Do Your Taxes (FAFSA Edition)

This tax post is for FAFSA filers old and new; includes parents of this year’s college seniors and parents of students in college now.

It’s a good day to…”Do Your Taxes”. Or at least generate a decent estimate.

Tax Forms 1040

Who should do an estimate by January 1st?

1. Parents of high school seniors off to college next year
2. Parents of current college students
3. Self employed people
4. Taxpayers with a change in income, plus or minus 20%+ over last year.

This post focuses on FAFSA filers…
Experienced FAFSA (Free Application for Federal Student Aid) filers know the joy of spending a part of the upcoming holiday weekend on personal finance and disclosing your finances to another government agency. I invite you to include your high school senior/college student for part of this exercise so that they understand that they aren’t the only ones who have to fill out forms so that they can go to a post-secondary educational opportunity. Some reasons to do so:

Funding college can feel like this!

1. If the family won’t be eligible for college aid due to the family income or assets, they need to see why.
2. If the only way they can go to college is due to a lack of resources, they need to understand the forms and their importance.
3. This is a good time to remind them to seek scholarship applications-many open up January 1st of each year.
4. Review your in-house rules for having “skin-in-the-game”. For instance, We expect you to earn/contribute $5000/yr towards this cost. Or you need to apply for X number of scholarships.

Note 1: The FAFSA asks for many pieces of financial information and despite the requests for early completion, most people have not even thought about their tax filings on New Year’s Day of any year. For divorced parents, it is good to communicate in advance about the required information.

Note 2: It is always recommended to complete the FAFSA, even if you think your family will not be eligible for any aid. In the coming year, there might be some program that requires the FAFSA, despite no financial aid award now.

Deadlines

Complete the FAFSA as soon as possible-your place in line matters for aid awards. This applies to federal and private sources of funding. A list of deadlines are here.

You can order a PIN to sign the FAFSA now at https://pin.ed.gov/PINWebApp/pinindex.jsp .

Print some tax forms. (for notes and listmaking) Choose an online tax calculator such as http://www.ownersmanualdownload.net/moneychimp-tax-calculator-2014 or http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx. Please note, these are for illustrative purposes only. The idea is to choose one that is easy for you to work with. Please use your favorite search engine to select one for yourself.

 

Get ‘er done!

 

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I have Six Figures of Income…and Debt

The question below on how to handle six figures ($354,000) of debt with an incoming check for $500,000 was answered by me on October 30th at Nerdwallet.com. Since last spring, I’ve been answering questions from real people at Nerdwallet’s Ask An Advisor platform. Those of us on the platform answer real questions from real people without knowing all the relevant information, only what they tell us. Other answers as well as mine can be found here.

Q: I will soon get a check for $500,000. I have $354,000 in student loans. Should I pay those off first?

A: (Dana Twight) Great that you are asking about how to handle this windfall. This is exactly the situation that financial planning is made for – balancing competing priorities and improving your short and longer term financial situation.

5 Points to Consider

1.Other debts: Do you have any other non-mortgage debts? If you do, they may very well have higher interest rates than your student loans. Consider paying those balances down first.

2. Emergency funds: Do you have an emergency fund-are you employed? In addition to the fund portfolio suggested by my colleague, I would consider setting aside a fund with six months income or expenses in it from this check. Or you could set aside the amount of one year’s health insurance premiums and deductibles. This could be the base of that fund-keep it in insured CD’s or accounts.

3. Insurance: This is also a great time to build an umbrella liability insurance policy into your annual budget. This type of policy covers you above other liability limits (say on a residence or a vehicle). Investopedia has a definition which mentions that it also includes libel, slander and invasion of privacy.

4. Tricks: Be careful about how you share this news with others. Resist the opportunity to open new credit accounts. Visit the opt-out website to opt out of new credit card offers https://www.optoutprescreen.com/?rf=t so that you don’t get oceans of new email or regular mail offers. Your financial institution may see your funds deposited and offer to help you invest them-stick to a fee-only planner and get hourly advice instead.

5. Treats: It’s ok to let yourself do something fun with a small part of the money, if you have waited for a vacation or a newer vehicle, or a really cool bike. Also treat yourself to fully funding your 2014 and 2015 retirement plan contributions, if you are still under retirement age.

Last but not least: Do you have your estate documents in order? A will, a durable power of attorney and health care directives as required for your state are a must. Take the time and the nominal percentage of this windfall to make sure that your documents match your intentions, now that you have more assets.

 

Best wishes for your success in your chosen field!

Stupid Marketing Tricks

Recently I received a financial services industry magazine email that really made me mad. Perhaps I should temper my response, but I am very interested in what you think. (By the way, this post will not garner me any product ads popping up alongside either.)

Here is the phrase that really got to me: (brand names withheld)

[Our] …”offering is addressing the needs of other advisors, transitioning middle-market clients to XXXXX so those advisors can focus on their more profitable, high-net-worth clients.”

This is where I part company with some other parts of the financial services business.

In a world where “serious people” debate whether the middle-class/middle market begins at $200,000 annual income or not, I am not surprised at this email’s sentiments , just disappointed.

To be fair, this marketing email came from an industry publication, not another financial planner, or CFP(R) . And also to be fair, I’d say a majority of the people in my business do like to help their clients and have a passion for problem-solving in the financial and personal finance arena.

For me, this business is not about sorting clients to see who is “most profitable”.

It is about sorting through the myriad of choices and “assumption of risk” that we all face every day. Helping people understand the ‘why’, as well as the ‘how’ and the ‘what’ of saving and investing.

• Did you know that many new financial products are introduced into the market each year?
• More information about financial services is available to you each day than ever before.
• http://www.researchmoz.us/evaluation-of-financial-products-in-private-banking-report.html
• http://uk.finance.yahoo.com/news/worst-financial-products-2013-120359526.html

In the last 45 years, we have seen the introduction of new ways to save, spend, share and invest. Just because it is new and shiny doesn’t mean you need it. Plus you have simultaneously been asked to assume the risk (oops-I mean the opportunity to exercise more choices on your own) of saving for your own retirement and financial future.

Advice should be available via online services, print and visual materials, and yes, even from live humans like myself to all people. Not only  to people who think a $200,000 annual income is ‘middle-class‘, or that the ‘middle-market’ is unprofitable.

Related articles

• ‘Dangerous’ financial products named (bbc.co.uk)
• Ask the Consumer Financial Protection Bureau http://1.usa.gov/ZhisU6

Guide on the Side vs. Sage on the Stage

Recently I was speaking with a small group and mentioned that my style was to be the “Guide on the Side” instead of the “Sage on the Stage”. This is a phrase I picked up from my time hanging about with classroom teachers. The source for this phrase is from  1993 article by Professor Alison King.

Here’s what the phrases mean. Well, really what I mean, within the context of financial education and learning. Feel free to chime in by making a comment below.

Sage on the Stage: In the old days, the teacher was the only one talking and spent all of her/his time in the front of the room talking offering knowledge to their students. Very little feedback was sought and was often punished if unwanted comments or questions were asked. Did you have any educational experiences like this?

As with other institutions, there was only one perspective shared and/or valued. You had to conform to the teacher’s style.

Students were expected to listen, take notes, memorize, then regurgitate upon request.

Guide on the Side: Using this style, the educator/leader walks along side the students, instead of leading from the front. I am reminded of Paulo Freire when I think of this:

“It should not involve one person acting on another, but rather people working with each other. Too much education, Paulo Freire argues, involves ‘banking’ – the educator making ‘deposits’ in the educatee.” (Source the non-profit site infed.org)

Ô Homi (Paulo Freire) (Photo credit: paulicasantos)

When I work with clients, I want to be their “Guide on the Side”. Sometimes people say to me, ” I don’t know anything at all about money/investing/finances”. Well, of course you do. That is a given. How much do you need to know? That is a subject for a first meeting…And a two-way conversation.

First, I like to learn about your family lessons about money, finances and savings, plus how you have implemented those lessons-or not.

• Are you a spender or a saver?
• How much financial news do you consume?
• What worries you?
• What do you take pleasure in doing?

My job is to help you move forward from where you are; after understanding about how you got there. It is an interactive experience, where your perspective matters-a lot. If we don’t move forward together, we go nowhere.

education (Photo credit: Sean MacEntee)

Student Loan Debt … Debt Sentence?

In the Wisconsin public university system, the average student graduated with 5 times the student loan debt in 2011 than they had in 1982.

The amount went from $5,000 to $27,000 in just under 20 years. Let’s check that number against inflation. Between 1982 and 2011, the buying power of $5000 more than doubled to $11,654.87. Let’s review:

• Wages increased 2.4x
• Consumer Price Index: increased 2.3x
• College Costs: increased 5x

We all have heard that higher education inflation is higher than “regular inflation”. For example, in 2009, the price of higher [public] education increased by an average 6.5%, despite a 2.1% decline in the Consumer Price Index (CPI) during the same time.

In 1981, I graduated from a different UW (University of Washington in Seattle) with that same amount of debt-$5000. At the UW today, the average student debt load is $23,000, $4000 under the other UW.

University of Washington Campus & Vicinity (Photo credit: AvgeekJoe)

What happens after the end of the “formal education”? You might have a job, you might be a boomerang child and move back home with your family, or you might get an “internship” that pays $10 an hour for a job that used to be given to a college graduate. That graduate may have made $20,000 in 1982. Last year, a college graduate or a worker of any age needed to make $46,619 to equal that 1982 buying power.

I know people who have $15,000, $25,000 and $50,000 in student loans. Even if they have “good jobs”, as opposed to a paid internship [formerly a permanent a job with benefits], it is hard to pay your bills.

Here’s a website for everyone to check out as their kids graduate from college this spring.  http://www.thecalculator.org/ This one is for Washington State only and illustrates how much they need to make to cover expenses in every Washington county. For information on other state self-sufficiency calculators, please click here.

For an interactive graph on student debt in the entire US, check out this chart at truthdig.org.

Please be careful as you check the cost of higher education for yourself and family members. Bankruptcy is not an option for student loan debt (or medical expenses).  Trick question:

1. Who will loan you money to retire?

I’m not saying don’t do it, but really dig into the post-graduate numbers to see how much your graduate will need to earn to cover their debts. Ideally, they are by your side as you engage in this process!

Related articles

• Student Loan Bankruptcy Fears Drive Congress to Rethink Law – WSJ.com (policyabcs.wordpress.com)
• Class Notes: Law School, Student Loans and More Education News (newsfeed.time.com)

Learning about personal finance can be “informal”

“Across our lifespan, humans spend more than 80% of their 16 waking hours in “informal” learning environments outside “formal” classroom walls.”

(University of Washington College of Ed. publication Research That Matters, Volume 10)

So why are some of us stuck in our learning patterns about money?  Or School’s Out Forever?  Apparently we have ample hours after our “formal education” is over to pick up new material, concepts and even practical things like improving your financial infrastructure.

Have you ever heard a friend or colleague say things like the following:

• Math and I don’t get along
• My wife/husband takes care of that
• The economy doesn’t affect me (yes, I heard that once)

My all time favorite is, “I don’t do live math”. (heard during a public radio pledge drive)

Perhaps some of this goes back to the way we all learned about math in school, whether we learned “good” or ‘bad” money lessons at home, or if our education has all come from ‘the school of bad experiences”. Granted, some of us had truly bad math instruction, and some of us just didn’t see the relevance to math, personal finance and economics at the time we first saw with the material. Some people learn about stocks at age 15, but it doesn’t mean that you can’t pick up new concepts at any age.

My reason for beginning my blog with this research is to give yourself permission to begin anew with your learning. You can also give yourself permission to approach your personal finances in a way that is different from “keeping up with the Joneses”, the way other members of your family learn, and the way you learned math from “Mrs./Mr. Smith” in high school. In other words, allow yourself to embrace new informal learning opportunities!

As you follow this blog, you will learn and even change your perceptions about personal finance for the better. I will help you understand that small, consistent, sustainable changes matter. You don’t have to hit a home run. You don’t need to have that ultimate, sexy cocktail party story about your fabulous investment that made you so rich. You do need to remember that “right-size” changes, are what are best for you.

When we learn new things, as youth or adults, remember this advice from UW Professor Walter Parker:

“We have to help [learners] develop the sense that, “If things are tough, it just means I am a novice, it doesn’t mean I don’t have the competency for this work.”