of cocaine.
Brokamp: That's right. It didn't at that point. So, it comes public in 1919 at $40 a share. He buys a bunch ...
Southwick: That seems very expensive for a single share back then.
Brokamp: Right. Now the key to that is, as the town's banker, he would lend money to people to buy it. Back then it was mostly a farming community, and largely tobacco. They made the light tobacco that would go around to make cigars.
Farmers would say, "I need to borrow $2,000." He'd say, "I'm going to lend you $4,000, but you've got to agree to invest half of that into Coke." And so what happens is by the late 1930s, according to some reports, on a per-capita basis Quincy is the wealthiest town in America because of all these Coca-Cola millionaires. The numbers vary depending on the time frame and which article you read. Some say there were at least 24 millionaires. At least 67. Some over 113. Regardless, it's a fascinating story, and one of the keys of it was that during the Great Depression, when the economy was in the tank, people were living off the dividends from their Coke.
And the same with recessions that came afterwards. In other words, Coke kind of sustained the town during the tough times. And if you go to Quincy now, you will see that. First of all, there's a big mural of Coke on the side of one of the jewelers, but some of the Coca-Cola millionaires use their money to do things like fix up a theater. Buy a Girl Scout camp. Fix up a church. Things like that.
As for the banker himself, Mr. Pat, when he died in 1940 he had 18 children by two wives and he left each of them $1 million in those dollars, which today would be worth almost $18 million. According to a Bloomberg story from the 1990s, the residents of Quincy owned 7.5 million shares which then had a value of $375 million.
And you'll read other stories about at one point Quincy accounted for about two-thirds of Coke shares and that Coke, which was headquartered in Atlanta and about four hours from Quincy, would send a courier down with proxies. Now there apparently is an official historian at Coke and he's cast some doubt on a lot of these things, but he said in terms of a per-capita basis, there's no question that something extraordinary went on there in Quincy.
Now, one thing we do know for sure in terms of how much someone made in Coke is that we know what happened to SunTrust banks. So SunTrust is a regional bank also headquartered in Atlanta. It helped bring Coke public in exchange for $110,000 worth of stock. They held on to that. They didn't start selling until 2007 and then completed the sale in 2012. According to a 2012 article in Fortune, their pre-tax gain on all those shares was $1.9 billion. According to the CEO of SunTrust, their return was 2 million percent on their investment, which is pretty nice. In fact, if you look at a share of Coke if you bought it back when it went public in 1919, it's gone through several splits. That one share would have now turned into 9,200 shares. If you reinvested all the dividends that $40 investment would be worth over $10 million today.
Hamilton: So the moral of the story is put all of your money in one stock?
Brokamp: That's right! Thank you!
Southwick: I was going to say...
Hamilton: That's my takeaway. That's the fun, right?
Southwick: This could just as easily gone the other way, right? Mr. Pat could have been nefarious and been like, "Oh, see, I've got a great investment for you." Studebakers, elixir, and whatever.
Brokamp: So, that is very funny that you bring that up. Because right here in my notes I have one of the lessons, and whenever we tell these types of stories, it has survivorship bias. So, I looked at the Dow Jones, which at that point did not quite have 30 stocks in 1920, and you look at the companies in there. So one of them was Studebaker. American Can Company.
Southwick: That name just sounds old to me.
Brokamp: Baldwin Locomotive. Central Leather Company, Anaconda Copper, and, of course, as we all know, that was the year American Beet Sugar was dropped from the Dow.
Southwick: A crazy year.
Brokamp: So I don't know what happened to all those companies, but there might be some other town in Florida where everyone bought tons of Anaconda Copper out in Florida and they've lost all their money. So, I think the lesson, here, is not necessarily put it all in one stock. The lesson here is the power of long-term investing.
Brokamp: There are several anecdotes from people in the town that said the thing is we just never sold. In fact, one was by the Chamber of Commerce with a county named David Gardner [of course, not our David Gardner]. But people just held onto their stock and lived off the dividends. That's really the power.
And also, how the power of this money was created for generations. I mean, the original banker, like I said, died in 1940. His daughter just died a few years ago and had enough money to do so much for the town they named a road after her. So, to think not only long term for yourself, but generationally, and how much you can do for your family, and then how much your family can do for the community.
Southwick: It's a legacy.
Brokamp: It's a legacy.
Southwick: The Coca-Cola legacy.
Brokamp: That's right.
Southwick: All right. Well, that's the show. Nathan, thank you again for joining us! We appreciate it. Come back!
Southwick: Although you're moving to Colorado.
Hamilton: I am, but I can call in sometime.
Southwick: We'll figure it out.
Brokamp: I think we'll just have to go there and record the show.
Hamilton: We'll take a field trip to Colorado and then go to Florida.
Southwick: All right, well summer is coming to an end, here, so this is the last time I'm going to ask you guys for postcards. So far we've received, I don't know, hundreds? Over a hundred? A lot.
Brokamp: A lot.
Southwick: A lot of postcards.
Brokamp: And we love it.
Southwick: We love it. From 26 different countries and 26 different states as well as Guam and the U.S. Virgin Islands. But it's never enough. It's so great to hear from you guys, our listeners, and know that you really exist and aren't just in our imaginations unless I've been doing some Tyler Durden trips around the world in which case I'm bummed. I don't remember the Maldives.
So, our address is 2000 Duke St., 2nd Floor [although you don't necessarily have to put that in], Alexandria, V.A. 22314.
Rick Engdahl: Which states are we missing?
Southwick: Uh, well there's 26 of them. Ohio, I think, is one of them. New Jersey. Virginia. We don't even have one from Virginia. I can just walk down the street in Old Town and pick one up, but I'm not going to do that because that's cheating.
So, anyway, please send us your postcards, even if you think you're from a boring place, we'd love to receive it. The show is edited coca-in-ally by Rick Engdahl. Our email is Answers@Fool.com. They're never going to get better, Rick. They're never going to get better. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
Alison Southwick has no position in any of the stocks mentioned. Nathan Hamilton has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.