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Educate parents and young adults in practical money matters

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Destination Unknown?

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Imagine you’re about to set out on a road trip.  You would absolutely need to have an idea of where you wanted to go – north, south, east, or west.  You would have to work within the confines of how much time you had for this trip – that would determine how far you could go.

Your financial goals are no different than that road trip; failing to plan means planning to fail.

Even if you haven’t given retirement much thought, in terms of what it looks like and feels like, chances are you have an idea of when you would like to have the freedom to walk away.  For those of you bemoaning that you will need to work until you die, it’s time to see if that is really true or simply your worst fear taking over and freezing you in your tracks.

But, you have to set your goals.  You have to make this a priority.

The trouble is, unlike the mortgage payment or electric bill, there are no immediate ramifications if you don’t take the time to do this.  It is important, but it is not urgent. The consequences of your inaction won’t be felt for decades.  That is why it is easy to procrastinate – especially if you are suffering from paralysis.

There are a number of helpful calculators on line that can gauge where you are and where you need to be in order to meet your goals, such as the ones at Vanguard.

What I like about these calculators, is that they help you nail down the answers to the questions I raised in my last blog, A Plan to Overcome Paralysis.

If you are tired of worrying about the great unknown, here are your starting steps:

  • Determine how much will you need. The retirement expenses worksheet will help you get a handle on what your living expenses will be in retirement.  You may not have a mortgage payment in retirement, but perhaps travel or hobbies may constitute more of your budget in retirement then it currently does.
  • Take inventory of the money you will live off of every month from fixed sources (e.g., pension, social security, rental income etc.) and plug it into a retirement income worksheet. The end result of this exercise is you will have a better sense of how much you will need to draw from your investments in order bridge any gap from your fixed income sources.
  • Find out when you can retire. Vanguard’s calculator is easy to use:
    • Plug in how long you plan on living in retirement.  It is not unreasonable to expect to live into your nineties, so don’t short-change your life expectancy.
    • Enter how much you currently have saved and how much you want to be able to withdraw annually to supplement social security, pensions or other sources of income (see your retirement income worksheet).
    • Don’t forget to adjust the pie chart to the side, which asks for how your portfolio is currently invested (stocks, bonds, cash).
    • Once all that data is plugged in,  you can run a simulation to see the probability of achieving your goals and not outliving your money based on the amount/type of assets you have, and the time frame you need the money to last over.

In the event the results that you get are unsatisfactory, don’t get discouraged.  The numbers may not work, but you then can explore what it might take to reach that goal. You may need to invest more money, increase your allocation to stocks (if that risk level is appropriate), delay retirement, or plan on working a part-time job in retirement (or some combination of things).  Then you can decide which sacrifices you are willing to make and whether these actions are enough to move the needle in the right direction. The control is yours; you get to decide.

Once you have a sense of the parameters you are working with, you will no longer randomly throw money into an account without rhyme or reason.   You will know what you are working towards. Most important, this will free you up to actually envision what you want your retirement to be so you can begin to enjoy the process of planning with purpose.  Then, you will confidently know what your destination is and how to get there.

 

When the Meter is Running Out on College Planning

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Your child is just a few years away from going to college, and the acid in your stomach is churning.  You worry if you will have enough; you’re mad that you didn’t focus on this sooner.  Desperation is a dangerous thing.  It can cause reckless behavior — a gambler’s mentality of, “Let’s try and hit it big!”  Of course, anything that can rocket can plummet; that’s the way it is with investing. When any goal is short-term (5 years or less), the money needs to remain “safe”.  You can’t afford to lose it now.  So, what can you do?

First, understand that you still have time to position yourself in a more favorable light to receive financial aid.  Colleges start looking at your finances from January of your child’s junior year to December of your child’s senior year (the look back period — “LBP”). Effective 2017, they are changing this period to the “Prior, Prior Year” (“PPY”); meaning your finances will come under scrutiny from January 1 of the child’s high school sophomore year to December 31 the junior year.

They look closely at income, with assets in the child’s name heavily counting against you.  Minimizing your income, and removing assets out of your child’s name prior to this LBP/PPY can significantly impact your financial aid eligibility.  Here are seven key actions you can take now:

1. If your child has money or investments in his/her name (bank accounts, investment accounts, etc.) get this into your name before the LBP/PPY.

2.  Make sure any 529 plans are owned by the parent with the child as the beneficiary.  Having a grandparent as the owner would be detrimental, and this would count as student income.

3. Your income is looked at heavily.  If you know that you will be getting a bonus/commission check during the LBP/PPY, see if your employer can pay this in advance of the LBP/PPY.

4. No consideration is given to the debt you are carrying.  Pay down credit cards — it will take some cash out of your accounts (which would count against you for financial aid purposes) AND get you healthier, financially.

5. Spend — provided you can afford to, and it is necessary.  For example, if your child needs a new computer for school, or a car; or if your roof needs to be replaced, spending the money can benefit you if it comes out in advance of the LBP.

6. Seriously consider the local, in-state education system.  In NY, SUNY and CUNY schools are well regarded and very affordable.  Community colleges can offer a steep discount on the first two years of college (when most students are taking introductory courses).  Look into what Transfer Agreements the institution has with four-year colleges.  Also,  investigate Honors Programs, as they often have partnerships with prestigious universities.

7. Most important, make sure you fill out the FAFSA form, as it is required if you hope to get any merit-based scholarships or if you plan on taking a Stafford Loan.

You can’t control what you haven’t done in the past, so move forward, controlling what you can.  Make the most of the time you have left, and make these adjustments while you still can.  Remember, the meter is running.

 

 

 

 

College Bound Concerns

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Anyone who has a child getting ready to start college for the first time probably has a list of concerns a mile long. Among the worries is the handling of money. Whether your child is going away or staying home, there is a real opportunity to start your son or daughter on his or her first journey into financial responsibility. While it might be hard to look at your “baby” as an adult handling money, there’s no time like the present to learn these important lessons. These tips will help your child get off to a strong start.
1. Consider what income sources are available. Will your child save money over the summer or have a job while at school? Will you be supplying extra money?
2. Decide on who is paying for what. Sit down and be clear about what you are paying for, and what you are not paying for. This will allow your child to ballpark what his/her expenses might be. Go shopping together so your child can get a real sense of what things cost; then put together a rough budget.
3. Look at ways to shave the expenses. For example: Does your child really need a car? Is public transportation an option? Can used books and supplies be bought on line or at the book store? Can a roommate share the costs of a refrigerator or rug?
4. Make a final weekly budget. Based on the figures from the three previously mentioned points, put together what can realistically be spent each week and allow for 5% savings as a cushion. I recommend a weekly budget, because it is a big task to stay balanced for a whole month; breaking the task into a series of smaller ones may be more manageable.
5. Use cards with caution. Explain how debit cards work. There may be fees associated with them and, if lost, they can pose a danger to the account if not reported promptly. Using ATMs at another bank can get expensive, as well. Credit cards also require caution. Show your child why finance charges are not an option because they make the cost of purchasing goods much greater. If credit cards are used, have him/her keep the minimum low, and keep spending below the minimum.
6. Record keep. Encourage your child to always balance the checkbook. All transactions should be entered in the checking account ledger (cash/debit card transactions, checks written/deposited, and credit card purchases). This recordkeeping should be done immediately, and not when it hits the bank/credit card statement, so that your child always knows what actual funds are available.
These steps will lay the foundation for good money habits for years to come.