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Budgeting for Coffee Sucks, Try This Instead

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Trying to cut back on your spending gets tedious when you focus on minute details. Yes, it’s important to track every dollar — but to feel anxious about spending on small purchases that you value because you’re trying to save more and spend less? That can quickly lead to budget burnout.

 

Preparing for and responsibly purchasing big-ticket items (from a laptop to a car to a house) is much more important than counting every last penny. Think about it. Does it make sense to stress over buying a coffee or spending an extra $1.99 to add guacamole but to have zero plan when it comes to major purchases?

 

Quite frankly, budgeting for coffee sucks — and it’s not worth your time or effort to pour your energy into everyday items instead of looking at the big picture and failing to prepare for big expenses.

 

You want to make responsible decisions on the big stuff. A few coffees won’t break the bank and deserve a place in your budget if your daily latte is truly important to you.

 

But buying “too much car” or “too much house”? That’s where you can run into major financial trouble.

Cutting Out Lattes Just Doesn’t Cut It

Focusing on small expenses, like your coffee fix doesn’t do much to impact your budget, cash flow, and ability to save and invest if you fail to examine your larger purchases.

 

If you spend $5 every single day of the year on coffee, you will spend $1,825 throughout the year. Now, that’s no small number. But perhaps all you need to do is cut your coffee consumption by half. You still get to enjoy your latte multiple times per week while also saving $912.50 per year.

 

Compare that to obsessing over the tiny costs and nickel and diming yourself. You’d save some more. But you’d also likely be stressed out and less happy. And the bigger issue? You might exhaust your decision-making power by constantly denying yourself a small pleasure.

 

You need that financial willpower more when it comes to big depreciating things, like cars and boats, etc. Let’s image you purchase a car today and lock into monthly payments of $250 for five years. That means you give up more control in the future on what you can afford to buy(and how much you can save and invest) because the $250 is already accounted for, every month, for five years. All in, that’s $3,000 a year and $15,000 over five years!

 

It’s a much more dramatic impact than budgeting for coffee.

 

The Impact of Big Expenses on Your Budget Over Time

 

Take this one step further. Say you spring for the extra fancy model of the car. If your monthly payments were $500 for five years because you financed a more expensive car, that’s $30,000 worth of cash that you devote to this one expense.

 

That’s the other thing about budgeting for coffee: you can change your mind anytime about how much you’re comfortable spending on those little things. Big purchases that you pay for over time? Not so much. You commit your future budget to being limited for years.

 

If you took that same (lower) car payment of $250 and invested it instead every month over five years, you would have about $17,000 assuming a 5% rate of return. Leave that money alone for 30 more years until retirement, and at 5%, you’ll have $73,500.

 

It’s important to think bigger and look at big-ticket items that can drain your cash flow for years to come. While cutting things like a daily latte can help you reduce costs, prioritize preparing for bigger purchases first and don’t set yourself up for failure by depriving yourself small pleasures like coffee from your favorite cafe a few times a week.

 

Instead of Budgeting for Coffee, Create a Big-Picture Plan

 

Try this relatively simple process to review your big-picture budget without getting into all the details of every single purchase:

 

Take your last pay stub and find the net amount (after taxes and deductions for your retirement account, health insurance, life insurance, etc.).

If you’re paid once a month, the net amount on your last pay stub is what you want. If you’re paid twice a month, multiply the number by two. This is your net monthly income.

List every single fixed expense you have and how much each one costs you, on a monthly basis. These expenses may include your mortgage, utilities, insurance, other debts to repay, taxes, etc.

Add up the monthly cost of each fixed expense.

Subtract the total amount you spend on fixed expenses in #4 from the net amount you earn each month from #2.

The difference is the amount you have to spend each month on everything else, including savings.

 

The best way to increase your discretionary spending (and more importantly, your ability to save), is to knock off or reduce some of the fixed expenses.

 

This may mean spending a couple of hours shopping for cheaper car insurance. Or, if you’re spending more than you earn each month, it may mean a change as drastic as moving to a less expensive place to live.

 

Here’s an example:

 

Net monthly income = $6,000

Fixed expenses = $4,000

Difference = $2,000

 

That $2,000 has to cover all your food, gas, entertainment, gifts, shopping trips, everything for the month. That includes savings and other investments outside what you automatically contribute to retirement from your paycheck.

If it’s not enough, look at your large recurring expenses and see what you can cut. You may need to sell the expensive car and get a cheaper one. You may need to reconsider major luxuries in your lifestyle that seriously drain your budget of cash to put on things that are ultimately more important to you — like being able to travel, save for a big goal, or retire sooner to spend more time with your family.

 

In Times of Change, Focus on Your Financial Plan

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No one can guarantee when the markets will go up or down. Lots of talking heads and so-called “experts” like to claim they know when factors like news items or current events will impact how the stock market behaves, but it’s all guesswork.

It’s extremely easy to get caught up in a 24/7 news cycle that produces headlines and predictions meant to invoke emotional reactions in viewers. But the key to long-term financial success is tuning out the noise and understanding that ups and downs happen.

We know markets can be volatile. That’s part of the price paid to invest and earn more money than you could almost anywhere else — and it’s also something to account for in a comprehensive financial plan.

The only certain thing is that the market will rise and fall. We don’t know exactly when. All the noise from reporters, TV hosts, or others speculating about what the market will do next because of elections, the Fed, or whatever else they point to as the why behind their guesswork only serves as a negative distraction.

Instead of panicking and reacting based on what you hear on the news or from folks at work, you can create and set a financial plan, tailored specifically to you, based on reasonable, objective decision making (instead of emotional and irrational). A great financial plan accounts for your goals, your risk tolerance, and your concerns — and it means you already know what to do when others threaten that the market may take a turn due to whatever people happen to be worked up over today.

What Does It Mean to Have a Comprehensive Financial Plan?

A comprehensive financial plan is specific to you. It includes factors like:

  • Your goals (saving for a house or a child’s college education, retiring early, starting a business, and so on)
  • Your income
  • Your cash flow
  • Your tax situation
  • Your target retirement date
  • Your future earnings and income
  • Your risk tolerance
  • Your time horizon

Note that each of these components of a financial plan starts with “your.” That’s because a comprehensive financial plans starts with you — not the news, or the global markets, or future predictions.

And of course, a financial plan can include more than just what’s listed here. Again, the theme is you. What’s important to you? That has to be factored in.

While investing is an important part of achieving your long-term goals, focusing solely on investments alone is similar to running around a hamster wheel. There will be highs and lows, but if you aren’t working toward something, you’re just running in circles.

Investing coupled with a comprehensive plan that looks at the big picture ensures you are investing appropriately for your situation and making progress toward your goals.

Don’t Panic and React with Emotion

One of the most important benefits to having a financial advisor is that they can serve as a gatekeeper to keep you from reacting emotionally and totally derailing your financial plan. When markets tank (like they did in 2008 and 2009), people start to panic.

As they watch the markets fall, they react emotionally. They can’t stomach losing so much money. They freak out! And then they sell at the absolute worst time: when markets are already down!

Keep in mind that after you sell at the bottom, you won’t know when to buy back in — and that often leaves people buying at the top of the market. Selling low and buying high is the opposite of prudent investment advice. Meet the “behavior gap”.

Think of it this way: you wouldn’t go to a store and specifically not buy something because it was on sale. It’s the same way with stocks. When they’re down, they are “on sale.” This is the rational, objective way to look at the market.

But when it’s your money and your net worth you see taking a hit because the market dropped, it’s extremely difficult to maintain that mindset and act rationally. Again, most people panic and never dream of buying because it really hurts to see those red down arrows next to your investment balances.

An objective third party can help you prevent such a huge mistake. A financial planner willing to act as your fiduciary will remind you of your comprehensive financial plan that was already built assuming there would be market volatility.

In short, that means your planner can give you some of the most valuable advice you can ever receive when everyone else is panicking: don’t deviate from your plan! That may mean staying the course and taking advantage of this latest ‘sale’.

The Right Plan Will Hold Steady Through Current Events

Ultimately, a comprehensive plan stands the test of time. Because market fluctuations are expected (remember, it’s the timing that’s unexpected), your plan already accounts for them.

Your financial plan tells you what to do even in turbulent markets or troubled and uncertain times. It’s designed for the long-term. What feels like a big, massive upheaval today will likely be a blip on the radar when you look back in 30 years.

The best way to safeguard against panic and emotional reactions is to have a financial plan — and then stick to it.

Ready to invest in real estate? Take a close look at your margins

Philip Taylor

                              Photo credit: Philip Taylor

We’ve all heard the mantra: “Location, location, location!” When buying investment property, a great location is often considered the #1 rule for success. But as we’ve all seen in that late night, drag-out game of Monopoly, location certainly isn’t the only factor at play.

A decade ago, we all learned more than we wanted to know about subprime mortgages. People were investing money they didn’t have using loans they should never have been given. The stage was set for the perfect storm. Home prices started falling, refinancing became difficult (especially with historically high debt-income ratios), and those previously attractive adjustable-rate mortgages began to reset at higher interest rates. Monthly payments rose dramatically and mortgage delinquencies soared. It’s the scenario that led to a shocking 3 Million foreclosures in 2009 followed by a complete overhaul of mortgage banking regulations. It took years for housing prices to climb back out of a deep, black hole—and even longer for people to recover financially and psychologically.

Prior to the housing crash, real estate had almost always been viewed as a solid investment, averaging over 6% for decades. Now that housing prices are on the rise, investors are once again turning their eyes toward rental properties. Many risk-averse investors gravitate to real estate as an attractive proposition. You can feel it. You can see it. You can drive by your property and know your investment is real. But is investing in property the right choice for you? The answer depends on one thing: the margins.

Many investors look at a basic equation, “money in and money out,” when calculating returns. It seems so simple. Purchase a $200k property that generates $1,300/month rent and earn $15,600 a year—it’s a risk free 8% return using borrowed money! But is it? There’s much more to the equation, and if you dive in and look at the details that deliver the actual margins and return, you may find your investment isn’t what it seems. Be sure you’re considering these key factors when calculating your actual profit margin:

  1. Maintenance & turnover costs. Of course, installing that new water heater costs more than just your time, and your renters may not be very forgiving of an overgrown lawn. Maintaining any property can be expensive, and costs can escalate even further when you experience turnover. Cleaning, marketing, and preparing your property for a new tenant adds up, and every day your property is vacant becomes another drain on your margin.
  2. Insurance & mortgage expenses. Insurance premiums for rental properties can run over 20% more than a typical homeowners policy, and additional liability insurance may be required. Also consider that mortgage rates are higher for second (and third and fourth) homes, and require a 20%+ down payment. Creative techniques to use personal lines of credit can be used to mortgage the property, but that means tying up your available credit that may be needed as an emergency fund during leaner times.
  3. Liquidity. Speaking of liquidity, you pay a steep price for being able to ‘touch’ your property. While it may not be a tangible expense, real estate’s lack of liquidity creates costs when you need cash and timing is an issue. In most cases, completing a sale and seeing any cash in your pocket can take several months, which can force you to borrow money to cover expenses. And borrowing may be difficult if you’ve tied up your credit line with property.
  4. Weighting. Many clients ask me, “How much should I invest in property?” Unless you’re building a career in real estate, an age-old rule of thumb is that your net worth should be spread evenly across three areas, with 33% of your equity in each: 1) real estate, 2) partnering with the great companies (i.e., owning equity), and 3) lending to great companies (i.e., owning bonds). And yes, your home must be included in this equation!
  5. Estate & legal complexity. Have you seen what lawyers charge these days? As a landlord, you’ll need legal help to understand your rights, draft rental and operating agreements, choose which type of entity should own your properties, etc. If a tenant needs to be evicted or if you have a dispute, legal fees can skyrocket. Plus, estate planning for real estate can get complicated (and expensive) quickly with an LLC or partnership.
  1. Capital gains & depreciation. It’s not uncommon for CPAs to recommend investment property to minimize taxes, but in reality, when the time comes to cash in your chips and sell that property for college or that summer home you’ve dreamed about for years, all depreciation is essentially recaptured by your diminished basis—and subtracted from your “earnings” and any return on investment. Capital gains tax ranges from 15% to 20%, so they’re an important part of your real margin. Postponing capital gains is simply robbing Peter to pay Paul…and it all comes around in the end. (Think you’re exempt? If you haven’t lived at a property for at least two of the previous five years, you’ll lose the capital gains tax exemption, which allows individual filers to keep $250,000 of profit from the sale tax-free.)
  1. Tax complexity. It sounds great: write off expenses through the property to avoid Self Employment tax on your income. If you carry a loss, now you have stepped into Passive Loss Land. Income exclusions limits, at risk rules, passive activity limits, etc. Don’t forget property tax! All of this complexity eats up your valuable time, increases your expenses, and reduces your margins.
  1. Compensation for your own hours worked. Here are a couple of questions for you: How much do you make an hour? Is your money working for you, or did you “buy” another job? For example, if you’re earning $150K annually working 40 hours a week (with a few weeks vacation thrown in), you’re making about $78/hour before benefits. It’s not uncommon for property owners to spend several hours a week managing everything from rent collection to fixing water heaters to dealing with vacancies and rental applications. Of course, if you’re paying someone else to manage your property, be sure to subtract management fees from your margin, and include your true hours worked in the equation as well.

So is buying investment property a wise idea? Is it the best way to build wealth? Is rental property really ‘risk averse’? Only if you can be certain that “sure bet” doesn’t turn into a financial drain that steals your precious time, overweights your net worth with investments that lack liquidity, and adds too much complexity to your finances. If you’re not willing to do your homework and consider these important factors, don’t expect location to save a poorly planned use of your life savings. Even Park Place won’t win the game if your margins aren’t in line with your costs.

Want help deciding whether real estate is the right investment for you? Contact me to schedule a time to run the numbers.

Generation X? I feel your pain!

Photo-Bill Gracey

Generation X has some problems—and not just their own. Perhaps the biggest one of all is that this group has everyone else’s problems too! On one hand, they’re dealing with aging parents. On the other hand, they have young kids, college-aged kids, or adult kids who are moving back home or need financial support because they can’t find a decent job post-college. And all this is happening right when stressed-out GenXers are in mid-career and trying desperately to build their own net worth.

 

If you’re in your late 30s, 40s, or early 50s, you know the scenario well. Your career is in full swing, and even if you are making a great salary, it seems money is just flying out the door. If you have kids, they’re more expensive than ever (who knew $100 cell phone bills, iPhones, laptops, and SAT prep camps would be part of the new parenting equation?) and college costs are skyrocketing more each year. Your house is another story. Even if you were lucky enough to purchase a home (or at least refinance) in today’s low interest rate environment, you’re still paying a higher percentage of your income than previous generations toward housing. And if you’ve been in the same place for a while, renovations can throw another blow to your budget. But it doesn’t stop there. You are the “sandwich generation.” Your parents are aging…and they need your help. According to the Pew Research Center, about one in seven GenXers is providing financial support to both a child and an aging parent. From helping your parents through illnesses, to getting them set up on Medicare, finding great assisted care, selling their real estate, and more, the tasks you have to tackle seem endless.

 

It’s exhausting just thinking about it. As an advisor, one of my most important roles is helping my GenX clients juggle these overwhelming responsibilities today while also planning for the future. Because no matter how mired you are in today’s challenges, your own retirement could be an even bigger problem—unless you plan well today. To help make the juggling as easy as possible (let’s face it: it will never be easy!), here are my top five tips for getting through the “sandwich generation dilemma” with your sanity in tact:

 

  1. Take care of yourself first. With so much responsibility for others, it’s easy to forget to take care of you. But just like we’re told to put on our own oxygen mask first before helping others, it’s vital that you keep yourself healthy too. Get your annual physical. Get a flu shot. And see your medical team when something isn’t quite right. These are the years when preventive care makes a huge difference in your health today (so you can take care of everyone else) and helps to ensure your wellbeing as you age.
  2. Start thinking about how you want to define “retirement.” Unlike your parents, you probably don’t see yourself retiring at 62. You expect to live a longer, healthier life, and you may be planning to keep working much later or start a second or even third career—something that invigorates you and keeps you socially, intellectually, and physically active later in life. You want to play by your own rules, but that takes money. Which leads us to…
  3. Invest in yourself now so you can buy your independence and dignity later. Let’s face it: money is the key to independence. Once you’re ready to move on from your current career, you’ll want to have the assets to support your “non-retirement” dreams in the future.  Whether investing in yourself means earning an advanced degree, nurturing a talent, or simply putting a percentage of today’s salary into a “next career” bucket, being proactive now can help you make your dreams come true down the road.
  4. Lower your stress by getting your financial “house” in order. If you’re like most GenXers, your finances could be in better shape, in part because you’re money is so tied up in everything from your kids’ college tuition to your parents’ medical bills. That might be why 68% of GenXers report that they don’t have a good handle on cash flow, 53% don’t pay off their credit cards regularly, and 23% pay late fees. While changing this behavior may feel like one more thing to add to your to-do list, it will save you time—and stress—in the long run.
  5. Keep an eye on your endgame. Yes, all this juggling can feel overwhelming, but it’s vital that you attack your finances with gusto as soon as possible. Don’t just get your parent’s estate documents squared away—tackle your own as well. Make sure your money is working for you every day, and be sure you have adequate insurance in place to protect your assets and your family. Just like taking care of your health, making your finances a top priority can help lower your stress, give you more time to spend with your family, and ensure you have the financial strength to keep all those balls in the air.

Need help with the financial piece of the puzzle? Contact me to schedule a time to review your specific situation. Together we can plan for the future—your own, your kids’, and your parents’.

Is “breaking news” killing your financial plan?

The Only Goal That Matters

 

 

The financial journalists have been in their glory these last few weeks. Greece was a great headline grabber, as was the exciting reaction to the craziness by the US and global markets. It was better than football, basketball, and baseball seasons all wrapped into one. Why? Because it got people tuned in and waiting for the next “breaking news” story. It spurred lots of web clicks. It got the news sites buzzing and, ultimately, I’m sure it sold a lot of whatever was being advertised at the moment.

 

The fact is, all that financial “news” means absolutely nothing to the normal investor. Sure, the play-by-play changes in the stock market may make a difference to the day traders—at least for the day. And yes, the clicks on CNN’s website will make a difference to some marketing genius’s commission check. But for anyone investing for the long term, none of it matters. It’s just noise.

 

Carl Richards, author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, gets it. He’s great at breaking down financial topics and explaining them through simple graphs and diagrams—on napkins (see above and below). Carl obviously shares my perspective on “important, global news” and its relationship to your personal financial plan. What he says here is true: there’s “very little overlap!”

 

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But now you may be wondering, if the news doesn’t matter, what does? We all want to feel like we’re in control of our finances, and somehow listening to all that noise makes us feel like we’re doing something. “I’m paying attention!” “I’m staying informed!” And while the financial news may be a great form of entertainment, knowing the details of the Greek default, the plummeting price of Gold (yes, the 0% yield I talked about in my blog way back in July 2013 holds true), or the latest guesses on when the Fed will raise interest rates won’t help you reach your financial goals.

Instead, turn off the television, turn off the Internet, and pay attention to these 5 steps:

 

  • Make a plan and stick to it. If it’s complicated, work with a financial planner you trust, create a plan based on your goals, and make it happen.
  • Balance your savings, spending, debt, and risk. Part of your plan should include building your wealth while also managing spending and reducing both debt and risk.
  • Diversify your investments. The old saying that you shouldn’t “put all your eggs is one basket” is probably more true in investing than anywhere. Diversify, diversify, diversify.
  • Plan for future expenses. Don’t spend what you don’t have. It’s much better to save today for the new car you know you’ll need next year than to finance it and pay a whole lot more for what you get. For more on this, see my blog 7 Steps to Start Building Wealth Now.
  • Focus on your own goals. Stop getting sucked into the latest financial news frenzy, and remember that your neighbor’s “big stock win” has nothing to do with your long-term plans. Carl Richards’s napkin says it best: “When it comes to investing, the only goal that matters is yours.”

 

Spoiler Alert!

Whatever you do, remember that journalists have no dedication—much less any fiduciary responsibility—to you, the investor. And to take a little fun out of their game, here are my big spoilers: Greece will eventually pay back at least a sizable portion of what they owe; Germany won’t stand for any less. Gold will continue to yield a big, fat 0%. And neither of these “news” items will affect your retirement outcome. But maybe (just maybe!) the Saints will be lucky enough to make it to Super Bowl 50. Now that would be some news to pay attention to!

Need to create a long-term plan based on your own financial goals? Contact me to schedule a time to meet. We can dive into your finances together and put a plan in place that works for you.

Stop the online marketing madness!

Even if online shopping isn’t really your thing, it’s the time of year when many people turn to the internet for some serious help from the new “North Pole.” The web is a great way to stay out of the mall, out of long lines, and happily shopping away in your slippers. Better yet, the presents you buy are delivered right to your door—if not straight down your chimney by Old St. Nick.

So yes, I’m all for online shopping. Except for one serious issue: the power of invasive marketing to get us to buy more—and spend more—than we should. In my opinion, intuitive, online marketing is kicking the asses of American consumers, and most people don’t even realize it.

Here’s why it matters: When it comes to managing your life savings, one of the biggest success factors is slowing your spending. Making conscious, conscientious decisions about every purchase you make can have a major impact on your finances, but keeping a lid on spending can be a challenge—especially when we’re constantly inundated with marketing that is designed to lead us away from those conscious, conscientious decisions.

The power of intuitive marketing

If you search Google for “best deal on tires”—and you actually need tires—those ads popping up on Facebook for the next week may very well lead you to a great deal at a local tire store. But what if you find yourself dreaming about a brand new red Corvette? You don’t need it, but if Santa was feeling extra generous, it may be right up there on your wish list. So you do a quick search just to feed your fantasy. And then, day after day, that beauty keeps showing up everywhere you look! Facebook. Google. Yahoo! (Paid advertising is, after all, what keeps most of the internet free. The ads are the price we pay, just like the ads on good old network television.)

The truth is, when you plugged “Corvette” into your browser, you fed much more than your fantasy. With just a few keystrokes, you handed out your dreams on a platter and fed the ubiquitous internet marketing machine. And it’s a killer.

Why? Because intuitive internet marketing really works. Recent studies show that “click-throughs” aren’t the true indicator of success with online marketing campaigns. What seems to be working is the repeated image—much like roadside billboards. Suddenly, you just can’t stop thinking about that Corvette. You start to think you really need that new Corvette. Maybe it really is a priority. Or, just maybe, you’ve been clobbered by Chevy’s massive online marketing budget and its focus on behavioral targeting and online behavioral advertising (OBA).

Putting a lid on OBA

If you’ve never heard of it before, OBA is the technique used by online advertisers to create smarter, targeted, and highly personalized marketing campaigns based on their knowledge of how, where, and when to attract your attention. It’s what fuels the ads for the items you just “happened” to be thinking about (in other words, you typed the search word into a browser, included it in an email, or posted it on Facebook). While it’s become nearly impossible to outwit OBA completely, you can take a few simple steps to significantly reduce your trackability.

If you don’t want Facebook or other participating companies to collect or use information based on your activity on websites, devices, or apps for the purpose of showing you ads, you can opt-out through the Digital Advertising Alliance. You can also opt-out using your mobile device settings.

To stop most online advertisers from tracking your activity, see this article by Kim Komando (skip to page 2 to get straight to the ‘how-to’ tips).

To stop tracking by advertisers on Google and Yahoo!, log into your Yahoo! or Gmail account and go to the Yahoo! Ad Interest Manager or Google’s Privacy Center. The “opt-out buttons are on the front page of each site, along with a number of advanced options that let you decide which types of ads you would like to see if any. 

For the marketing that does slip through the cracks, just remember to be conscious and conscientious about every purchase. We’re all going to make a few splurge purchases every now and then. For some of us, it may even be a red Corvette just in time for Christmas. But by reducing the flood of targeted online advertising and being more aware of marketing’s impact on our own behavior, we can all save a bundle this year. Simply limiting our spending to the things we really need and want will prevent us from being coerced by tech giants’ massive marketing campaigns.

Why ‘Tapering’?

Lately, the press has been beating their drums about the winding down of QE3 (Quantitative Easing 3) and the fancy name for the process is called ‘tapering’. The pundits insist inflation is soon to follow. After all of this money printing, certainly inflation is on the horizon, right?

How does QE3 affect the economy?

The Federal Reserve uses monetary policy to guide the economy. The Fed has two mandated goals:

1) Provide stability to the financial markets and

2) Control inflation.

It could be argued that when push comes to shove (and it often does) the Fed will temporarily disregard inflation if stability is in question. We are now nearing the end of that precise type of cycle. After the entire system came into question in 2007-2008, stability to the markets took center stage. In order to get markets to flow after this economic shock, the Fed took unprecedented measures. Covertly, they manipulated the players (Lehman, Merrill, Bank of America, FNMA, GSA etc) while overtly they supported financial flows (increased FDIC insurance, flooded the markets with cash (bought debt), eased interest rates, changed the rules at the discount window, and even supported stocks- taking equity in several companies etc.)

The Fed can look back over the past 5-6 years and affirm that they have stabilized the economy (domestically and internationally). Now its time to get back to part two of their agenda; controlling inflation.

Monetary policy is constantly manipulated by the Fed, that is nothing new. What is new, however, is the transparency of “Fed Speak” and the process the Fed used to implement their policy tools. In the past, the Fed wouldn’t announce policy changes, specialists and insiders would de-cypher Fed jargon and Treasury trades to queue rate directives. Today the Fed routinely announces their intentions publicly. In the past, monetary policy was generally concentrated in the short end of the yield curve (short-term interest rates) in hopes that long-term rates would follow in unison. Quantitative Easing ( QE, QE2, QE3) is aimed directly at long-term rates, intentionally relieving rates on mortgages, which is where the root of the previous ‘easy money’ crisis began. Mortgage burdens have eased significantly since, as millions of homeowners used this window of low long term rates to refinance their debt and immediately improve current cash flow.

Does quantitative easing definitively cause inflation?

The prevailing wisdom is that QE3 will lead to a spike in inflation as cheap money will fuel more speculative excesses. We believe their is enough slack in the economy and strong demographics at work that will counter these forces. As the process ‘tapers’, some players may scramble to borrow and force rates even higher temporarily. But interest rates returning to pre stimulus prices won’t have a long lasting push on inflation. As a matter of fact, they should actually slow the economy as borrowing costs rise. The Fed realizes if they just turn off the spigot overnight, they would shock the system. It should be noted that the average amount of cash on hand at corporations has swelled to over 20% of assets! The odds of these companies borrowing needs pushing interest rates significantly higher seems far fetched. Will these companies really need to rush out to borrow!?! UNLIKELY… A normalization of interest rates will probably allow these companies to put their money to work by lending (buying debt)!

Demographics at work…

Enter the baby boomers. Baby boomers are heading into retirement in droves. They have spent the last 6 years chasing yield and trying to stretch their dollars further and further in an abnormally low interest rate environment. These people will use any increase in interest rates to put their cash back to work too! Money Market rates and CD’s have paid so poorly, that many have taken more risk than they should carry. Higher interest rates will allow baby boomers the chance to improve their cash flow going forward, as they purchase fixed income products (Treasury, CD, Money Market and Corporate Bonds) once they retire.

The re-normalization of interest rates is a welcome sign that the economy is continuing in the right direction. The fact that the Fed believes it could now address the possibility of inflation, is encouraging. Quantitative easing has dramatically helped people and institutions refinance their debt obligations and improve cash flow when money was tight. “Tapering” will allow those awash in ‘cash’ to put their money back to work without shocking the system. The combination of demographics and historically large amounts of cash on hand will blunt most inflation pressures caused by a ‘normalizing’ of the interest rate environment.

What’s the best way to fund college in Louisiana?

Parents need to start saving for education expenses as early as possible. It is estimated that over the next 18 years the costs of attending a public university in Louisiana for an undergraduate degree could cost as much as $174,000! People often ask me, “What’s the best way to fund college expenses for a loved one?” There are a couple options, but a 529 plan trumps the Coverdell and the use of a Roth I

What is a 529 plan?
A 529 plan is qualified plan that was developed to help fund education expenses, using tax benefits as incentives.  Earnings inside of a 529 plan grow tax free, and will be tax exempt if used for Qualified Higher Education Expenses (QHEE). These expenses include tuition, fees, room, board, books, supplies, special needs services, and certain required equipment.
A 529 plan offers flexibility by allowing the account owner to transfer the account to different beneficiaries, even allowing the account holder themselves to be beneficiaries.

A unique advantage to the 529 plan is estate related. Assets inside of a 529 plan are removed from your taxable estate, but the account owner maintains control of the assets. This can be a valuable tool when combined with the opportunity to front load your funding. Front loading allows an individual to stack 5 yrs of gifts ($14k/yr for 5 yrs= $70k all at once). Couples filing jointly can stack $140k at once without generating a taxable gift. When you consider the flexibility of changing beneficiaries, there are few comparable options.

Why is LA START a better 529 plan?
Most states offer 529 plans, but, believe it or not, Louisiana has one of the finest programs in the USA! The Louisiana Student Tuition Assistance and Revenue Trust Program, commonly referred to as the “START Saving Program,” is a great way to save for college and other post secondary schools in a qualified account. Louisiana’s START program is direct sold, which means there is no middleman in between your funds and the plan, you deal directly with the plan administrator which is the Louisiana Office of Student Financial Assistance. The START program has no administrative fees or charges and uses several low cost Vanguard funds, leaving more money for your beneficiaries to use for college. Direct selling reduces expenses dramatically, but it also explains why so few people are familiar with the plan. Brokers don’t get paid to sell them, so they don’t sell them.
Very few states offer a ‘matching program’ but Louisiana has a match with a sliding scale of 2% to 14% depending on account type and adjusted gross income. These matches are called earning enhancements, they are savings incentives added to your account annually. Consider earnings enhancements as ‘free money’ for post secondary education savings.

Another benefit of the Louisiana plan offers a state tax break for account owners based on each year’s contributions. Couples can reduce their taxable base by $4,800/yr and individuals $2,400/yr.
Also, it should be noted that one of the fixed income investments offered is a deposit in the Louisiana Principal Protection Fund is guaranteed by the State of Louisiana and last year this fixed income fund yielded over 2.5%. How will a 529 affect financial aid?
 The assets inside of a 529 plan remain the possession of the account holder which will greatly reduce the impact of a 529 plan on a student. Parental assets are currently assessed at a maximum of 5.64% of total value for the Expected Family Contribution(EFC) calculation used by FAFSA.  Grandparents 529 plans will be assessed a higher EFC, but will only affect the financial aid the year following the distribution. Grandparents should consider saving their 529 plan distributions for senior year if reducing financial aid availability is a concern. Here are the details on Effective Family Contribution EFC.

What if my beneficiary gets a scholarship?
If your beneficiary is fortunate enough to get a scholarship, what can you do with the funds inside of the 529 plan? It is worth noting that most scholarships will only cover a portion of a student’s qualified expenses that could be funded out of your 529. But if it looks like you will still have money left in the account after paying these expenses, there are a couple alternatives. The IRS allows account owners to refund assets equal to the value of the annual scholarship without incurring the 10% penalty (contributions are never taxed, earnings will be taxed as ordinary income). Another way to use excess 529 funds is to simply change beneficiaries.

How do I get started?

To open a 529 plan with the LA START, either the beneficiary or the account owner needs to be a Louisiana resident when the account is opened. Once the account is open, residency is no longer necessary. There are 6 categories of account ownership. Accounts can be opened with as little as $10. Once the account is open, there are no time limits for funding or distributions. START funds can be used for qualified higher education programs in ANY state.