Useful Financial Guardrails for College Families!

Posted by on Sep 14, 2014 in Featured, General | 0 comments


“If we wait for the moment when everything, absolutely everything is ready, we shall never begin.” – Ivan Turgenev

Financial independence training is a short-term pain, for a long term gain. But it’s terribly important because “untrained” college students are sitting ducks for unscrupulous financial service companies and their own lack of financial sense.

So, with that in mind, here are some off-the-cuff guardrails to consider for your son or daughter who is entering or continuing on through college…

1. Make a definite plan to leave college with no consumer debt. And I’m talking a real PLAN. Credit cards, car loans — college kids are ripe for the plucking. Consumer debt is a killer, simply because it depreciates so much. In a short matter of time, these items lose their value, but the payments and interest continue to inexorably pile up.

So set up a clear budget for travel, late-night snacks, and other miscellaneous lifestyle expenses (heck, going through the process might even prompt some lifestyle evaluation!). Tell your child: “You should have an exact answer if I ask about your weekly spending limit.” And have them try to earn enough over the summer that they can afford to skip the part-time job during the fall and spring semesters.

2. ATM bank fees are killer. Moving to a new city often means the local debit card will be charged from $1.50 to $3.00 for every withdrawal from a foreign ATM. Consider an online bank account that reimburses all ATM fees or a local bank with easy ATM access, or moving accounts to a bank local to the school, or a mega-national bank.

3. Overdraft fees are as common as hangovers for the college kid — avoid both. A recent Pew Foundation study found that the median overdraft penalty fee is $35; an additional $25 accrues if this overdraft is not repaid in seven business days. The average bank allows up to four of these overdrafts to occur in one day for a total fee of $140 or more per day. However, if you open a savings account in addition to your checking account, you can use the overdraft transfer protection. You might even set up a situation where the college student controls the checking account — but you control the savings.

4. One cell phone bill gone awry can swamp you. New routines in college will likely mean that data habits will change. If your child doesn’t have an unlimited plan, have them make it a habit in the middle of each billing cycle to review their account’s data usage for the month. By the way, this is a very good expense to NOT pay for as a parent.

5. Avoid gimmicky credit card offers. Often the first credit card is awarded at a football game where so-called “free” T-shirts are being handed out. Again, college kids are ripe targets. Shop online for the best rates and terms and purchase a dozen dress shirts with the money saved by finding a card with less onerous terms for interest rates and late fees. Focusing on the so-called “rewards” which credit card companies give you is a distraction in your financial life. Like a casino, credit card companies win most of the time — which is why they stay in business.

And, of course, having children enter into adulthood sometimes changes your tax considerations. Let us know if this applies to you — we’re here to help!

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Financial Independence 3: Realistic Numbers

Posted by on Aug 3, 2014 in Featured, General | 0 comments


“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

This is my third, and final, installment in a continuing series on real financial independence. Now is when I help us see when we may be inadvertently planning for failure…

Too much house
You can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your budget. Too much house is one of the most common mistakes a young family can make.

Try to keep your rent under 20% of your take-home pay after you graduate from college. Aim for all associated expenses (mortgage, insurance, taxes, etc.) to be less than 30% if you own property and some of the payments go toward the principal. And by no means let your housing costs exceed 38%, or your budget will be doomed before it even begins.

Most of us never saw our parents and grandparents in their younger days when they were struggling financially and lived in tight accommodations. It is as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers. To decide how much house is enough, calculate how much house you can buy for 30% of your standard of living.

Transportation
Transportation costs should be under 15% of your lifestyle spending and include insurance and maintenance as well as saving for your next purchase. When purchasing remember whether your pay cash or financing, you are paying interest.  See where the interest rate is cheaper.

As a result, your first car may be a clunker! Immediately start saving for your next car and the inevitable costly repairs. This strategy will limit the number and quality of cars you can afford. Remember, there are families earning more than you who take public transportation or share rides to work.

Eating out and prepared foods
Starbucks has become the poster child for budget busters. Buying a $4.50 cappuccino when you are young costs you $450 in your retirement account. And spending $4.50 a day costs you $450,000 in your retirement!

It doesn’t have to be a latte. You can generate amazing savings from any expense. But a pricey latte illustrates the huge markup on a dollar coffee. Aim for food to be under 15% of your lifestyle spending. You would like your food to be inexpensive, healthy and convenient, but it can’t be all three. You can usually only pick two.

Healthy food tends to be more expensive per calorie. So do convenience foods. One person eating out can often fund the entire family eating at home. And even when you purchase food in the grocery store, prepared foods can cost more than twice what you would pay for the individual ingredients.

By learning to cook with common staples such as rice, beans, flour, oats, potatoes, and chicken, you can drastically reduce the percentage of your budget spent on food. Save even more by brewing your own gourmet coffee at home.

Other regular expenses
Review monthly, quarterly or annual recurring charges. Research the cheapest basic service for your phone, cable, Internet, and insurance. Often, these really are “commodities” (i.e. those things which it hardly matters who provides them). Compare that to what you are paying now, and ask yourself if those seductive extra features are really worth the cost.

A gym membership used regularly might be a wise choice, but if you haven’t shown up there for weeks, it isn’t. For each expense ask yourself, “Is this really a necessity?” Any way you can reduce your regular bills saves money every year.

In summary, every category of your total budget must stay within a limited percentage. Careful planning and a courageous look at your lifestyle can help you identify those budget busters. Adjusting a few spending excesses could solve all of your spending problems.



And, as always, my team and I are here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.
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Financial Independence 2: No More Surprises

Posted by on Jul 26, 2014 in General | 0 comments


“Wisdom is learning to let go when you want to hang on. Courage is learning to hang on when you want to let go.” – Mark Amend

This is second in a continuing series on real financial independence, and I’m here to alert you to those items in a family‘s financial life that can wreck the well-planned budget…

Interest on debt
There’s no excellent reason to buy anything on credit. If you find yourself considering an expensive purchase and then trying to find the payments in your budget, you are planning for failure. The only two loans you should even consider are a home mortgage loan and a student loan for an education or training that increases your earning potential. Money makes money. Credit does the opposite. Debt breeds poverty.

The average American family carries close to $10,000 in commercial credit. At 18% interest, that’s $1,800 a year or an unnecessary $150 every month per household. If you put that payment into the markets every month over your working years, earning an average 10% return (for calculating our example here), you would retire with an additional $1.5 million.

Unknown unknowns
None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.

Insurance deductibles
Review the insurance coverage for your car and home (if you own). A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.

Medical costs
Medical expenses are rarely planned. To prepare your budget, have some insurance in place that will limit your catastrophic loss. Second, set up an emergency fund that will cover your expenses if they reach that limit.

Car repairs and replacement
Your car won’t last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don’t buy a new $30,000 car and think you won’t have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.

Don’t borrow to buy a car and then start making payments unless it comes with very low interest rate charges. That’s nearly always a bad idea and simply ensures you won’t save, invest or grow rich. If you can’t afford to save the payments in advance, you are stretching too much. Buy used or wait.

House repairs
Owning a home and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.

So I recommend you set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.

Emergency travel
Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family’s budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.

If you really get strained, I suggest you swallow some pride and ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.


Here’s my bottom line: No budget can anticipate every major expense. Life serves up surprises with some regularity. So if we can all put some healthy margin in our daily living expenses, it will give us the stored resources to weather these major bills and then better plan for them going forward. Around here, we love to help our clients set up a private reserve strategy so that they have funds available for all of life’s unknowns.



And, as always, my team and I are here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.
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Financial Independence 1: Avoiding Budget Busters

Posted by on Jul 7, 2014 in General | 0 comments

“Tomorrow is often the busiest day of the week.” – Spanish Proverb

This will be the first in a series on TRUE financial independence … and, the first step, really, is getting your spending under control.

In that vein, here is the first of  three rules that will help you and your spouse limit impulse buying and better align your spending with your thoughtful values…

First, limit the dollar amount you can spend unless you and your spouse both agree. You owe it to your partner not to undo months of frugality and sacrifice by acting on a whim. Honoring each other in this way helps avoid resentment and alienation that can bust your marriage as well as your budget.

Negotiate the dollar amount. I suggest setting a limit of 1% of your monthly budget. If your annual spending is $60,000 and your monthly budget is $5,000, you would need to confer on any purchase over $50.

The idea of setting a limit may seem more acceptable if you consider the millionaire mindset. Millionaires recognize that saving and investing just $100 a month over the course of your working career produces a million dollars at retirement. They watch their spending carefully. They recognize that frugality is just another way to describe deferred consumption, which is the definition of capital. And capital, once invested, is what produces an ongoing income stream.

Put another way, if the average budget should include 5% taxable savings each month, every time you mindlessly spend over 1% of your budget, you lose more than a fifth of what you should be saving and investing outside of retirement accounts. I’ve seen many financial affairs ruined by the repeated spending of amounts much less than $50 at a time.

If you are struggling financially and having trouble agreeing on your goals, you may want to set the limit lower. As you both begin to feel your spending is under control and your savings exceeds your targets, you can readjust the limit higher. Exceptions can be made for regular bills and necessary purchases such as utilities and groceries.

Talking with someone else about a possible purchase can clarify your thinking not just about the item but also about your other competing financial priorities. It changes the question from “Do I want to buy that?” to “What do I want to give up to buy that?”


And, as always, my team and I are here to help! Stay tuned for more information. 
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When College Has a Negative ROI!

Posted by on Jun 22, 2014 in General | 0 comments


“What’s right isn’t always popular. What’s popular isn’t always right.” – Howard Cosell

As many have claimed (such as the US Census Bureau, for example: http://www.census.gov/prod/2002pubs/p23-210.pdf ), a typical college degree is worth up to a million bucks over a career — but that’s not true for every degree.

What’s becoming more and more apparent is that prospective college students need to do their homework beforehand, because some degrees simply aren’t worth the investment.

Of the 1312 colleges evaluated in the 2014 PayScale College ROI Report (found here: http://www.payscale.com/college-roi/full-list/financial-aid/yes ), graduates from 58 institutions are estimated to be worse off after 20 years compared with those who skipped college and went straight to work. These 58 lackluster institutions make up 4.42% of all the colleges surveyed. The lowest grade goes to Shaw University in Raleigh, North Carolina, where PayScale estimates that grads will be $121,000 worse off after 20 years for earning a degree.

To calculate this estimate, PayScale uses an opportunity cost measure they call return on investment (ROI). After factoring all the net college costs, the report compares 20 years of estimated income of a college graduate versus 24 years of income from a high school graduate who started working immediately and didn’t have to pay college expenses (or take loans).

Future college students (and their parents) must realize that not all colleges are equal.

The graduates from the lowest ranking schools report earning less income after graduation. The PayScale website is helpful because it allows you to see reported earnings of graduates from over a thousand colleges. I also assume that low-performing schools in this report tend to offer less financial assistance, which leaves their graduates with larger debt burdens.

However, the most highly endowed colleges can reduce their cost of attendance with grants and scholarships. For example, Stanford is one of the most expensive schools based on sticker price, but its financial assistance is typically generous. So the net cost is very competitive, and their ranking is number 4 based on the PayScale study.

Debt burdens are relative. A doctor’s salary can more quickly pay off a high-price education loan than can a teacher’s. A good rule of thumb is to avoid incurring college debts that will be more than half of your expected annual income. Limiting loans to no more than 50% of a future salary allows graduates to pay off their debts after five years, using 10% of their future salary.

Some students begin to realize their faulty economics only after they have enrolled. Not surprisingly, those schools with the lowest ROI also have the highest dropout rates in the country. For example, we have Adam’s State, which has a 21% graduation rate and a 20-year net ROI of minus $20,143.

What should be clear from this data is the world of difference between the outcomes of graduates of highly-rated schools, and of those near the bottom of the barrel. Attending a college with a poor ROI is not necessarily a mistake, but the financial aid package had better be sweet. So,treat your college decision like any investment: you also need to do your homework before you commit your time and money to an unknown outcome.

I hope I am helping the college choice discussion for you, rather than hindering! If you need help in paying for your children’s college, let us review your plan to make sure you are doing this
on the most efficient basis.
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Is A Trust Smart For You?

Posted by on Jun 7, 2014 in General | 0 comments


“If we wait until we’re ready, we’ll be waiting for the rest of our lives.” – Lemony Snicket

Parenting is more than reading to your children or getting them to eat their vegetables. It’s also about securing their financial future. One way to do that is by drafting a trust and naming a trustee.

This is a great tool to consider, and it supersedes a will in many cases. It’s definitely something that every family should look into.


Here are a few questions to ask yourself to determine if a trust is right for your family:

Do you anticipate leaving your children more than a modest sum of money?
A trust may not be worth the effort if you think you’ll only be leaving a child (or children) $100,000 or less. On the other hand, if you’re leaving life insurance money to cover four years of school and you own a home, there’s a good chance a trust would make sense for you.

Do you want to have some say in how your children’s money is spent?
A trust allows you to restrict spending to basic support, including food, clothing, education and health care.

This is something that can’t be done with a custodial account. If the custodian is a soft touch, he could end up lavishing your child with designer jeans and a fancy car, leaving very little left for the college years. Even worse, if the custodian is also the guardian, he could start writing himself large “support” checks to help cover his other expenses.

Would you prefer that your children not inherit the money when they turn 18 or 21?
If you think giving a high-school senior a large sum of cash is a recipe for disaster, then you should consider a trust. The ability to delay inheritance is one of the great benefits of a trust.

Should something happen to both parents, for example, children can receive half of their inheritance at age 30, and the remaining amount when they reach 35 (or some other pre-established benchmark). Our 20′s are such a transitional time that it often makes sense not to burden children with weighty financial decisions.

Do you want the money to be used for a college education?
If you specifically bought life insurance so that there would be enough money to help fund college in the event of your death, then you’ll definitely want to delay the age at which your kids inherit your money. Otherwise, your child could think a red Ferrari is a better investment than a diploma.

Would you like your children to have recourse if their money is mismanaged?
One more benefit of a trust that you don’t get with a custodial account is that a trust is a legal contract; the trustee has an obligation to follow your directions and act in a reasonable and prudent manner. If the beneficiary feels the trustee spent the money frivolously, he can demand an accounting, and can sue for reimbursement if the trustee acted improperly with the funds. It may be pretty tough to prove illegal or improper actions with a trust, but just the threat of a possible lawsuit can keep someone in line.


These ideas above are to help you keep control of your assets.  If you want to get in control of your taxes, check out our free book on saving taxes. Just click on the top right to download.

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Caring For Two Generations!

Posted by on May 19, 2014 in General | 0 comments


“You cannot drive your car looking at the rear view mirror. Focus on going forward.” – Steve Harvey

Depending on your perspective, this can feel like a double-whammy.

Certainly, as with children, it’s always a better idea to focus on the benefits of more time with your parents, etc. … but yes, I’ve seen many times how this can put a major drain on a family.

From what I’ve observed of adults thrust into the role of caring for their parents, the biggest struggle often comes from trying to keep their dual responsibilities segregated. They try to ensure that the needs of the aging parent don’t impact what’s going on in their children’s lives.

As an example, the adult children feel like they have to choose between making sure that Mom takes a walk for exercise, and attending a child’s piano recital. No matter what the adult parent chooses, he or she often feels like a failure at everything.

What you need to realize is that this process is not something that you can keep separated in your life. You’ll do your family a great service by viewing it as an experience to be shared with everyone in the family, and maybe even with some members of the outside community.

Ludwig van Beethoven's Parents, Johann van Bee...

Ludwig van Beethoven’s Parents, Johann van Beethoven and Maria Magdalena Keverich (Photo credit: Wikipedia)


If you find yourself in this situation here are 3 practical tips I can offer:

1) Get the Actual Facts. You may have avoided talking with your parents about finances in the past. Whether you were taught that those things are private or “it just never came up,” now is not the time for surprises. You need to know how your parents are doing financially and whether they’ve made any provisions in case they become ill or suffer a long-term disability.

2) Ensure the Estate is Set Up Right. At this stage of your parent’s life it’s important to make sure that your parent’s legal house is in order. This can be a tricky conversation to have, but your parents absolutely need to have a financial power of attorney, advance health care directive (a healthcare power of attorney plus a living will), and a simple will. It may not be the fullest estate plan for your parents. It might not be proper Medicaid planning. However, it is the bare minimum you will need to help care for your parents.

3) Insure Against the Future. Now is the time to examine long-term-care insurance or assess whether savings will cover an extended nursing home stay, assisted-living facility costs or extended home-care services. You may be tempted to begin to liquidate your holdings or stop saving for your own benefit to help pay for the cost of your parent’s care. Big mistake.

Remember that there aren’t nearly the same kind of government programs or lending scenarios that will help you pay for your kids, or their college or fund your retirement — as there are to help support aging parents. It’s vital that you continue to save for your retirement.

We are here to help in this process.  Give us a call and we can help you answer the top four most important questions for planning your financial future.
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