If this bubble don’t burst, it’s going to be scary

Higher Education Bubble Blooming

According to the most recent College Board Annual Survey of Colleges, the sticker price of a college education keeps rising, faster than the price of groceries, health care and almost everything else in the basket of goods used to determine the Consumer Price Index (CPI). In the last 10 years, in-state tuition and fees at public four-year colleges increased 5.6% annually on top of a CPI growth of 2%. The average estimated total expenses for most public in-state four-year students (depending on the state) vary in the astounding range of $65,000 to $90,000.

S0, that means that if you were blessed with the birth of a child recently, you will need to save $430 monthly to pay for in-state college tuition, fees, room and board. Double this rate to cover the full costs at the average private institution. And this doesn’t even include money for a cell phone, pizza, room decor or other stuff that college students deem “necessities.”

Now it’s true: most students don’t pay full price for college. In 2009-10, undergraduate students received an average of $12,894 in financial aid, split almost equally between loans and grants. Grants are the most attractive because students are not saddled with a repayment plan after college. Federal grants make up 26% of total aid. Institutional college grants account for 17%, state grants for 6% and private and employer grants (scholarships) for 4%.

But that hasn’t stopped the fact that students are graduating with larger debt loads than they were 10 years ago. This is one of the driving factors of the recent-graduate-laden Occupy Wall Street movement. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100. This private college debt is 17% more than it was 10 years earlier, even after accounting for inflation. In addition, a growing percentage of all college debt is unsubsidized and begins accruing interest immediately.

Perhaps there are some good things which are shaking out here. That is to say, degrees might have to be evaluated a little more closely — that anthropological art history degree might should be scrutinized a little more, yes?

So, students will have to make smarter education choices. Today’s global marketplace places more value on hard skills such as engineering, computer technology, teaching and finance. Technical degrees and certificate programs will become commonplace. A liberal arts education will likely diminish in popularity and become more focused at the elite institutions. More students are likely to begin their education at lower cost community colleges and complete a four-year degree at schools that specialize in their concentration.

Parents may feel overwhelmed about the amount they need to save for college. But college education is one of the two lifetime investments for which we approve borrowing money (the other is a home mortgage). Students should plan to graduate with a debt load no higher than half of what they can reasonably expect from their first year’s salary. For example, those with a starting salary of $40,000 should keep their debt at or below $20,000. Thus graduates can dedicate 10% of their annual salary to school debt and pay it off in five years.

New parents who are able should immediately begin saving $430 a month for college. Alternatively, a onetime $50,000 investment should cover tuition, fees, room and board at an in-state college 18 years from now. Yes, this is pretty scary. But there’s other options…

Giving a child the gift of a college education and a debt-free start to adulthood is one choice. Other parents believe their children should participate in financing their college education and can apply the 50/50 savings approach. Parents commit to saving half of the money needed, and their children commit to the other half. Students participate by working hard in high school, applying for scholarships, taking summer jobs, seeking out work study opportunities and accepting reasonable loan levels.

The support of grandparents can help tremendously. The vast majority of the college accounts that I’ve seen are owned and funded by grandparents. Instead of buying the latest gadgets for their grandchildren, they make annual contributions to a college savings account. If the grandparents own the account, it has the added advantage of not being included as a resource on the student’s financial aid forms — and that is a beautiful advantage, trust me!

One last thing: I’m not a stocks advisor, but–I do NOT recommend prepaid college tuition plans. At best, they tend to match college inflation, and if used at an out-of-state institution, returns are based on money market rates, which are abysmally low right now.  Even worse … who knows? This bubble may just burst, and you don’t want to have locked into a tuition which might fall through the floor on its own some years from now.

I do hope this helps, if it didn’t scare you too much! Let me know if there’s anything I or my team can do to help. As you can see, both with taxes and family finances, we make it our mission to think ahead on your behalf!

Warmly,

Howard

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The Rental Decision Part II

The Rental Decision

Long-time renters often cite all the negatives of home ownership, and there are some to be sure.  But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:   In our last blog we talked about the conception that owning a home is more expensive than renting.  Let’s look at some other conceptions.

Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary. Simply baseline the same property and look at renting versus owning it. Everything you pay for as a homeowner, the landlord has to pay for as well.  Who do you think pays for that? Do you think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart?  No — you pay for it!  It’s all priced in over long-term rent trends. Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords.  You are paying to put their kids through college and for their Caribbean vacations.

Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent — PLUS a tidy profit to the landlord.

Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are — it’s just not itemized out in tidy fashion for them.  It’s all in the rent.  This is logic — and reality.

Current Conception #3: Renting Provides for Much More Flexibility to Move. This is a major (and legitimate) reason NOT to own.  After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at.  However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move!  They end up renting for years on end when they could have owned.

And that flexibility? Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose — which then requires a calculus on your end as to how much of an increase makes it worth moving out, in order to just rent somewhere else.  Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission, or perhaps not at all (not very flexible).  So, you’re trading the  slight mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.

To reiterate, if you’re a current renter, you may feel this Note is critical of your situation. It’s not.  It’s an economic reality that many Americans never have had, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get my clients and friends thinking who DO have the means to save for a down payment, and who may be better off financially as owners than renters… but who continue to muddle along in complacency because they’ve convinced themselves that homeowners get hosed and renters have all the perks.

If you’re especially interested in math, here’s a helpful exercise for you to consider.

http://www.khanacademy.org/video/renting-vs–buying-a-home?playlist=Finance

Lastly, I’m here to HELP you, only and always. Let us help you through the important financial decisions in your life, while taking a holistic view of ALL of the costs.

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The Rental Decision Part 1

The Rental Decision
Long-time renters often cite all the negatives of home ownership, and there are some to be sure.  But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

Lets take a close look at this.

Current Conception #1: It’s More Expensive to Own Than to Rent — This is probably the biggest myth out there that many proponents of renting continue to propagate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows, the rent-to-buy ratio is favoring “buy” in many parts of the country, more so than at any point in recent history.

Now this isn’t just a rah-rah “buy a home” Note, and I would concede that it is entirely plausible that home prices continue to decline for several more years. But if you’re not buying to sell, but rather buying to live, it can be MUCH more economically efficient to own over rent, especially at this time.

Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm

Let me repeat:  It is becoming cheaper to own and it is becoming more expensive to rent.

In my analysis, this trend will continue for years.

Why?  First off, the Fed‘s policy has been to reward debt holders and punish savers with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low.  This in turn, is pushing up gold prices and equities prices, and investors are pricing in future inflation. This bodes well for landlords, and poorly for renters. See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers. This makes homes more affordable, while landlords are embarking on higher annual rent increases.

We will look at another Conception on our next blog.  Stay tuned.

Lastly, I’m here to HELP you, only and always. Let us help you through the important financial decisions in your life, while taking a holistic view of ALL of the costs.

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Money Worries

With all of the news about spiraling federal debt, it’s natural that Americans are taking a hard look at their own situation, and it sometimes leads to worry–even for those who are relatively secure.

Interestingly, my clients who have MORE cash in the bank often worry more! Funny, right? But it’s normal human nature….

You see, under all guidelines and measures, my finances are very solid. I’ve got a thriving business which is more secure than most people’s jobs. I work with numbers and am very good at taming balance sheets.

Yet, I still sometimes worry about money.

After a lengthy time of thinking, discussion and some more thoughts into the matter, below are a  few techniques I’ve settled on which can help us ALL reduce our worries over money.

1. Realize that It’s Exaggerated – Worry is a funny feeling – it seems to exaggerate any problem. While there are certainly many people who actually run out of money, those are usually not the people that tend to worry.

2. Spend the Same Time Making Money Instead – If you are going to spend time worrying about money, why not use that time and get a side job instead? Maybe start a website (or two, or three). I know it’s easier said than done, but the more you work at it, the easier it gets.  I have some clients who have set up a side job being their own boss and looking for partners, maybe you should connect with them? Contact me if you want out to find out more about these opportunities!

3. Confidence – Part of the reason why we worry about money is because of the lack of confidence in our own abilities to earn an income. How can we boost our confidence you ask? Confidence comes from success, and success starts from taking action. So try a few low-risk entrepreneurial ventures. If they bomb, see it as a laboratory: learn from it and try again.

But never (never) allow it to touch your identity as a person.

4. The workplace plays a big role in worry. Are your colleagues encouraging? Is your boss supportive? If not, then do something about it. Don’t get into the thinking of “I can’t find another job”. Yes you can — especially if you HAVE a job right now. If you got this job, you can get another one!

5. Worrying is Actually Good – A little, measured worrying is actually healthy for us. It’s what drives us to be better. It’s what turns our energy switch to the “On” position. The right way to deal with it is to channel it into your work ethic, and your desire to be better.

Of course, what I listed above is just the tip of the iceberg. How do you deal with worrying about the lack of money? Or do you? What has worked for you? I’d be interested to hear.

Lastly–ELIMINATE worry by calling us for advice! You do NOT have to walk this financial road alone…

Until then…

Howard

Three Most Important Family Preparedness Steps

When I think about what frightens parents, seeing their children in a vulnerable position pretty much tops the list–whether it’s at home, at the pool, or any other place in public.

What exacerbates this is knowing the fear which children themselves feel when they are surrounded by people they don’t know, and when they can’t fully understand just how much love their parents have for them.

Put these steps into place…and you’ll eliminate at least some of these dangers…

#1: Identify a Clear Plan for the Care of your Children.
Did you know that 74% of parents have not named guardians? Worse, of the 26% who have, most have made 1 of 6 common mistakes that leave their kids at risk.

When you name short AND long-term guardians for the care of your children, you must give clear guidance to your caregiver and everyone you’ve named to care for your children, in written form. Just by naming these guardians (both short and long-term), your children never have to be put in a situation in which they would be taken out of your home and into the hands of strangers if something happens to you.

An even better step, if your children are old enough for this discussion, is to tell them this plan. Don’t make a big deal of it…you don’t want to frighten your kids at the prospect of your loss. But they’ll feel better knowing that you’ve selected people they can trust and love to care for them well.

#2: Properly Document Your Decisions
Parents often have discussed and agreed upon a guardian for their children and have even made their wishes known to their families; however, not documenting these decisions can result in your wishes not being followed when it really is too late.

You see, if you don’t communicate your wishes in a legally-binding document, you are placing your children in a “free for all”. Without clear, legal guidance, every family member has equal priority of guardianship and the decision about the care of your children will be left in the hands of a broken-down court system and some judge who doesn’t know you or your kids.

This legal documentation is particularly important if you intend for a friend to care for your children as courts will almost always choose a family member over a friend.

Also, don’t forget to be sure to leave behind specific guidance about how you want your children raised.  Education decisions, healthcare decisions, discipline decisions … these are all things you care a lot about and would want made consistent with your opinions for how your kids are raised.

#3: Don’t Neglect Their Financial Future
Sure; there are different schools of thought on this issue. Some parents don’t want to overwhelm their children with too much in their bank accounts at once, which is understandable.

But, regardless of how you structure this provision, providing sufficient financial resources for your children’s care is your responsibility. And, as a responsible parent, you must take steps to protect what your children will receive … whether it’s through life insurance, savings or some other means.

To do so, establish a living trust to receive any life insurance benefits your children would receive so that they don’t get access to your assets at the age of 18, and make sure your living trust holds on to the title to any assets that would go through probate in the event of your death. And, if your estate is large enough, you will want to plan to avoid estate taxes as well.

Many of these issues can be handled by an estate-planning attorney, and we’d be happy to put you in touch with somebody good. Or, there are online options as well. Either way…let us know how we can help! Visit our site www.savemoretaxes.com to obtain your free report on saving more taxes.

IRS changes the Standard Mileage Rate

The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011.

The real question is whether this rate is realistic for the increasing costs we face while using our vehicles for business.  The only way to know for sure is to keep track of your expenses and see which method works best.

If you need help in setting up a daily system to keep track of your expenses, let us know, we can help.

How Planning Can Save you $1000+

Looks like summer is finally right around the corner. That means the year is almost half over and before you know it’s over.

Too many clients (almost all of them) wait until the winter before they look at their tax obligations. Even worse, they wait until that season before they speak with their professional in any kind of proactive way.

That’s a problem, and it could be costing you some serious savings.

Here’s an example:

Let’s say that you were considering taking money out of a pension (401k) to finance the down payment on a house. It’s quite a common maneuver. But let’s say next that you do this withOUT discussing it ahead of time with a professional. That could be a four (or five) figure mistake.

If you were to come into our offices or contact us before such a move, I would ask you a few easy, but very important questions, and then (depending on the answer) likely advise you to first roll the money ($10,000) into a Traditional IRA. You could then withdraw the money at a savings of $1,000.00. This is because money used for a first home, up to $10,000, is penalty-free when taken from an IRA, but NOT a 401K.

Would you be pleased by that move? I’d guess “yes”, especially if you knew about other clients I know of who failed to plan. This couple just learned of the $41,000.00 penalty they had to pay for doing the same thing, but from their 401k.

Ouch.

There is no guarantee that you will save by speaking to us in advance. But this I CAN guarantee: If you don’t speak with us, we won’t be able to save you a dime.

Let us know if this was helpful.  Do you have a situation that might create a tax issue. Be proactive and contact a tax professional.  Hopefully us.

How Warren Buffett did it!

Warren Buffett‘s Financial Wisdom
Billionaires aren’t hatched overnight.

But there will be another generation of such men and women in the next few decades — and chances are, they will tread the same path as those who have come before.

So let’s look at Warren Buffett’s path as an example, shall we?

1) Start with a meat and potatoes small business — and be your own boss.
Buffett made his fortune by doing things his way, not by following the crowd. In high school, Buffett and a pal bought a pinball machine to put inside a barbershop. With the money they earned, they bought more machines until they had eight different shops running their machines. When they sold the venture, Buffett used the proceeds to buy stock and start another small business. By age 26, he’d become his own boss and amassed $174,000 — or $1.4 million in today’s money.

LESSON: Don’t fall for the temptations of a huge, immediate windfall business. Cut your teeth on the side, with something basic, reliable and small.

2) Mind the foxes who steal from the vineyard: small expenses.
In the famous book, The Millionaire Next Door, authors Stanley and Danko report that millionaires live well below their means. They budget, plan investments, and allocate their time, energy, and money into building wealth instead of displaying high social status.

Warren Buffett’s companies are known for watching out for small expenses. Exercising vigilance over every expense can make your profits and your paycheck go much further.

LESSON: The next time you spot a sale or online deal, check in with yourself to see if that $50 is better saved or invested than spent. It might seem like you’re spending a relatively small amount of money, but it all adds up.

3) Debt kills.
Warren Buffett advises his people to limit what they borrow. Living on credit cards and loans won’t make you rich. Buffett never borrowed a significant amount of money, not even for investments or mortgages.

The Millionaire Next Door reports that millionaires’ parents did not provide “economic outpatient care”, and their own adult children are economically self-sufficient as well.

LESSON: If you do give your teenager a credit card, make sure to set firm limits and specify use ahead of time. If they abuse the privilege, they lose the card. Do the same for yourself.

4) Leap forward.
Very often those who supply the affluent become wealthy themselves.  In fact, one of the best ways to make money is to sell products or services to those who already have money. Many people don’t see these opportunities because they’re far too busy seeking money and security in the short term only.

Well, when Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. But he didn’t allow others’ opinions to keep him from leaping into a profitable venture. Over and above, I might add, others with greater private means.

Lastly, I will suggest this: Get professional advice on new ventures and ideas. We are here for far more than “just” tax planning. I and my team would love the opportunity to sit with you, and help you evaluate the direction of your financial life … and point you in a new direction, should it be necessary. Take advantage of our free report by clicking on the link to your right to help you save more taxes!

What to do if you have not received your tax refund!

It has been several weeks since you filed your return and you have not received your refund. What should you do? Here are some  steps you can take.

Your Refund Status: Make sure you have a copy of your tax return on hand or know your “filing status“, SSN and the exact dollar amount of the anticipated refund.
* Online: Go to IRS.gov and click on “Where’s My Refund”. (http://www.irs.gov/individuals/article/0,,id=96596,00.html?portlet=4)
* Automated Phone: Call 24 hours a day, 7 days a week for automated refund information.
* In-Person Phone: Call during the hours shown in your IRS form instructions.

“Do I need to keep a copy of my return?”
Yes, for a *minimum* of three years. There’s all kinds of contexts where it’s useful. We do keep one on file, on your behalf, but it’s just smart and safe for you to keep one in a secure place at home. (I’ll soon have a Note about Amended Returns, and you will need a copy for that process, as well.)

As for the supporting documents from your return, anything that relates to a home purchase or sale, stock transactions, retirement, business or rental property, should be kept much longer than the three years.

We will have more ideas for you to consider so that this year you will save more taxes.  Watch our blog for upcoming postings. Any questions, send us a note.

When The Tax Return is Wrong

Do you have a tax accountant who guarantees their work…in writing?

Sure, some guys might say: “We’ll make it

right if we screw up”, but then the stuff hits the fan and they fight you every step of the way.

I’ve heard too many horror stories about taxpayers getting a letter from the IRS, then they take it to their accountant, and then the letter sits on a desk gathering dust.

Or stories about the CPA who makes some calls on your behalf, but then you get charged an arm and a leg in the process.  Or sadly, a taxpayer doesn’t get any help from the person who prepared their taxes for them so they “go it alone”, call the IRS themselves and have to try to figure out what to do and not to do during this normally ugly IRS correspondence … THIS can be a nightmare!

Don’t let that happen to you. You need to have a written understanding with your tax professional that you won’t be left in the lurch. Oh, and also-does this guarantee actually do something you want it to?

I’ve seen some accountants guarantee they will file your taxes for you by April 15th or they will file an extension for you.  Well…great!  That sure makes you feel good in the morning, doesn’t it?   Other weak guarantees I’ve seen in the tax industry are, “We guarantee we will begin preparing your tax return the same day we meet with you.”

That means nothing to me.  I don’t care when you start preparing my taxes.  I want to know how long it is going to take you to finish it and do so without leaving out silly errors you know you should have caught.

So remember:  the guarantees should be in areas you care about, like:

Tax Return Accuracy … Speed of Service … Most Money Legally Yours … Ongoing IRS Protection For Years After Filing …

These are the things YOU care about!  Make sure the tax professional you choose stands behind these critical areas of tax filing so you get the most out of your tax filing experience.

We stand behind our work and have done so for the last thirty years.  See what others have to say about our work.  Check out our web page.

PS–If you would like to receive weekly emails on various topics, you may go HERE to subscribe: http://howardkaufman.mylocaltaxpro.com

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