admin August 29, 2019 No Comments

5 Steps to Financial Success

Whether you are about to graduate college, just landed a new job, decided to review your finances, or simply stumbled upon this post (hi!), it’s the perfect time to take a look at your spending and saving habits and make sure you’re taking these FIVE steps to reach financial success and live your best life ever!

Step 1 – Spend Less than you Make

The number rule in adulting is to learn to spend less than you make and save a little for the future.

Read more about how exactly to do this HERE. If you are blessed with nailing this concept from the beginning: what’s next?

Step 2 – Save Money

The main planning you need to worry about next is where to put your “saving money”. You have retirement plans, non-retirement investment accounts, the bank/savings/checking, and possibly debt to pay.

If you have debt, you do want to address that first. How much is the interest you’re paying? If it’s credit card debt, it’s probably 18% – 27%. That’s A LOT! There’s not much that will get you a better return than paying that debt. It’s sort of like having a bond in reverse. If you pay $1,000 extra, you will be saving 18%-27% which is like a $1,000 bond paying you 18%-27% or $180 – $270. That’s a great return!

The only thing that is a better return is if you can put money in a retirement account, a 401(k) or 403(b), and have your employer match it. If you put in $1,000 and your employer matches and puts $1,000, that’s 100% return! I don’t know of any “sure thing” investment that will do better than 100%. The problem is that it’s hard to get that money out. And if you need to take it out, you’ll pay taxes (at your tax bracket for federal and state) and a 10% penalty. So still a great deal but it’s not “liquid” or available money.

Step 3 –  Build an Emergency Fund

Why does having easily available money matter? If you get a traffic ticket or a flat tire or sick and have to pay for care, you’ll need cash in hand. The money in your retirement account won’t help you much. So you’ll need an emergency fund. How much do you put in an emergency fund and how big should your emergency fund be?

Well, this is where it gets tricky. If you can save 10% of your pay check and you have matching funds, consider putting 5% in your retirement account and 5% in your emergency fund until your emergency fund is half full.

What’s half full for an emergency fund? If you have a corporate job with a steady pay check, 3 months of expenses. Keep your emergency money either in the bank, in a savings account, earning interest or in a brokerage account (like a non-retirement Vanguard or Fidelity account) in a money market. Either will hopefully be paying 1% – 2% right now. If your emergency fund is in an account that’s earning less than 1% consider moving it.

If you are a freelancer that has fluctuating income (one month is a boom month and the next a bust), you need a larger emergency fund. Think more like six months to a year saved up. We suggest having a year in cash or cash equivalents.

Step 4 – Take a Deep Breath + Deal with your Debt

What if you have debt too!?!? Then it gets even more complicated! But don’t worry, YOU GOT THIS. You just HAVE to save for emergencies. If you don’t, you’ll be raking up even MORE debt when you get that flat tire or surprise trip to Urgent Care. And you really don’t want to miss out on your company’s matching funds either. So like many things, we recommend balance here.

Just like protein is good for you but you don’t want to skip your fat or carbs (fruits and veggies). With the retirement, emergency fund, debt trio, you need to balance your savings among all three until you’ve gotten on your feet.

If you have credit card debt, you have to pay the minimum. No debate about that. Figure out how much that amount is and look at how much savings you have left to allocate. At that point, if you are dividing up 10%, if you have matching money from your company for your contributions, I would continue to put 5% into your retirement account. And split the rest between your debt and emergency fund until you have at least half your emergency fund filled or you pay off your debt.

What about if you don’t have matching funds? Skip the retirement savings until you have your debt is under control and at least half of your emergency fund is filled. Why? Your debt is losing you money now. Your retirement fund is hopefully going to save you money in the future. It probably will but how much and when is uncertain. The 25% you will not be paying in interest on your debt is a sure thing now.

Also, debt is like an anchor that prevents you from living your dreams. A retirement and emergency accounts are the sails that helps you reach your dream destitution. But just like a ship that has it’s sails up but anchor down doesn’t move far, you also will be stalled in your progress until the debt is under control.
If you can save 20% or 30% or more now, do it! Believe it or not, the younger you are the easier it is to cut your expenses. As you get older, you have more expenses and expectations. It’s easy to live frugally and get your financial foundation rock solid.

On the other hand, if you’re getting off to a rocky start with low wages, that’s a bummer. You’ll also have to watch your expenses but will make less progress on your emergency fund, retirement savings, and debt. Keep working hard, looking for a better job, and find side gigs. Persistency can get you really far. Don’t give up and keep working hard to improve your income opportunities. We truly, truly believe in you.

Step 5 – Have Fun!!!

When planning your day to day budget, do set a little aside for some fun. A weekend away, a night out with friends, a concert or sports event. You do need to live your life and planning for fun will help you feel fulfilled. Don’t spend money on things that don’t matter to you, just because others are spending money (that perhaps they don’t even have) or it sounds good in the moment. Spend on purpose.

And there you have it, FIVE steps to reach financial success and live your best life ever!

If all of this sounds easier said than done, schedule a FREE 15 minute call with us. We are here to help!

admin August 29, 2019 No Comments

What the Heck are 401(k)s, HSAs, and Other Confusions

If you hear the words 401(k), HSA, and deductibles and you look like this…

You’ve come to the right place.

Whether you’re reading this because you just landed your first job (congratulations 🎉) or you’re just looking for some clarification, we’re here with all of the answers to make sure you find success in your career, finances, and life!

Let’s get started.

So, what the heck is a 401(k)?

A 401(k) is your employer sponsored retirement plan.

They come in many different forms, but this is the most common and most well known. It’s an opportunity to save for retirement in a tax advantaged way. I’d say the first step is to figure out if your employer matches and how much you need to contribute in order to take full advantage of the matching schedule.

You may have two types of 401(k) accounts offered, a Traditional and a Roth.

Traditional 401(k)

Everyone will have a Traditional available and that allows you to put money into the retirement account BEFORE taxes are taken out. If you put in $1,000, that’s $1,000 off the top of your pay before taxes are taken out. But don’t worry, the government won’t let you NOT pay taxes. You’ll pay taxes on those dollars when you take them out during retirement. This is called “Traditional” because it was the way retirement accounts worked when they were first designed back when your grandparents were probably still working. The idea was that you would be in a lower tax bracket when you retire and therefore you would pay less taxes in the long run.

Roth 401(k)

Roth plans were introduced recently because it was discovered that people often are NOT in a lower tax bracket when they retire. Many people take as much out of their retirement plan after retiring as they were getting as salary before retirement and therefore they were in the same tax bracket. All that great planning was for naught. But the government realized the errors of their ways and designed the Roth plans. In these plans, the money you put in is AFTER taxes are paid. (The IRS wants taxes one way or another. No getting out of taxes completely!)

With a Roth plan, when you contribute $1,000 from your paycheck, you will first pay taxes on that money. Say you’re in the 20% tax bracket and your state taxes are 5%, you will have $250 go to taxes and $750 will be deposited into your Roth IRA. That may seem like a bad deal BUT, you will never pay taxes on that money again. Ever! Hopefully, that $750 grows for the next 10, 20, 30, 40 years. And say you have interest, dividends, and growth of $2,000 on that $750, you get to take out $2,750 in retirement and not pay a penny in taxes. Sweet deal, right!?

How much should I contribute?

It’s difficult to give blanket advice here about how much to contribute to Roth versus Traditional because there are so many variables involved. Our rule of thumb is 50/50. When you’re younger and in a lower tax bracket, you may want to put in more than 50% and when you’re older and in a higher tax bracket, you’ll want to put in less. But 50/50 is a good all purpose target.

Most employers that offer 401(k)s are now offering a Roth option so it’s important to make sure you are also taking advantage of this option, especially if you are in a lower tax bracket right now.

Some resources:

How to Set up Your 401(k)

3 Things to Consider before Maxing out Your 401(k)

Next, Health Insurance

What is health insurance?

In Julia Kagan‘s easy to understand words, “Health insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly”.

When it comes to health insurance, Step 1 for young adults is to figure out whether you need to stay on your parents (if you are fortunate enough to have been on it to begin with) or switch to your own. Find out if your employer has a health insurance offering and if they do figure out how much, if any, of the cost that they cover. Do a quick cost comparison of how much the premium is on your parents versus how much your premium is through your employer. Make sure you compare prices for the same deductibles. Employers may pay half or even all health insurance premiums. Some will even put money into an HSA. We’ll discuss HSA in a minute.

What are copayments?

A copayment is the amount that you have to pay when you get medical services. Sometimes insurance plans require you to pay a percentage like 20% of the visit cost and the insurance pays the rest. Other times, you’ll pay a flat fee like $10 or $20 dollars. It’s typical for you to have to put “skin in the game” when you use medical services.

What is a deductible?

When you go to the doctor, your health insurance expects you to pay for the first dollars paid. If your deductible is $500, and you go to the doctor that charges $250, you’ll pay the whole bill since you are under the deductible. If you end up going to the doctor three times for a total of $750, you’ll pay $500 and the insurance may pay $250 (or more likely a little less because of the copayment).⠀

With a high deductible insurance plan, you pay a high deductible (hence the name) but you have the tax advantage HSA to help you save to pay for that deductible. After you finish paying the deductible, you then pay only the copayment, if you have one, for the rest of the year. Each year the deductible goes back to $0.

High deductible health insurance can work well if you are young and healthy. Again, this depends on the individual, their personal and family history, and financial situation. Most young people have low medical expenses and only need insurance to cover big bills.

What is an HSA?

An HSA is a Health Savings Account connected to health insurance that has a high deductible.

When you have a high deductible, a HSA may come in handy. Your HSA allows you to keep your insurance costs low but still have coverage for those emergencies that would otherwise wipe out your bank account and put you in debt. Employers who offer plans with HSA’s may put money into your HSA or match funds that you put in. It’s important to know what your employer does and what you can do to maximize your benefits.

More Resources:

https://www.nerdwallet.com/blog/health/health-insurance-guide/

https://www.nerdwallet.com/blog/insurance/disability-insurance-explained/

https://www.nerdwallet.com/blog/health/dental-insurance/

https://www.nerdwallet.com/blog/health/vision-insurance/

https://www.nerdwallet.com/blog/health/what-is-an-hsa/

We hope we’ve helped you understand all of this a bit more. If you’re still feeling confused, we invite you to join our private Facebook group and ask all of your questions there.

Tara Unverzagt August 29, 2019 No Comments

How I started Adulting

Hi all, Tara here! Recently a friend reached out and asked for some advice on how to best navigate post grad finances and “adulting”. Like so many other young adults, he was wondering how start working toward financial success while managing student loans, new jobs, and all of the other exciting, but overwhelming things that come after college. So, we wrote a few different blog posts to answer his questions (jump to the bottom of this post to find the list of these posts).

But his inquiry also inspired me to share my story with all of you. So without any further ado, this is the story of how I started “adulting” and navigating MY finances. Enjoy! And yes, that is me on the left!

I remember when I first graduated college.

I was super excited to start a real job. I had been freelancing through college and interned at a software company. All that seemed like small fries to this new, big job at Xerox Corp! The only problem (and I’m the only one who is going to see this as a problem!) was that it was in Los Angeles. I really wanted to go to the east coast, Boston in particular. Somehow I took a wrong turn and ended up on the left coast.
I was anxious to get started. The week after graduation, I got everything home from college. My furniture consisted of moving boxes, milk crates, plywood, and a foam fold out couch that served as a bed. I lived “ready to move” because I moved a lot in college.

At home, I filled a quarter of a moving truck (I have no idea who was in the other three quarters) and headed west. About a week after graduation, I had moved in with my grandmother who lived in the OC. That was handy. She drove me around looking for a car. There is nothing worse than negotiating a good deal with a car dealer with your grandmother all dressed up in high style and lots of jewels on. We had to explain “No, I’m paying for this. Grandma isn’t ‘helping out’!” I got a Doge Colt with no radio, no air conditioning, and no power anything. But it was CHEAP! and I could pay cash.

I was lucky enough to work my way through college, got a one-year Air Force ROTC scholarship (I just couldn’t sign away six years of my life going into Junior year), and lived like a starving college student. All that effort meant I graduated with the $10,000 that my parents had given me to pay for college.

I would love to take credit for great planning but the fact is the $10,000 was in a Treasury Note (earning about 15% interest, I might add!!! Compared to today’s 1.3% – 2% interest that Treasuries are paying!) I had forgotten about the money my folks were giving me and worked and saved through college. It wasn’t until years later that I realized I had put myself though college (with the help of the Air Force and generous employers/clients).

I was lucky to start debt free.

Starting out debt free was a fantastic advantage to me. Not many parents and students have that luxury today. Although, I find a lot of people end up with more student debt than they intend because they just aren’t paying attention or planning for the future. Both are easy traps to fall into that everyone does fall into at some point in their life. And I say this now just because if you are reading this and IN college or about to go to college (or parents of college students), you still have an opportunity to pay attention and plan (read more in our student loan 101 blog post HERE).
Once I got my car and started my job, about two or three weeks after graduating, I was working a full day and living in a hotel trying to find a place to live. I grew up with a financial planning mother, so I knew I wanted to keep my housing under 25% of my pay check. Not an easy feat in the LA area. And made harder because I just didn’t feel like I had enough time after work and on the weekends to do the research and find a place. I didn’t have the luxury of internet. I was looking through the paper’s want ads and driving around. Today it would be far easier and can have more work done remotely. But I can’t imagine that it’s “easy” even with technology.

I was also having an issue because the places I was renting from wanted a check with a local address on it. And I couldn’t get a local bank account until I had a local address. How is that supposed to work!?!? A family friend in the area helped me out. But I wonder to this day, how would I have resolved this without my network stepping in to help?

Luckily, I had enough money after buying my car to pay for first and last month’s rent. I also had a little extra to buy bare necessities in my new apartment. I was up and running but looking forward to that first pay check to fill my bank account a little more.

The first days of work were filled with filling out paperwork. Today it’s even worse because corporations back then paid for medical insurance, disability insurance, vision and dental insurance, and they had a pension plan. There was no 401k when I first started working. But there were IRAs. My financial planning mom said “Put $2,000 in every year. Buy one stock and in no time you’ll have a diverse portfolio.” I did that and still have many of those same stock in my portfolio today. And yes, they are worth far more than $2,000 today.

What would I have done without a financial planning mother?

I probably wouldn’t have started investing as early. And if I did, I certainly wouldn’t have known what to invest in. I was a computer programmer, not an investor. I did go to a financial advisor when I first started my job. He asked “What are your goals?” I said I didn’t have any. He asked “Do you want to buy a house, have a family, when do you want to retire?” I had no idea if I wanted any of those. I could just as easily see myself staying single and traveling the work picking up odd computer programming jobs as any of that. The advisor said he couldn’t help me. Hmm…

Today my kids and their friends are going through all this and it’s so much harder. Just getting a job today is hard. You can’t get a job unless you have previous experience, but how are you supposed to get previous experience if you never had a job. It certainly takes grit and planning to navigate today’s adulting process. And if you’ve successfully landed a job out of college, kudos to you! And if you’ve taken the freelancing path and have work (maybe not in the black yet, but have work), also kudo for the bravery and hard work to get there.

If you’re still looking for work, you are not alone and do use all your resources: college placement offices, county and state services, networking events, your family and friends. And keep busy, volunteer anywhere or do odd jobs/consulting/freelancing. Show that you can show up every day, meet deadlines, and put in a good day of work. That will take you far. You’ve got this!

Read more from our blog posts on how to best navigate post grad finances and “adulting”:

– How to Calculate your Cash Flow

– Five Steps to Financial Success

– New Job Confusions (What are 401ks, anyway??)

– Student Loans 101

What next?

Have you joined our FREE Elite Facebook Group that’s all about opening up conversations about money for Millennials? If not, what are you waiting for?

We understand that many financial problems start because most individuals DON’T talk about money and therefore DON’T know how to approach money decisions. But we’re different. We LOVE talking about money! And we are here to talk about it with you! So, we’ve created a safe space where we can talk all. things. money.

Want to join us? Click HERE -> http://bit.ly/SBFPMoney-Join

Tara Unverzagt February 8, 2019 No Comments

3 Spending Best Practices to Help You Feel Less Uncomfortable with Your Financial Situation

“How am I doing financially? Am I ok?” I hear these questions frequently. And there are other frequently asked questions. “Do I have enough money for emergencies?” “How will I pay for college for my kids?” “Can I afford to spend money for [fill in name of your dream money sink hole] now?” Whether they want to buy a new car or remodel their kitchen or they get a sinking feeling when the stock market drops, most people are uncomfortable regarding their finances. Frankly, being a little nervous about your finances is a sign that you’re paying attention which is good.

“If I buy this car now, will that impact my vacation plans?” Maybe. It’s not a simple question to answer. If you have read past articles, you’ll know that I’m a big proponent of “spend less than you make,” a concept that’s easy to understand and, oh, so difficult to execute. If you spend less than you make, you should have a stash of cash to use for things like buying a car — without needing to take out a car loan. Okay, so far?

Three concepts to consider when spending money

1. Money in the bank is for spending, right?

“If I have enough cash in the bank to pay for the car, I can afford it, right?” I used to run the numbers for people to see how reducing their net worth by $XX,XXX will impact their goals. Even that seemingly simple question may not have a simple answer. Sometimes, it’s easier to reach long term goals if you move the money for it out of your bank account and into a long-term saving account.

2. Don’t just consider THIS purchase.

Sharon and Steve like to cook. They spend all their free time in the kitchen. A big part of their budget is spent on food and pots & pans. They spend less than they make and have a budget that works for them. They asked me whether they can afford to remodel their kitchen to make it a really wonderful place to cook in. I looked at their lifestyles and how that expenditure might impact their overall objectives. The numbers said yes, they have been saving money and have no debt; they should be able to afford the new kitchen and still meet their other goals.

I also knew that, if they remodeled the kitchen, there was a good chance they’d go out for dinner and entertainment less because they’d be enjoying their new kitchen. I knew they wouldn’t be back next year asking whether they could afford to buy a fancy car or go on a luxury trip. Cooking is their passion, and the remodeled kitchen will help make their lives more enjoyable for years. Sharon and Steve aren’t spending to make themselves happy. They are already happy, and their new kitchen can help them enjoy their hobby even more.

Zach and Kimberly asked me whether they could afford to buy an expensive car. I looked at the numbers and, yes, they could afford to buy that car. It wouldn’t impact their long-term objectives much. But they always struggle to spend less than they earn. They often turned to debt to pay for things they want. Given their spending habits, they will likely be back next year wanting to take their family to Asia. The year after they will want to remodel the basement. Their list will go on and on.

The new car will make Zach and Kimberly happy right now, but they probably won’t really be satisfied or happy in the long run. They need to reflect on the “need” they are trying to satisfy and address that first. Are they just bored, looking to impress their friends, or in some other way not happy with their current car? Until they know the answers to those questions, they shouldn’t buy that expensive car.

When making any important decision about spending, you need to stop and think about your values and your long-term goals. Think about a major purchase you made five years ago. Do you even remember any? If you do, is it important today? Is there something you’d like to buy today that is more important than that was? What might you want to buy five or ten years in the future? Is that more important than what you’re thinking about buying today? Money spent today is money that you don’t have tomorrow for something that may be more important to you.

3. Money Doesn’t Buy You Happiness

Money enables you to have choices, but there’s no guarantee that it will make you happy. Much research has been done on people who received a windfall of money and spent it within a few years, buying everything they thought would make them happy. In the end none of those purchases increased their level of happiness at all, and they often ended up as poor as or poorer than they were before. (As a matter of fact, a study showed that even the neighbors of a lottery winner often ended up poorer in the long run, too!) What went wrong?

Someone recently said, “The people I know who ‘made it’ and are wealthy are the only people that know what money can’t do for you.” If you’re thinking “if I only had more money than…, I’d be” – happy, respected, secure; know that those feelings can’t be purchased by money. You have to find happiness yourself. And it could be as simple as changing the stories you tell yourself.

Your Budget Tells Your Story

Spending less than you make is the goal. If you find it difficult to achieve this consider what’s important in your life and make sure that every dollar is used to enrich your life and bring you satisfaction. We find that apps like YNAB can help you get organized, see where your money is going, and make sure you get the most out of every dollar. Take control of your spending and don’t let marketing, your friends, or your family make you feel badly about how you live your life and spend your money. Let your budget tell your story and be proud of it.

Ready to Gain Control of Your Financial Situation?

Enter our BRAND NEW Financial Coaching Program.

Our Financial Coaching Program is truly the first of its kind, and allows you affordable access to a financial planner. Most Financial Planning options are set at an incredibly high price point. Not this program. This program is affordable and is aimed at working on all things finance 101 – still alongside an experienced financial planner!

This program allows us to easily serve as your financial coaches and help steer you in the right direction. We’ll accomplish this through a series of meetings in which we establish tangible goals to work towards, and discover your emotional drivers behind all of the decisions you make. By coupling your goals and your “Why?”, we’re able to help keep you on track by channeling your core values rather than just throwing numbers at you.

Once we’ve established your goals and your “Why?” we take a deep dive into your current financial life.

Accountability and follow through are keys to the success of this program, and are why we firmly believe that, together, we will be successful in reaching your goals.

With the South Bay Financial Partners Financial Coaching Program you can expect to live a less stressful and more fulfilling life by changing the way that you manage your finances.

Interested? Schedule a call with us HERE to learn more!

Tara Unverzagt February 1, 2019 No Comments

What’s Holding You Back? – A Reflection on Financial Success

Let’s take a moment to reflect today. What are your financial goals? What are your life goals? Almost always, there is overlap between them, and that overlap usually is happiness. What is happiness for you?

A partner whom you love and who loves you? Children who are happy and healthy, who are able to pursue their goals in life, and who love and are loved?

Enough money to buy and do what you want whenever you want it?

A debt-free life?

Whatever goals you’ve identified for yourself, do you have a realistic action plan to achieve your goals?

(As tempting as they are to imagine, winning the lottery, inheriting money from unknown sources, inventing some unidentified do-hickey that everyone will buy, being discovered somewhere unexpectedly and becoming a movie star probably don’t fit the criteria for a “realistic” action plan.)

Previous articles have offered realistic roadmaps for your success. Have you been able to stick to a plan for budgeting, spending, and saving? Investing, compounding, harvesting your rewards? “Spend less that you make.” “Have a regular savings plan.” “Buy low, sell high.”

On paper, at least, financial planning sounds easy, right? Why are so many people unable to get their financial house in order? There are more answers to that question than can be answered here, but if you still struggle with finances, you may need to start with looking at yourself and identifying some of the bumps on your road to success.

Are you telling yourself money stories that aren’t helping you?

They may involve buying rewards for yourself because “you deserve it” or spending too much money going out on the weekend because “life is short” or “spending time with friends is important.” Both sayings are, no doubt, true, but are there ways to do them honor without spending too much money? Maybe you tell yourself that buying a big, beautiful house is always a good investment. Guess what? Even a house can be just another consumer good that’s draining your bank account.

Sometimes you can’t tell your family and friends that you can’t afford to do what they’re doing. I’ll let you in on a secret: there’s a good chance they can’t afford those things either. They may be going into debt living the life “they deserve” or “they expected.” Don’t follow them down the path.

Take a hard look at what’s important to you.

Does your budget reflect your values and your goals? Or do they reflect the values of the “friends you keep.” Sarah Newcombe, a senior behavioral scientist at Morningstar, Inc., says that comparing ourselves to others is hardwired into our brains. She recommends choosing carefully whom you compare yourself with. If it’s Kim Kardashian and you realize she doesn’t really represent who you want to be, you might want to choose a new role model. A better model might be the quiet, unassuming millionaire next door who doesn’t drive a fancy car but was able to pay his kids’ college tuition without going into debt.

Decide what’s important to you, find a healthy role model who has achieved what you want to achieve, and then compare away. Newcombe says that your odds of being satisfied with your finances and life will increase with a healthy financial role model.

If you need help figuring out what you want from life and your money, contact us at South Bay Financial Partners. We can help you put the pieces of your personal puzzle together to make a beautiful picture that we call our lives. Schedule a FREE consultation with us here >> https://calendly.com/SBFP-Call

admin September 28, 2018 No Comments

Student Loans 101

Written by: Stuart Pyne, Associate Advisor at South Bay Financial Partners.

College is supposed to be “the best four years of your life,” filled with long hours at the library, meeting lifelong friends, and creating experiences you’ll have for the rest of your life. Simultaneously, it has also become “the most expensive four years of your life,” and, for most people, making decisions about financing your education, student loan options, and the inevitable debt begins at the ripe old age of 18. As a high schooler, you’re faced with one of life’s biggest decisions at a time when you’re still developing. Trying to decide what you want to do for the rest of your life can often seem daunting, but, nonetheless, you must make a decision. Deciding which school to go to and what to major in will have countless impacts on you for years to come.

As a recent graduate of Case Western Reserve University in 2016, I have found there is no worse feeling than having debt lingering over my shoulder, especially at the age of 22. Having learned from my mistakes–and my successes–I hope that this article will help those of you who are preparing yourself or a loved one to go to college. If I could go back and speak to 18-year-old Stuart, I would share some thoughts that I’ll cover in a series of articles starting with this one.

The Different Types of Student Loans

Student loans come in many different shapes and sizes. Before choosing any of them, you need to understand the differences among all of the options that you could be presented. They break down into two categories: federal and private.

Federal loans are offered through the U.S. Department of Education as either Direct Subsidized, Direct Unsubsidized, and Parent PLUS. Subsidized loans come with slightly more favorable terms but are strictly provided to students who meet the requirements of being in “financial need.” The main benefit to Subsidized loans is that they are offered at a low-cost and fixed rate, with the interest being paid by the government while you are in school, hence the term “subsidized”.

Unsubsidized loans are available to everyone and also come low-cost and at a fixed rate.  The key difference, however, is that the government does not pay for the interest that accrues on the loans while you are in school, which means you are on the hook for a larger bill.

Parent PLUS loans are available to parents who are paying for their dependent children’s college costs. Because they come with higher interest rates, students and parents need to utilize subsidized and unsubsidized loans before considering taking out a Parent PLUS loan.

On the other hand, private loans are taken out from banks, certain states, the college or university, and other non-bank financial institutions. The rates and repayment terms vary by institution, personal credit scores, income level, debt-to-income ratio, etc., very similar to any other loan you would take out from a private institution. Due to the lower costs and repayment terms of Federal loans, a general rule of thumb is to explore those first and then pursue Private loans after you have shopped them, to ensure that you get the best possible rates and terms.

Best Practices for Student Loans

Understanding different types of student loans is important but equally as important is knowing how to utilize them. Obviously, there are many different factors that will be in play, such as money or investments that can be used, eligibility for financial aid or scholarships/grants, and ability to work while in school, so each individual’s situation will be different. Your best option is to sit down with an expert and make your decision based on your personal situation, but I will lay out a general blueprint that you can follow when you are considering student loans.

If you qualify for Subsidized loans, it is of utmost importance to make sure you utilize these first, followed by Unsubsidized loans. Following those, you can consider private loans up to the amount that is needed to cover the total costs of attendance.

Note that if you don’t use a Direct Loan one year, you are not allowed to go back and reclaim it for the current year–they are very much “use it or lose it”. A common mistake people make is failing to budget their resources for all four years and running out of resources the final years and, consequently, being cornered into taking more expensive student loans.

If, for example, you have $20,000 saved and allocated for costs of attending, you’re better off allocating $5,000 per year to tuition from a 529 account in order to maximize the number of Direct Loans that you are eligible for. Below is a chart that shows how much in Direct Loans you are eligible to receive per year for an undergraduate student who is still a dependent of his or her parents.

 

$5,500 total, no more than $3,500 Subsidized $6,500 total, no more than $4,500 Subsidized $7,500 total, no more than $5,500 Subsidized $7,500 total, no more than $5,500 Subsidized
Year 1 Year 2 Year 3 Year 4

Considerations When Picking a College

There is absolutely nothing simple about college planning, and, unfortunately, understanding the types of student loans is only one piece of the puzzle. Deciding which college to attend goes beyond just a school ranking, location, major, etc. For best college planning, you must analyze all of your and/or your child’s financial and academic information to determine eligibility for need-based and merit-based financial aid, which can then be referenced against a list of schools to maximize scholarships. In addition, it’s important to understand the differences among schools and how they award financial aid.

The sooner you start planning for the cost of college the better. For parents, spending time planning when your children are young, picking the right school when they are in high school, and planning how you will fund each year can reduce the amount you may need to borrow and the types of loans you have access to.

Tara Unverzagt August 7, 2016 No Comments

Think about Medicare BEFORE turning 65

While talking to a friend who recently turned 65, he asked “Do you warn your clients about all the decisions they have to make when they turn 65?” I thought he was talking about planning for Social Security and the best strategy for collecting your benefits. In fact, he was talking about Medicare. And no, I don’t normally talk to my clients about that and decided I should.

As you approach 65, you have a few months to decide what kind of Medicare you want. Perhaps you didn’t know there was more than one flavor of Medicare, which is where problems can start. Unfortunately, you could be faced with late enrollment penalties if you aren’t ready to make the decisions. While signing up on time is important, you have the opportunity to change your Medicare choices annually.

If you receive Social Security, you will automatically be signed up for Medicare on the first day of the month that you turn 65. My birthday is June 23, so Medicare can start on June 1st for me. If you are on Social Security because you are disabled, you will also automatically be signed up for Medicare, even if you are not 65.

It’s common, and often a good idea, to delay taking Social Security until you are 70. If you decide to wait to take Social Security, you will have to take action to enroll in Medicare at 65.

Being “automatically signed up for Medicare”, is actually an over simplification because there are four parts to Medicare, Part A, B, C, and D. When you are automatically signed up, you are signed up for “Original Medicare” Part A and B. That may not be what you want to do, though.

Part A covers things like hospitals, hospice care, home health care, and skilled nursing facility care. Part B covers doctors and other health care providers, outpatient care, home health care, some medical equipment, and other health care needs outside a facility.

You have a choice between Original Medicare and Part C, Medicare Advantage Plans. If you choose Original Medicare, you choose the doctors and facilities you want to go to for health care needs.

Most people pay Medicare taxes as part of their payroll taxes when they are working. If you do, Part A is free and Part B typically costs $104.90 per month. High income individuals and couples may pay more. You may also end up paying a late enrollment penalty if you don’t sign up during your initial eligibility period.

With the Part A and B Original Medicare plan, you typically pay a deductible before Medicare starts to pay. You also pay a copayment (for example 20% of fees charged or possibly a flat fee such as $10 or $20 per visit) for service from your doctor or facility. There are no out of pocket limits with Original Medicare.

With Medicare Part C, Advantage Plans, you are limited to a select group of doctors and facilities, similar to an HMO or PPO. As a matter of fact, you might be able to continue your current plan. For example, if you are currently using Kaiser Permanente in Southern California, you can continue to use them with the Medicare Advantage Plans (some services and fees may be different on Medicare). Medicare Advantage Plans have all the same coverage that Medicare Part A and B have and your specific plan may have extra coverage like vision, hearing, and/or dental.

If you choose to enroll in a Medicare Advantage Plan, you are still part of and pay for Part A and B, the same as on the Original Medicare, but you may also have to pay an additional Part C premium payment. Often you don’t have a deductible, such as with HMOs, but you may have co-payments. If your Advantage Plan is a PPO (preferred provider organization), you may have reduced deductibles and co-payment verses Original Medicare.

You may want to choose Medicare Advantage to stay with your current doctors and facilities at a lower rate. If you’d like to have more choices, you may want to choose Original Medicare. Don’t wait until you turn 65 to look into and consider your options or you may end up paying more. Starting a year or two before, will give you plenty of time to consider all the options.

In the future, we’ll look at Medicare Part D, Prescription Drug Coverage and supplemental insurance. It’s not easy growing older and it’s worth planning for a successful transition.

You can find out more about Medicare at Medicare & You 2016.

Contact me, if you’d like to know about this or other financial planning, investment, or tax topics. If you found this article useful, subscribe to have all articles emails to you.

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Tara Unverzagt July 18, 2016 No Comments

Index funds are safe, right?

My last article showed how you could work towards a carefree retirement like my grandfather had by looking at your spending and saving choices today. Your spending and saving decisions are the number one behavior that affects your financial life. Once you have that under control, you hopefully have money to invest. What do you do now?

What Now?

Let’s look back to what happened before 1980. That’s more realistic going forward than to expect a return of the high flying 1980s. For those who survived the 1980-2010 roller coaster with savings intact, interest rates could go up long term, but “normal” pre-1980 interest rates were just a few percentage higher than current interest rates and the stock market is a bit high, but about where it should be.

Buying low and selling high is still the way to make your money work for you. Unfortunately, the way we’re wired, we love to buy high, when investments are exciting. Then we want to throw in the towel when prices are low. This is a formula for failure.

Stocks are often the investment to emphasize but sometimes more in bonds are called for. Sometimes cash is king, when interest rates are super low and the stock market is valued high (sound familiar?) Most people think this ratio depends on your age, but that’s not the only parameter to look at when deciding your “asset allocation,” or how much you invest in bonds vs stocks vs cash vs any other investment choice.

A huge portion of money today is being invested in basic, low fee investments, like index funds and ETFs (Exchange-Traded Funds). You won’t “beat the market” but you’ll do as well as the market, right? Maybe, maybe not. Not all index funds and ETFs are created equally. You still need to do your homework on the fees and what they invest in. And know that when you buy an index fund to “match the market”, you’re choosing to buy the big losers as well as the high flyers.

Sears was in the Dow until 1999 when it went from a high of over $60 in 1998 and tanked to below $40 in in 1999. If you were invested in the “index” you would have held Sears to the bottom before being rid of it. Individual stock holders could sell long before it hit bottom. Sears wasn’t removed from the S&P 500 until 2012 when its value was below the required threshold to be in the S&P 500.

The index funds have helped investors that buy individual stocks because the index funds have distorted the price of some stocks and created market inefficiencies. When a bunch of money goes into an index fund raising a particular stock price higher than it should be, it’s a great time for someone who owns that stock to sell and take a profit. The person with the index fund will just hold on to it while the price peaks and then sinks. On the other hand, if a stock is undervalued, the index doesn’t take advantage of the bargain and buy more shares. And, as in the case of Sears, the index may hold on to a tanking stock that should be sold.

In addition, asset allocation at any given point has been shown to be far more important to wealth accumulation than what particular stock or bond you buy. If you always keep the same asset allocation, you will sometimes be over invested in stocks and under invested in bonds (see below for a time when investing heavily in bonds made sense) or vice versa. While no one has a crystal ball telling them the highs and lows of a market, there are usually pretty good signs that an asset class is in the range of the bottom or the range of the top. Right now both stocks and bonds, overall, are overvalued. What will you do?

The answer to that question is not simple or straightforward. It depends on your individual situation. The internet will give you great generic advice, but I’ve never met a generic person. Talking to a professional can help you sort through your priorities and risk tolerances. For example, someone that has a million dollar income will deal with risk tolerances differently than someone who is living pay check to pay check. If you are planning for just retirement, you will plan differently than if you have to pay for your kids’ college before retirement.

What Happened?

Investing was far easier for my grandfather then for you or me. Interest rates were pretty steady, between 2% and 5% most of his life. In retirement, interest rates went soaring to a peak of 15% in 1980, the highest interest rates of all time. Having reliable, steady, high interest rates in retirement is so sweet!

The stock market was a roller coaster during his lifetime, as it has always been and always will be. The Dow Jones Index went from around 1350 to as high as 7000 before returning to below 3000 before he died in the early 1980s. If you were invested in stocks back then, utilities were where you found the best growth. The Dow Jones Utility Index went from just over 10 in the early 1940s to as high as 160 by the 1980s, or about a 7% annual return.

Life changed in the 1970s when I was a kid and my parents were saving for the future. Interest rates went crazy, as did inflation. From the “bumping along” 2%-5% rates, interest rates shot up in the late 1970s to early 1980s. This turned all investing heavy into bonds and the stock market was flat 1965 to 1972. Life was uncertain and scary for most of us. Buying a house with a mortgage interest rate as high as 20% was daunting to many, prohibitive to most. Grandpa’s generation was happily retired invested in bonds at those high rates with a steady retirement income as a result.

Investing has always been complicated, but probably more so today than ever before. We think 1980-2010 was “normal”, but it’s no longer relevant. Our journey through our working and retirement life is nothing like Grandpa’s journey. So while he taught me a lot, I have to figure out this one myself.

The information given here is general in nature. If you would like to know how it pertains to your particular situation click “contact” above. If you found this or any of the other articles interesting, please subscribe at the bottom of this page.

photo by https://www.flickr.com/photos/ecotravols/

 

Tara Unverzagt July 5, 2016 No Comments

I Want a Carefree Retirement

Knee deep in debt, Bob and Carol were trying to decide if they should raid their retirement account to pay for the rest of the kids’ college education or if they should take on more student loan debt. Both choices made them sick to their stomach to think about. Either way, they couldn’t see a comfortable retirement in their future. It’s a situation that’s all too common today.

Life was different during our grandparents’ era. My grandfather, for example, went to college and paid for it himself. He became a civil engineer. My grandmother owned a beauty salon and together they raised three children. All three kids went to college, paid for with cash from my grandpa’s job and savings and their children paid for part of the expenses with summer job money. All three kids went on to live very nice middle class lives. Grandpa retired to a life of leisure full of golf. Grandma’s retirement revolved around church, singing in the choir, helping her friends, and taking care of the house. They liked to travel, especially to Florida for the winter.

It would be lovely if that was how our lives went, but it isn’t, we’re more likely to be in Bob and Carol’s situation. In Grandpa’s days, having debt would have been an embarrassment as well as scary. Coming out of the Great Depression, you might buy something on lay away, where you paid a little every week until you fully paid for the item and took it home. Otherwise, owing someone money was frowned upon.

Somewhere along the way, the finance companies talked us into thinking it was ok to use debt to pay for everything. You could buy anything on a credit card and make low monthly payments. Nowadays, many don’t even own their car. You carry the debt for the car that’s owned by the dealer. [Debt can be helpful see Use Debt to Your Advantage]

Grandpa had it right by not using debt to pay for goods. Using debt to buy consumables like a car or everyday items will make you poor. Once you take on debt, your expenses go up with debt payments. A $25,000 car turns into a $450 per month payment for five years or over $28,000 total. If you saved that $450 per month BEFORE you bought your car and invested it, you would only need to put aside $22,500 and you could do it in just over four years. That’s almost a $6,000 difference. What could you do with $6,000?

For many of us, our retirement years will be very different than our grandparents’ retirement. My grandpa had a pension, plenty of savings, Social Security at 65, he didn’t have to deal with high health care costs, and was debt free his whole life. I don’t have a pension, won’t be eligible for full Social Security benefits until 67, will have to pay for more of my health care costs, and cope with a home mortgage. And many will be dealing with their kids’ college debt as they try to retire. We will have to work a lot harder to get that comfortable, carefree life, plus we will live much longer lives than previous generations. How will we fill all those extra years and how will we pay for them?

Some people don’t want to retire at 65, they love what they do. My advice to these people is keep working. There’s a good chance you can work until 70 or even 80 and still have plenty of years to relax in retirement. The extra money will help finance those extra years. If you’re to the point where you need a change, consider a completely different job using the expertise you’ve gained. For example, you could teach math instead of working as an engineer. You could also consider a more relaxed job involving a hobby. One of my clients loved playing tennis and ran the club house at his tennis club when he retired. He was able to see his friends, make a little money, and play tennis for free. Or if you’ve saved enough to last a long retirement, you could consider volunteering at a charity that inspires you. You won’t make money, but will have purpose in life which research has shown is a key component to successful aging.

So why do we need to work longer these days than in Grandpa’s time? A lot of factors come into play. The only retirement plan most of us have today are the ones we fund. Companies decided they didn’t want to take on the risk of investment markets not doing well, so they pushed the risk on their employees. Healthcare costs have gone up and companies push more of the cost to the employees. More people are self-employed where you pay for everything and everything is going up in price.

Life has become much more complicated to manage. Today, we expect to have choices. Some people want to be able to pay more for insurance to go the doctor of our choice while others want to save money on their insurance and don’t care which doctor they go to. While choices are good it can be hard to know which choice is right for you.

The truth is, your retirement success is not affected as much by the outside world, as by your spending and saving habits. Just like always, spending less than you make leads to financial success. If you lose a job, you have to cut back. If college is too expensive, you can to consider a less expensive college, try two years at a community college (no one asks where you completed your Freshmen and Sophomore year), or have your child participate in a work/study program to help pay the cost of college. A much bigger part of your paycheck goes to healthcare which means you have to cut back somewhere else. Your car? Your home? Your hobbies? You have to choose insurance and retirement programs to meet your needs. That takes education and planning.

Take a moment to visualize your future self. What do you want your life to be like? Feel how comfortable life would be if you could choose to work, play golf, or travel. Then look at what could get in the way of getting to that retirement. What can you do now, in the next year that is totally achievable to help make sure you achieve that retirement? Is your comfortable retirement worth enough to make a commitment to your one year plan? When you’re tempted to spend money on those lower priority items, think about your future self and consider “paying” him/her by putting that money in your savings account instead.

Control your spending and save for your future. Think about working a little longer since you’re going to live a little longer. You too can have that comfortable retirement that my grandparents lived.

Contact me if you’d like a carefree retirement.

To find out ways to invest for retirement, check out Part 2: Index funds are safe, right?

Photo by Extra Zebra; https://www.flickr.com/photos/23438569@N02/