Investing

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What is a 529?

Investing

Short Answer: What is a 529? It can help you cover a variety of secondary education expenses.

When exploring paying for education post-high school graduation, you’re bound to hear the term “529” thrown around. 

But, what is a 529? If you’re confused by the term, you’re not alone. According to a survey by investment firm Edward Jones, only about 29% of Americans know about 529s as an education savings tool.

Below, we’ll explore 529 education savings plans in-depth, with the help of expert insight from Mary Morris, the Chief Executive Officer of Virginia529, the largest 529 plan in the U.S.

Roth 401(K) is to Retirement as 529 is to Post-Secondary Education

What is a 529? It’s like a Roth 401(k) plan, but for education. 

Think about it, Roth 401(k) plans are offered by employers and provide tax-advantaged accounts to help save for retirement. Contributions grow over time, and when it comes time to retire, you can draw down from a Roth 401(k) tax-free.  

529 education plans are provided by the state and offer tax-advantaged accounts to help save for education expenses. 

529 tax benefits come from both the federal and state level, and contributions aren’t taxed. Withdrawals (for qualifying expenses) from a 529 aren’t taxed, either. That means you don’t have to pay taxes on any earnings or growth on the account, as long as it’s used for qualifying expenses.

529 tax benefits also include specific state tax benefits. As you explore your state’s plan, look into what advantages your state may offer, such as tax-deductible contributions.

“The more you save in advance, the less debt you have to take out in loans”

A 529 plan can help ease the burden of post-high school educational expenses, explains Morris, “the more you save in advance, the less debt you have to take out in loans.”

If you can cover some of the cost of education with a 529 plan, you may not have to take on as many loans. That means lower monthly student loan payments and a chance to build up savings and wealth as you start a career.

The earlier contributions start in a 529 plan, the more time they have to grow. However, it’s never too late to open a 529 plan, and any contribution can be a helpful way to pay for educational expenses.

Even if you’re uncertain about what the future may bring in terms of education, a 529 is a way to keep your options open. It only makes it easier to cover expenses. 

A 529 isn’t Just for College Tuition 

There’s a misconception that 529 plans can only pay for college tuition. However, you can use money from a 529 to cover lots of secondary education programs and expenses, explains Morris, including:

  • Community college
  • Online courses
  • Graduate programs
  • Vocational school
  • Apprenticeships
  • Associate degrees
  • Private elementary and secondary education

Not sure if your course of study is covered? You can consult the U.S. Department of Education’s database to see if the institution is accredited.

What’s more, 529 plans can also cover expenses around qualified education, including:

  • Room and board
  • Supplies 
  • Internet access
  • Living expenses
  • Textbooks 
  • Tools

529s aren’t limited to use on a traditional 4-year college campus. They could help someone pay for certifications later in life, or they could help cover the cost of trade school for a recent high school grad. Considering the 529 tax benefits could translate to big savings on everything from textbooks to tuition.

A 529 Can be a Family Savings Tool

Not exactly sure what the future holds in terms of your education plans? It doesn’t mean a 529 account goes to disappears, says Morris. While 529 accounts have designated beneficiaries, it’s simple to transfer the balance of an account to another family. 

For example, if a high school student has a 529 account but gets a full scholarship to college, they can transfer the account to a parent, sibling, or other family members. That means anyone seeking education can take advantage of the account, ensuring the money doesn’t go to waste.

Once you can answer, “What is a 529?” it becomes clear it can be used for so much more than just college tuition. A 529 can help establish a young person’s career, whether entering the trades or an associate’s degree. A 529 can be used as a tool to save for mid-life career changes or additional certifications.  

No matter what you want to use it for, it can be valuable to start building a 529 account today to save for future education.

Extra Credit

How do I get started?

If a 529 plan sounds like the right fit for you, consider the following steps to get started:

  • Look up state plans. Most states have their own 529 contribution plan. Find your state’s offering for more details on local 529 tax benefits.
  • Open an account. In some states, you can open an account for as little as $10 to start, Morris says. 
  • Set a recurring contribution. If you only have $10 or $20 to spare each month, set up a recurring contribution to a 529 plan. Chances are, you won’t even notice the $20 leaving your account each month. From there, it’ll have a chance to grow.


If you’re a high school student (or younger), consider talking with your parents about setting up a 529 account in your name. You can deposit gift money or paychecks from a part-time job to save for school. 

when to start investing

Should I Be Investing or Saving?

Financial Decision Making, Investing, Spending & Saving

Short Answer: Or both? For short-term needs, you’ll want savings.  For long-term needs, you’ll want investments.  This is rarely an either/or decision, and with changing retirement plan types, it’s more important than ever that individuals understand how and when to start investing.

With apps, the power of the market is in the palm of your hand, making it easier than ever to invest. But, deciding how and when to start investing hinges on existing savings and whether you have “enough” to start investing.  

Establishing an emergency fund and savings is an important part of financial wellness. Without it, you could be forced to withdraw from retirement accounts, incurring hefty fees or penalties.

But, at what point do you know when to invest in the stock market? Read on to understand when to prioritize saving and investing.   

When to Keep Saving

Deciding when to keep saving will depend on a couple of factors. Here’s when you should consider saving over investing.

You have no emergency fund

Over half of Americans have less than three months’ savings in an emergency fund, reports Bankrate. If you don’t have emergency savings built up, you’re exposing yourself to risk. 

For example, say your car breaks down, you lose your job, or you have an unexpected medical expense. Without liquid savings on hand, you may end up racking up credit card or personal debt to cover costs. Alternatively, you could end up withdrawing from retirement accounts, incurring hefty fees to access the money early. 

Having emergency savings provides a cushion. When any kind of emergency arises, you don’t have to scramble to find money to cover the costs. 

When establishing an emergency fund, a good rule of thumb is saving at least three months of expenses. That means if you lost your income, you could pay for everything from housing to groceries with savings. 

If you don’t have an emergency fund, put aside cash every paycheck until you meet the three-month threshold. Bonus points if you can save up to six months of living expenses.

You have high-interest debt

If you have any high-interest debt, such as credit cards or a personal loan, consider paying this off before investing in the market. 

Why? Because the average stock market return over the last 100 years is 10%. If your debt carries a high-interest rate, say higher than 10%, you’d be losing money in the market in the form of interest charges on your credit card. 

If your high-interest debt compounds, you’re charged interest on your interest. That means debt can snowball, growing larger faster than you may anticipate.  Say, you have outstanding credit card debt with a 22% interest rate.  The money you are losing on interest outweighs any realistic investment return assumption. 

Paying off high-interest debt first will almost always yield a higher return than investments in the market. Plus, the relief of paying off debt can allow you to focus on other savings and investment goals.   

You’re saving for a big purchase

Debt paid off? Emergency savings in place? It might be time to start investing. 

If you’re planning on a large purchase in the future, such as saving for a downpayment or wedding, you might save a portion of your income set aside for investing. 

If your big purchase is three to five years down the line, consider keeping it in a high yield savings account instead of investing. This helps diminish risk. If you need the money in three years and the market is down, you may not have time to wait for it to rise, meaning you’ve lost money. 

If you can save for the purchase and invest simultaneously, it may be wise to do so. For example, you’re considering that big purchase in 3-10 years, and because of that, are comfortable taking on investment risk and waiting for the right time to make the purchase.  But, if your savings need is pressing and shorter-term in nature, you may prioritize more of your extra cash towards this goal instead of the stock market. 

When to Start Investing

Investing can be a great tool towards securing your financial future, but figuring out when to invest in the stock market will vary from person to person based on their financial goals. 
There are no set guidelines for when to invest, but consider these rules of thumb before jumping onto the latest investment app.

You have excess in your budget

If your budget is operating in a surplus each month, consider throwing the extra cash into retirement savings or another investment vehicle. While you’re at it, take a look at your overall budget. Are there places you could cut expenses, putting aside even more into investments?

You have a 401(k) match

Does your employer offer a 401(k) match or other retirement savings incentive? If you’re not participating in the program, you’re essentially leaving cash on the table. 

Taking advantage of a 401(k) match is essentially free money, as you only contribute a portion to your account, and your employer does the rest. 

If you’re not sure about 401(k) matching at your workplace, reach out to HR to learn more.

You’re starting a Roth IRA

If you have excess cash in your budget, but don’t have a 401(k) available to you, consider a Roth IRA. A Roth IRA is a retirement account with limited annual contributions. This can be a powerful tool for retirement savings, no matter your age or income, as it helps you save money tax-free for life. 

Even if your income is limited or low, putting away some extra cash in a Roth IRA can make a big difference down the line. 

You’re thinking long term

If you’ve satisfied short-term savings goals, it might be time to think about longer-term goals. If you’re exploring goals that are five-plus years out, such as retirement or future investments, it’s a good indicator you’re ready to spend more time in the market. 

One caveat of understanding when to invest in the stock market is liquidity. Once money goes into the market, it can be harder to pull it out.  The objective should be to “stay” in the stock market for long-term investors.  Troutwood’s Time Portal provides data on every career cycle since 1926, defined as concurrent 42-year periods.  Each period had unpredictable ups and downs but staying invested worked throughout all of them.

Am I Too Young to Start Investing?

There’s no perfect age at which to begin your investing journey, nor is there any age that is too young.  Warren Buffet famously started with $114 at the age of 11. We all move through life at different speeds, so while peers may be knee-deep into WallStreetBets, you might still be focusing on establishing an emergency fund, or taking that first step with a Roth IRA. 

While there’s no cut and dry rule of when to invest or at what age, generally, you should feel comfortable doing it once you:

  • Pay off high interest debt
  • Establish an emergency fund
  • Create a balanced mid-term savings goal

Keep in mind you may be able to balance satisfying some of these needs while starting an investment account. Just keep an eye on your budget to make sure you have enough left over for day-to-day needs. 

If you’re just starting your savings or investing journey, check out Troutwood’s newsletter to learn more straight from your inbox. 

Extra Credit

What is liquidity?

How easy is it to convert this asset into cash? That’s the metric by which liquidity is calculated. For example, cash or a savings account is high-liquidity—you probably just need to transfer it to an account to be used. 

On the other hand, physical assets like homes are less liquid. Assets need to be sold, and oftentimes they’re taxed when they leave the investment account. 

What is 401(k) matching? 

401(k) is a benefit offered by some employers. The terms will vary, but an example of a 401(k) match would be “matching 100% of your contributions, up to 3%.” That means the employer will match your pre-tax 401(k) contributions 1:1 until you reach 3% of your total compensation package. 

Example:  A $50,000 salary with a 3% company match.  This means, if the employee (you) contributes 3% of $50,000, or $1,500, your employer will contribute a matching $1,500, making the employee’s (yours) total contribution for the year $3,000.

Matching can be an excellent way to grow your retirement savings without upping contributions, and that’s why it’s often referred to as “free money.”

s&p 500 criteria

Why Does the S&P 500 Matter?

Investing

Short Answer: The S&P 500 is an index of the 500 largest public companies in the US. This list is often seen as a barometer for the U.S. economy as a whole.

If you’re just beginning to follow the stock market, the term “S&P 500” might sound like just another phrase in the alphabet soup that is the world of finance. In reality, the S&P 500 is one of the more important indices in the market and takes the temperature of the U.S. economy overall. Read on to learn about S&P 500 criteria, the history of this index, and why you should be paying attention to it. 

What is the S&P 500?

Let’s start with what the S&P is, then we will cover why it’s important.

While the stock market is composed of domestic and international components, the S&P (short for Standard & Poors) is the most widely tracked index, and it serves as a commonly used benchmark to which many other investments are compared. 

An index is a collection of assets, in this case, grouped stocks. The uniting factor of the S&P 500 is its holdings are only from the top 500 listed stocks on the New York Stock Exchange and NASDAQ. 

The S&P 500 started in 1957 (with 90 companies), but Standard & Poor’s has been around in some form since the 1860s. Originally, it was just Poor’s Publishing, which printed railroad travel books back then. In the 1940s, Poor’s merged with Standard Statistics Bureau, a financial data publisher. Today, S&P Global is a benchmark for the U.S. stock market data and indices. 

While there are plenty of different indices from other companies nowadays, the S&P 500 was groundbreaking for a few reasons:

  • It was the first index to be computer-generated 
  • It was and still is published daily

Now that you understand its historical significance let’s explore how companies earn their spot in the S&P 500 today.

S&P 500 Criteria

Each quarter, a committee “rebalances” the index by removing or adding companies to the list. 

To qualify for the S&P 500, a company must be:

  • Publicly traded, with at least half of the shares publicly available
  • Have a stock price of at least $1
  • Be based in the US
  • Have a market cap of at least $8.2 billion
  • Report positive earnings in its most recent quarter
  • The sum of its earnings from the past four quarters must be positive

It’s also important to note that once a company qualifies for the S&P 500, it’s not an invitation for life. Companies have to work to stay in the S&P 500. A drop in earnings could knock it out of the index.

A quick look at the S&P 500, and you’ll probably recognize a few of its constituents, including:

  • Apple Inc.
  • Microsoft Corp. 
  • Amazon.com
  • Alphabet 
  • Tesla

The S&P 500 weighs each of its holdings accordingly. It’s that calculation and data that’s helped establish the S&P 500 as a bellwether for the entire U.S. economy. While it’s only a portion of the stock market, it can help predict the market trends as a whole.

Why should you pay attention to the S&P? 

To put it simply, the S&P 500 is basically a cheat sheet of the U.S. stock market. It tracks some of the most prominent players in the market. The index can be a great tool to understand the overall economy. If you’re just beginning to familiarize yourself with the stock market, following the S&P 500 is much easier than tracking individual stocks. The S&P can give you a bird’s-eye view of the market and economy. A single stock offers a more limited view. 

The most heavily weighted companies in the S&P 500 (as of December 2021) are:

  • Apple
  • Alphabet
  • Microsoft
  • Amazon
  • Meta
  • Berkshire Hathaway
  • JP Morgan Chase

Given this list, it’s probably a little more evident why the S&P 500 reflects the economy. 

If Amazon stock is down, there’s a chance that unemployment is up. If Apple and Berkshire Hathaway’s stocks are up, chances are, the economy is strong with discretionary spending and home buying.

Now, while these aren’t golden rules, we can use the S&P 500 and its top performers to learn more about the domestic economy. 

More often than not, the S&P is used as a metric to compare other investments—for instance, if you have a retirement account, a progress report might have the account performance plus the S&P for comparison.

The S&P 500 is an excellent tool for anyone to understand the stock market better, as it tracks some of the country’s most significant players in the business. Its trends typically reflect the market and economy as a whole. 

Extra Credit

What is an index?

In the stock market, an index tracks groups of stocks. Some indices track the entire market, while others track an industry, such as Alternative Energy or Technology.  

Companies and firms use historical data and calculations to help weigh investments within an index to mirror an industry or the economy. People often choose to invest in indices because they’re a simpler alternative to investing in single stocks or other assets. Expertly calculated, indices may make day-to-day investing easier for the average investor.

What are the Dow Jones and the S&P 500?

Listen to any market report, and you’re bound to hear Dow, NASDAQ, and S&P 500 mentioned in the same breath. But, what are these terms, and what do they mean in relation to each other?

“The Dow” is often used as shorthand for the Dow Jones Industrial Average (DIJA). The Dow is similar to the S&P 500. It’s also a stock market index that can be used as an indicator of the overall health of the U.S. economy. 

NASDAQ is the Nasdaq Stock Market, a stock exchange based in New York City. Not to be confused with the New York Stock Exchange (also based in New York), the NASDAQ is the second-largest exchange in the world. Nowadays, its trades all occur online, not in a physical location.  

Diving deeper into the S&P 500

If you’re excited to learn more about this historical index, check out Troutwood’s Map of the Markets and the “The Missing Second Semester,” a book widely used in high school and college classrooms that dedicates an entire chapter to the S&P 500 and the important role it plays for many investors.

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