Keeping a Cool Head Can Mean Money
June 25, 2011 by admin · Leave a Comment
You’ve heard it before: Don’t let emotions get in the way of business. Well the adage holds true for investing, as well – probably even more so. It seems easy enough to do, but when you see the value of your savings falling like a botched Martha Stewart soufflé, your first instinct may be to sell, sell sell! But acting out of emotion can often be the worst thing you could do when it comes to investing. Here are some tips to prevent sabotaging your financial well-being.
- Make sure you have a specific financial goal (or goals) with a specific time frame in mind. Sounds pretty basic, right? It may be, but the trick is to really give this some serious thought. Very rarely are you saving for just one thing at a time. Most of us are saving for retirement, future college costs, and near-term goals like buying a new car or house, a home remodeling project, or planning a big vacation. The way you invest for a short-term goal is very different from the strategies you would use to meet a goal that may be 30 years away, like retirement. Long-term goals require growth provided from stocks (equities), because you will need the money to outpace inflation. If you put your retirement savings into CDs, after thirty years, your investment would be worth less than what you put in because inflation would have reduced its purchasing power. Short-term goals require stability, because you plan on using the money soon. If the stock market has a set-back, you can loose a substantial amount of your investment in an eye-blink. Therefore, CDs, money market, or even short-term bonds would be a good choice for a shorter investment time frame. When I hear people say they want to make as much money as fast as they can – they need to know the reality is that the inverse holds true for that investment, as well. If an investment can move up in value rapidly, it is volatile and it could just as easily (and swiftly) move in the opposite direction.
- Diversify your investments. Yes, stocks are for growth and bonds, money markets and CDs are for income, but having a mix of investments can really protect your investments from times when the stock market may be volatile, or times when rates on CDs or money markets are anemic. Alternative investments, as a group might be risky, but when added to a portfolio (and combined in very specific percentages) can actually reduce a portfolio’s overall volatility.
- Start as early as you can, and invest regularly. The earlier you begin investing for your long-term goals, the better, because time is on your side. As your investment grows, you can take advantage of compounding, which is when you take whatever income or gains from an investment and buy more shares. Investing regularly is another good strategy, because it helps remove emotions from investing. By treating investing like a bill to pay every month, you stop thinking about how else you could spend the money. Over the years, the money adds up and one day you look at your balance, and you can’t believe how painless it was to actually save. Most mutual fund companies will even link payment to your bank so every month your bank account will automatically be debited and you won’t ever need to remember to write out and mail a check. There is also another big advantage to making regular fixed investments every month: it is called dollar-cost averaging. Because there may be some months when the price of a fund is lower than other times, you will buy more shares, and during the months when the price is higher you will buy fewer shares. The price, in effect, gets averaged out over time. It helps protect you from sinking all of your money into an investment on a day that may happen to be a high. Yes, this also means that you will not be buying on the absolute lowest day, either. But, since the market is impossible to time, this is the most logical (unemotional) way to invest, not to mention it puts an element of discipline into your commitment to invest.
- The markets can be fickle, but don’t you be. A well constructed plan needs to be followed out. If you shift your plan as the market moves, you will forever chase performance and be a reactive investor. Holding firm to your plan isn’t always easy, but deviating from it can prove fatal.
Remember, like most things, the planning is the hardest part. Once you’ve determined what your goals are, and how much time you have to reach these goals then you can begin selecting the right investments. Then, you can let your money work for you.
Father Knows Best
June 18, 2011 by admin · Leave a Comment
No Father’s Day would be complete without reflecting on lessons learned from my own Dad. “Tony G” – as I affectionately refer to him – had a financial smartness about him that few MBA grads possess. His intuition, wisdom, patience and discipline all made him ideal for investing. And while it was simply a hobby, I think he could have made a living at it. Most important, how he lived his life is ultimately what made him successful as a father, husband and a man. Here are some lessons I learned from him that I will always treasure, and will pass on to our boys:
1. Marry well. No, it’s not what you think. Do not marry for money, but make sure you are compatible in all areas (money included). I never remember hearing my parents fight over money. They both worked hard to make the most of what little they had while they struggled to raise a family of seven kids on a military salary. The only way it worked is that they were both on the same page.
2. Don’t follow the crowd. Investing, like life, means making choices and tuning out what the hysterical masses are doing so you can think for yourself. Dad never cared what others were doing and we were always encouraged to make our own path.
3. It doesn’t matter where you came from. Dad had humble beginnings. He dropped out of high school and joined the military. Through hard work, he studied laboratory sciences and Cytology, earned his high school equivalency and took college level courses. Eventually, he headed up Coney Island Hospital’s Cytology/Laboratory efforts. He didn’t have a cushy upbringing, he had a lot of mouths to feed, he didn’t have a lot of money, but he knew he was capable of having a better life for his family. And, as little as they had, he always put away as much as he could towards savings/investing.
4. Who cares what you have? He was never boastful, never bragged, and never talked about what he had. He didn’t have to because he was secure. The money he earned and successes he achieved were for his personal satisfaction and not to “one-up” others. Money did not define him.
5. It can wait. We were never the family who got things first like the latest and greatest new gizmo. The most important basics always came first, and that included savings and investing. It is this discipline that allowed my parents to enjoy all their hard work in their later years.
6. Take chances. You can’t grow without taking risk. That means in your personal life, career and in investing. Anything worth having requires that you stretch outside your comfort zone. Not getting in the game costs you more than getting in and making mistakes. But, that doesn’t mean that all caution should get thrown to the side, either. Being impulsive and poor planning can ruin the best of intentions. Dad was good at seeing opportunities, and doing his research so that the chances he took weren’t gambling, but measured risk.
7. One for all and all for one. With a family as large as ours, there was no room for selfishness. If we had, we all had. If we didn’t have, no one had. He did not buy himself fancy toys at our expense. He was not overly extravagant with us or himself. Because of that, I never equated “gifts” with a measure of love.
Father’s Day, like every day, I miss hearing my Dad’s thoughts, learning from his very rich and full life, and laughing with him. So I say quietly, “Thanks Dad for teaching me and loving me well.”
If you are lucky enough to be able to speak to your Dad, let him know how valuable his love and advice are to you.
Happy Father’s Day to all the Dads out there!
Penny Wise, Pound Foolish
When most of us go to make an important purchase – a refrigerator, furniture, or a car – we shop around. We want to make sure that we don’t get taken advantage of and that we get a good value for our money. So why is it that when it comes to investments, (mutual funds, in particular) many of us have no idea what we’ve invested in and what it costs? Why would we rather haggle with a car salesman on a one-time purchase, than pay attention to our investment costs and our long-term financial goals?
There are many possible answers: maybe we’re not sure what we should be paying; or, in order to find out what we pay we have to read the dreaded prospectus (who wants to do that, and who can understand it, anyway?); or perhaps we really don’t believe that we can win this game, so why try? Right? Wrong.
There are many costs associated with owning a fund. Many investors do not actually see these costs, as they are deducted from the fund’s returns, but make no mistake: High fees handicap your portfolio’s ability to outperform the market. If you think of it as a race, a low fee investment starts one mile ahead of a high fee investment. Wouldn’t you rather have that one mile edge?
Let’s look at three similar investments, each returning 10%, but the fees charged vary widely. After the deduction of fees, the returns are dramatically different: ranging from 6.65% for the high-cost investment to as high as 9.80% for the low-cost fund. After 30 years, these fees would really impact your bottom line. If you invested $10,000 in each of these investments, after 30 years, the high-cost investment would be worth $68,996; the average mutual fund would be worth $91,289; and the low-cost mutual fund would be worth $165,222 – nearly $100,000 more than the high-cost investment. Of course, this example is hypothetical and does not reflect past or future results for any investment.
| High Cost Investment | Average Mutual Fund | Low-Cost Mutual Fund | |
| Assumed Return (before expenses) | 10.0% | 10.0% | 10.0% |
| Total Expenses | 3.35% | 2.35% | 0.20% |
| Assumed Real Return (after expenses) |
6.65% |
7.65% |
9.80% |
| After 30 years, $10,000 grows to: |
$68,996 |
$91,289 |
$165,222 |
So, how can you protect yourself from high fees? How can you “shop around”? For starters, know if the Fund carries a sales charge.
Typically, if a Fund carries the letters A, B, or C after its name, it is considered a “loaded” fund (has a sales charge). These products are “sold” to investors. That is, a salesperson (a broker, for example) earns a commission for selling you the Fund. These loaded funds also compensate a broker over the lifetime that you own the Fund. That is why these Funds carry higher expenses. Someone needs to pay the broker. Look at it as a transfer of wealth: a transfer from you to the Fund Company, and ultimately a piece of that goes back to the broker. There is nothing improper about this; however, you may question if this arrangement between the broker and the Fund Company is as beneficial to you, as it is to them. If the broker works for a company that sells its own proprietary funds (for example, Merrill Lynch), they are paid even more to sell the in-house product. Will this influence a broker’s recommendation?
Fee-only registered investment adviser firms (RIA), such as our sister company ATI Investment Consulting, Inc., are only compensated for the advice they dispense, so they work purely for their clients. In fact, should an RIA receive compensation from any source other than a client, it must be disclosed to clients as a potential conflict of interest.
By law, RIAs are held to the higher standard of acting in an investor’s best interest, which includes keeping expenses low. Brokers need only sell you something that is deemed “suitable”. To compare the RIA fiduciary standard to the Broker’s suitability requirement, consider this: If a client needs long-term growth and a S&P 500 fund is an appropriate investment choice, but one option carries fees of 1.5% in addition to a 5% commission, and the other carries a fee of 0.15% with no commission, the RIA would be obligated to recommend the lower cost option, because low fees are in the client’s best interest. The broker could sell the one that paid him more (a commission) even though it is more costly to the client, because the investment is still suitable for the client.
Furthermore, brokers are paid on transactions and earn commissions every time clients buy or sell, and they earn trail commissions when a client holds an investment. Therefore, client satisfaction does not affect the broker’s compensation nearly as much as it does for the RIA. A fee-only adviser does not have these additional sources of income as a safety net. All an RIA has is the quality of his/her advice. If that is shoddy, the RIA will soon be out of business.
Don’t be afraid to ask your investment professional how he/she is compensated. It is in your best interest to know if his/her interests lie elsewhere. Ignoring this question while clipping coupons, shopping sales and looking for bargains is truly an exercise in being penny wise and pound foolish.
Investing Your Time Productively
June 3, 2011 by admin · Leave a Comment
“Hello I’m a procrastinator,” I may as well have introduced myself in this manner at the training session on time management. It turns out, I was in good company. Though I didn’t realize it at first, the room was filled with others who shared my dirty secret. The instructor stood at the front of the room holding up the calendar/planner and asked us to start our day – as we should every day – with a to-do list. When our pens stopped moving, he asked us to prioritize our list with A for urgent, B for important, and C for keep on track. Next numbers were placed after the letters to further prioritize the list: A1 being the most important, then A2, and so on. It seemed simple enough, and yet I found myself itching to tackle C3 and B2 first. These were projects I knew what to do about. These were things that would produce an immediate reward to my efforts. A1 — well, that one I wasn’t sure how to start. Once I had these goals and priorities written out, it was hard to justify wandering off to handle the less urgent issues. I felt better, though, when most everyone in the room giggled nervously when the instructor asked how many of us were not even looking at the As, but were thinking about the Bs and Cs.
Financial matters are a lot like those A1s that seem overwhelming or perplexing, so we jump ahead to the more interesting B and C issues – like shopping for a new car, or planning a weekend trip. Even the “not so interesting” things on our list take a priority because they have a deadline – like paying bills, for instance. The truth is, while there is no “deadline” imposed by anyone on your financial management, it is up to you to set them. If you don’t, time has that funny way of passing by very quickly. Before you realize it, a whole year will pass before you call to get the forms you need to Rollover your 401k from your previous employer, set up a Roth IRA, or the open the kids’ college savings accounts. There is no bill that is sent showing you what you miss out on, but the reality is that time is the most powerful tool in growing assets. The table below gives a snapshot of how planning ahead, and making the best use of time can be a powerful wealth builder.
The Planner and the Procrastinator are the same age, but The Planner invests early on, contributing $2,000 every year to an IRA starting at age 22. Though the Planner only makes these investments for nine years (a total of $18,000) versus the Procrastinator, who invests $70,000 over 35 years, the Planner ends up with $109,222 more at age 65. How? The Planner started investing 10 years earlier, and time alone made all the difference.
The Price of Procrastination
Based on an Average Annual Return of 9%
The Planner The Procrastinator __________
Invests $18,000 in an IRA Invests $70,000 in an IRA over
over 9 years (age 22 until 30) 35 years (starts investing at age 31)
Account Value at 65 $579,471 $470,249
The Planner Invested $52,000 Less than The Procrastinator,
But Earned $109,222 More.
Source: National Endowment for Financial Education
This example proves that wealth can be built with little investment if you maximize time. Of course, had the Planner kept contributing for 35 years, the results would have been even more impressive. So what do you do if you feel time has passed you by? The point is not to fret over what has already passed – you can never regain it – but to get on track as quickly as you can, so that you make the most of the time you do have.
Like time management, a thorough to-do list will get you focused on what you want to accomplish. Paying off credit card debt, establishing an emergency fund (3 to 6 months of income), opening a retirement account, and setting up college savings are the basic places to start. Next, look at what you can realistically contribute every month to work towards these goals. Finally, treat this commitment as sacred as your rent or mortgage payment.
While it is easy to get caught up in the day-to-day grind of living and get sidetracked, when you make these goals an A1, you are, in effect making yourself and your family an A1. That, I believe, is a very productive use of your time.
Do You Know…
- …How Long You Might Live? The Average life expectancy for a woman is 80, and 77 for a man. That means half of all people will live longer than this. If longevity runs in your family, you should think about have retirement savings that can take you through to age 90.
- …How Much You’ll Need to Retire? Some say you’ll need to withdraw 70% of your gross pay (before retirement) every year to cover your living costs. A more conservative approach is to look at your pre-retirement salary and deduct expenses that you shouldn’t have in retirement (like social security tax, mortgage payments, and contributions to your retirement plan).
- …How Time is the Greatest Grower of Assets? Like the example above shows, it is not how much you invest, but how long you invest for that makes the biggest difference on your results. Wealth can be built with small, consistent investments over time. But you can’t procrastinate!
Check out http://www.atiinvestment.com for calculators to help you plan for retirement based on life expectancy, income and your current retirement savings.
Marriage and Money: Learning to Get Along
May 25, 2011 by admin · Leave a Comment
If fighting about money has become a ritual in your household, you are not alone. Money is a leading cause of tension between couples. Before it goes too far, realize that you both have control of the situation. These steps can help you work together to fix your differences:
1. Know both of your money personalities and create a plan/budget that works. There are three basic money personalities: hoaders, splurgers, and avoiders. Understanding why you treat money the way you do, and gaining insight into how your spouse feels about money, will make it easier to manage your situation.
Hoarders love to save and bargain hunt. Because they fear that they’ll never have enough, spending money makes them uncomfortable. Luckily, they are happy creating a budget, because they enjoy keeping track of their finances. By putting “splurge money” into the budget they can learn to enjoy their money without worrying that they are spending too much.
Splurgers are happiest when treating themselves (or others). Spending makes them feel loved and successful. The danger is that they will spend far more than they bring home. Because they like to be rewarded, they too can benefit from putting a line item in the budget for reasonable splurges.
Avoiders lack the confidence to deal with money. They ignore their financial responsibilities, such as balancing the checkbook or researching their investments. Their greatest risk is missing opportunities to make their money go farther. And, if they are married to a splurger, they won’t realize that debt is mounting up until it is too late. The best strategy for Avoiders is to take a class or read up on basic finances. Creating a budget is the best way to get familiar with the situation they were trying so hard to ignore. Because Avoiders tend to procrastinate, setting up automatic bill payment and automatic investments (where money is wired from a bank account to the vendor or investment account) is a helpful strategy.
2. Discuss the division of labor. Make use of your natural talents and assign responsibilities accordingly. Maybe one of you is efficient at bill paying, but the other is better at balancing the checkbook. You do not need to do all the jobs together, as long as you both remain informed. The same goes for recordkeeping and investing.
3. Agree on the ground rules. Obviously, no lying and no concealing are mandatory rules. Another good one: large ticket items need to be discussed before purchasing. Just make sure you agree on what dollar amount constitutes a large purchase.
4. Make sure long-term goals are in synch. For example, if you have been a stay-at-home Mom, your husband may be counting on you returning to work. However, secretly you may be dreaming of setting up your own business. Make sure you thoroughly discuss where you both see your lives in the near future. Now is the time to work any long range goals into the budget (such as laying the groundwork for a business, career change or early retirement). Be very specific about what you want saved and by when. That is the only way you can see if you are making progress.
5. Communicate regularly. Even if one of you primarily controls the budget and bill paying, you both need to review what is going on. Make a monthly date to discuss your money.
Keep in mind, as you put together your budget, there needs to be a regular amount allocated to saving and investing. Work first on creating an Emergency Fund, and then fund retirement. Aim to save at least 10% of your income, then you can get started on college savings. Together, you can fix your differences and work towards shaping your future instead of your future shaping you.
Teaching Your Teen Financial Strength
May 13, 2011 by admin · Leave a Comment
Teens crave independence and want to be taken seriously; and, as parents we have to find ways that they can assume more responsibility in a way they can handle. Money just may be the answer.
While we make sure our kids learn reading, writing and arithmetic, there is something noticeably absent from their school education, and that is money smarts. Unfortunately, your teen may be able to go through life with little understanding of geometry but no one goes through life without having to deal with money. How your kids learn to manage it may be one of the greatest indicators of how successful and responsible they will be as adults. It’s never too soon to get started, and while they may groan at first, your teens will start to quickly realize the power that comes from making choices on their own, and they will become more self-confident in the process. Here are some ways you can help your teen work towards financial independence:
- Adult conversations. Teens love to “listen in” and partake in adult conversations. Unfortunately, our adult response can be “This doesn’t concern you,” or “I was talking to your father.” We try and shield our kids from all the responsibilities they will some day face, but all we are doing is delaying their growth and progress. Have open conversations about finances in front of your kids. Take the time to discuss the decisions you are facing, whether it is buying a new car, refinancing your mortgage, or funding a family vacation. Let them see the way you and your husband research and sort through your options to come up with the best fit. Walk them through the math, as you analyze which outcome is best and then show them how you factor in the “quality of life” issues, such as saving time or convenience to make your final decision. Find out what they think and why.
- Basic banking. If your kids don’t have bank accounts of their own, set out with them and research which banks offer the best account for their needs. Show them that the interest rate earned on the account is only one factor to consider; the fees the bank charges, and the convenience (be it location, operating hours, or ATM availability) also will determine where to bank. After you do this research you may even find yourself switching your bank account. Have them open an account and show them how to keep track of checks, deposits and withdrawals in the transaction register. Also show them how to balance their checkbook.
- Savings. If they are earning money, have them commit at least 20% of their income to savings. If they have received gift money, encourage them to save a portion of that as well. This money should go towards a long range goal like college, or buying a car.
- Budget. Have your kids write down any money they earn or receive from you or others as gifts or allowance. Then have them write down everything that they spend money on. Back out at least 20% and make an item called “savings”. Then, based on what is left over, allow them to decide how they will choose to spend this money. At the same time, consider what you have been giving them to spend on items such as clothing, entertainment, and sports/clubs/hobbies. Now would be the time to adjust some of these numbers if you find yourself shocked by what you have been spending. If there is a difference that needs to be made up, your kids should decide if they will use the money in their budget to close the gap, or go without one activity to pay for one that they value more. Show them how delaying gratification now may make them able to save more money to purchase an expensive item they really want instead of buying a bunch of less expensive items they really didn’t need.
- Maintenance. Help them keep their budget on track by having them monitor what they have saved and what they have spent every month. Make sure they keep up with reviewing their bank statements and/or balancing their checkbook.
- Earnings. If they want a bigger budget, they will need to earn more. Guide them in ways they can earn money, such as babysitting, lawn work, tutoring, etc. Don’t forget to have them give their savings account a raise as they start to earn more.
- Charity. It’s always good for kids to realize their blessings and the importance of giving back to those less fortunate or to causes that help others. Help them decide on an amount to donate every month.
Finally, the best lesson you can give them is to put your money where your mouth is: be organized and know where your money is going; pay your bills on time; live within your means; and finally, enjoy your money but be responsible with it. As always, there is no substitution for setting a good example.
Motherhood, Money and Guilt
May 7, 2011 by admin · Leave a Comment
I had a dilemma. My husband’s birthday was fast approaching and I had no idea what to get him; the kids were just 12 months old and were too young to make something cute for him. Worse yet, he told me not to get him anything. He didn’t need anything. Seeing how I was no longer earning any money of my own, should I really run out and buy him something he didn’t want, and that he would end up paying for?
Times like these made me miss my paycheck. I had adjusted to shedding my professional skin, but losing the independence my paycheck provided took more getting used to than I had thought it would.
“It’s your money, too,” my older sister, a stay-at-home mom, reminded me.
I knew that, and my husband certainly never made me feel any differently, but there it was: Money Guilt (added to all that Mommy Guilt). Never mind that my salary had helped us buy our house, or that my salary (saved and invested well) contributed greatly so that I was able to stay home with our boys. So, where was this guilt coming from?
We’re a guilty species, us women. When we’re doing our best, we feel like we’re not giving our all. When we need help, we feel weak. Add money into the mix and it gets even uglier. If we earn more than our men, we feel pressured; and if we’re not bringing in “enough” (or any at all, for that matter), we feel less than.
I often hear mothers talking about missing having their own money, or hating to “ask” their husbands for money. The truth is, whether earning a paycheck or not, a mother impacts her family’s finances every day. She manages the household spending, and hopefully makes the money go a bit farther. In investing, her input can be invaluable. According to the National Center for Women and Retirement Research, women tend to spend more time researching their investment options than men do. Because women are less likely to chase “hot” tips and trade on impulse, they get better returns and also save on transaction costs and capital gains tax. This is supported by a study conducted at the University of California at Davis, which found that women’s portfolios gained 1.4% more that men’s portfolios (from 1991-1997). (Food for thought if you haven’t been involved in investment decisions.)
The gift I gave my husband that year was a montage video of our boys’ first year. It cost me nothing but time and patience, as I wasn’t too swift with the video editing program. That same month, my husband gave me a present, as well: a life insurance policy on me. I had been covered at work, but now as a stay-at-home mom it didn’t occur to me that I needed to be insured.
“Are you kidding me? Do you know what it would cost to take care of the kids if something happened to you?” my husband asked.
I guess sometimes it’s not about how much you bring in, but what you are bringing to the table that matters. Thankfully, my husband didn’t need reminding.
| Three Ways to Celebrate Your Worth |
| 1) Find out what your “Mom” salary would be. Check out: http://swz.salary.com/momsalarywizard/layoutscripts/mswl_newsearch.asp to calculate a personalized paycheck based on the number of kids you have, their ages, whether you work or stay at home; where you live, and the roles you perform. |
| 2) Get life insurance for yourself. Term life insurance is an affordable way to go. Websites like Selectquote.com can give you a quick quote. |
| 3) Get involved in the investment decision-making. Your input can really make a difference. Also, it may discourage any unnecessary/extravagant spending if you and DH map out a plan to achieve your financial goals. |
Know the Game, Before You Play
March 29, 2011 by admin · Leave a Comment
You would never jump into a game and wager thousands of dollars without first knowing the rules. And yet, every year many parents do just that as they embark on the process of seeking financial aid for college costs. The truth is if more parents understood how the information on the Free Application for Federal Student Aid (FAFSA) is analyzed, they would take steps to place themselves in the most favorable light. Strategic positioning can really pay off if you know how the game is played. Here’s what you need to know:
- How your data will be assessed: The formula FAFSA uses to determine the Expected Family Contribution (EFC) considers the parent’s income, savings and investment assets (excluding retirement accounts and the primary residence), as well as the student’s assets and income. On average, parents are expected to contribute about 5.6% of their assets and between 22% and 47% of their income (with a $20,000-$60,000 allowance based on their age) towards college costs. Students are expected to contribute roughly 20% of their assets and 50% of their income (with a $3,000 allowance) towards the tuition bill. Switching assets into a child’s name would not be a helpful strategy. If your child is employed, consider opening a Roth IRA, as retirement assets are not considered assets.
- What time fame you are working with: The FAFSA form is submitted during the student’s senior year in high school, based on data from the previous tax year (i.e., January 1 of the student’s junior year through December 31 of senior year), also called the Base Year. Strategies that can be employed to reduce income or assets before the assessment period could prove very beneficial (e.g., sell non-retirement assets before the Base Year and use this money to fund IRA or Roth IRA accounts; speak with your employer about receiving your bonus prior to the Base Year, or delay the bonus until the following year). In addition, avoid liquidating any investment assets during the Base Year, as that inflow of cash would be considered as income.
- What counts against you: Non-retirement assets are considered available funds, even though you may be carrying high credit card debt. Prior to January 1 of your child’s junior year, consider taking some of your non-retirement savings or investments and using them toward reducing or eliminating this debt.
- What works in your favor: Roth IRAs, IRAs, employer-sponsored retirement accounts, Coverdell accounts, 529 plans, annuities, or the cash value of life insurance policies are not considered as assets for the purposes of FAFSA. Prior to the Base Year, consider moving non-retirement assets (which FAFSA does count as assets) into one or more of these types of accounts.
Remember, if your child is looking at more elite, private schools, the CSS form will need to be completed as well. This formula assesses parents and students differently, and requires more of a contribution from both the parents and student.
After you submit the FAFSA form, the matter is out of your hands. But, what you do beforehand, when the matter is in your hands, can be critical to the outcome. Being aware of what you are up against may change your approach to the game and, hopefully, with a little planning, may help reduce the tuition bills.
Math that All Kids Will Love
June 9, 2010 by admin · Leave a Comment
Do you want to get your child’s attention and encourage them to save money? A little basic math will show them how they might become millionaires – if they start investing early.
Consider this hypothetical example: A teenager has a part-time job and puts $2,000 of her earnings into a Roth IRA every year starting at age 16 and ending at age 20. Then, she leaves that $8,000 total investment to compound for 47 years at an average rate of 10.7%. Even though no additional money is added to the account, at the end of 47 years the $8,000 investment grows to $1,114,423. Now, even though the average return may seem high, that is not the return the account earns every year but rather the average return earned over the 47 years. Of course results do not indicate past or future results of any investment.
The point of this simple example is to show kids how building wealth is not determined by luck (like all those losing lottery tickets out there), but by making regular, consistent investments, and by starting early. In fact, the power of time is the greatest advantage of our youth because it can help assets compound. Show your kids this example and then, as they receive gift money or begin earning their own money, encourage them to put away some of it. Getting them started early means they will take advantage of time to secure their financial future.
10 Steps to Financial Strength
January 11, 2010 by admin · Leave a Comment
With the day-to-day pressures you face, it’s easy to let your financial life go unattended — especially if there’s money left over at the end of the month. Yet, if you pay just a little more attention to your savings and spending habits, and get clear and specific about your goals, you will find yourself in a position of financial strength. Here are some quick steps you can take that are easy to implement and will get you results fast:
- Get Organized. An organized household spends less money. Why? Because when you know what you have you won’t buy duplicates. When you plan your meals ahead, and know what’s already in your pantry, you don’t overspend. When you keep track of your checking account balance and your bills, you avoid late fees, and bounced checks. What’s more is you save time – something we can always use. This step is also vital if you plan on following recommendations #2 and #3.
- Know Yourself. Track your expenses, so you have a good sense of what you spend, and where it goes. Then, and only then, can you see where your priorities have been. The question is: Is this how you want to spend your money? Or, do you need to shift your spending patterns to reflect your priorities?
- Cover your Bases. Make sure you have adequate life insurance on both spouses (about 7-10 times annual household income), disability insurance for all working spouses, and an emergency fund to cover at least 6 months’ of living expenses. Also, make sure your wills are up-to-date. A strong foundation makes all the difference in an emergency situation.
- Eliminate Credit Card Debt. If you carry a balance every month, make a plan to pay as much as you can each month – not just the minimum.
- Shop Smartly. Check the circulars and plan your meals accordingly. Add more beans and veggies to your meals (your wallet and waistline will thank you). If you are tempted to make a big purchase, go home and sleep on it. You’ll be surprised how these urges can pass.
- Eliminate the “Sin Tax”. Tobacco and alcohol carry heavy taxes. Cut back or eliminate these habits and you’ll improve your health and finances. While you are at it, bag the lottery. Wishing for a windfall is a waste of energy, especially when creating one is within your control. Take the money you would put into lottery tickets, and increase your emergency fund, retirement fund, or college savings. It will serve you better if you put the money there.
- Conserve. Conserve. Conserve. It’s not only good for the environment, but it’s good for your wallet. Shut off lights, use energy conserving bulbs, repair leaky faucets, and add weather stripping. Who needs to waste money and energy?
- Make a Plan. Where are you now, and where do you want to go? You’ll never reach your goals if you aren’t clear about what they are, how much time you have to get there, and how much you will need. Be specific, and list them all — short-term goals (e.g., paying off your credit cards in two years), to intermediate (e.g., sending two children to college in eight years), to long-term (e.g., retirement in 15 years). Work with a financial professional to estimate how much you will need, what the effects of inflation will be on affording these goals, what type of investment commitment per month you will need to make, and what range of investment returns you will need to receive to stay on track.
- Pay Yourself First. That’s right, you’ve earned it. Treat your financial goals with the same seriousness you treat your housing, car, cable and utility bills. That’s the only way your dreams will ever become a reality. Make sure you are participating in any company sponsored retirement plans available to you, and make sure you open an IRA or Roth IRA for you and your spouse.
- Know What You Own. What mutual funds do you own? What do they invest in? Make sure they invest in different types of securities; otherwise you’ll end up with all your eggs in one basket. Know what fees and sales charges you pay, as these expenses can really add up over time. It may be boring to read, but the prospectus has all the answers to these questions.
Remember, if you don’t care about your own money, no one else will. Pay attention to the areas where you can improve, and make your financial goals a top priority. These small changes will allow you to reap benefits for many years to come!
