Archive for the 'Financial Education' Category

Financial Wellness for 2010 & Beyond – Plastic Revisited

Published by JS Wolff on February 2, 2010 in Economy and Financial Education. 0 Comments Tags: , , , .

Just last week, the Senate approved legislation increasing the federal government’s borrowing limit by $1.9 trillion.  When signed into law the federal government will be able to borrow more money than at any time in our country’s history, making our total national debt a mind numbing $14.3 trillion.  And this will only allow us to pay our bills through 2010!

Using credit for money

Putting this into perspective, according to the Heritage Foundation the federal government will take in an estimated $2.19 trillion of taxes in 2009.  Simple math tells us that owing $14.3T while collecting “only”$2.19T is not a recipe for fiscal health. So last week’s vote was essentially the Senate’s way of literally, passing the buck.  Recent groundbreaking election results indicate that American’s are telling elected officials to stop this madness.

But maybe leading by personal example is the best way to initiate national change. Instead of raising our personal credit card limits and unsecured debt as many Americans have done in the last decade; let’s consider taking a retro approach to plastic. Prior to the introduction of the binge inducing revolving card, the standard plastic issued was known as a “charge card”.  And now this concept is coming back.

What’s the difference? As opposed to revolving credit cards, most charge cards require payment in full at the end of each month.  If you can’t pay, typically a late fee is charged.  So while old habits are hard to break, after a few late fees you start to think long and hard before putting something in the shopping cart.

Charge cards can be less risky for both consumers and card issuers.  For the consumer, it’s obviously more difficult and painful to accumulate debt. Issuers like them because there’s less chance than with a revolving card that someone will be unable to repay them. There’s a much shorter leash.

So go ahead, buy anything you want and put it on the charge card, as long as you can pay for it by the end of the month. And then call your Senator to convey clear grass roots message…”I’m not buying stuff that I can’t pay for in 30 days, repeat after me!”

Financial Wellness for 2010 & Beyond – The Decade of Roth Savings Plans

Published by JS Wolff on January 19, 2010 in Financial Education, Financial Tools and Financial Wellness. 0 Comments Tags: , , , .

A real change over the next decade could be a massive reconsideration of tax deferred savings plans. Exemplifying this shift, the new 2010 Roth IRA conversion rules seem to be getting lots of press and stirring widespread investor interest. So what’s behind the buzz?

In our September 09’ blog, “Rethinking the 401(k) Pitch”  , we underscored how the tax landscape had changed since IRA’s were introduced in the early 80’s.  We recounted that federal income tax brackets reached as high as 70% when 401(k)’s and IRA’s were introduced and it made perfect sense to shield everything we could from the taxman and bank on taking the money out at lower tax rates in the future

For the following 30 years, the retirement planning community coached us to maximize tax deferral benefits of the 401(k). But over those same 30 years, tax rates moved steadily downward. Currently the top federal rate is 35%, which is historically very reasonable. However, with the current out of control budget deficits and government spending, this trend may very well start to move the other way. Translation…we seem to be on a collision course toward higher taxes.

The 2010 Roth conversion affords a timely opportunity for a course correction. You can pay taxes now, hopefully before they go up, and be set for tax free distributions at retirement.  It works like this:

  • If you have an existing traditional IRA, you can convert it or part to a Roth IRA. A Roth IRA allows tax-free growth and tax-free income — if you are at least age 59½ — and as long as you have held your Roth account for five years or longer.
  • When you convert, income taxes will be due.  The amount converted will be added to your W-2 income.
  • For 2010 conversions only, you can include the full conversion amount on your 2010 federal income tax return or you can split it equally between your 2011 and 2012 tax returns.

So the filters to making the decision to convert are…

  • Do you have an existing traditional IRA?
  • Do you think taxes (or your tax rate) will be going up the future?
  • If you believe they are going up, do you think this will directly affect your likely retirement income?
  • Do you have the extra cash to pay the taxes over the next 2 years?

If you answered, “yes” to all of the above, then a Roth conversion may be the right option for you.

To fine tune your Roth conversion decision process, you might want to model a few scenarios on a calculator built for this purpose.

Contrasting your FSA Employee Benefit and the Child and Dependent Care Tax Credit

Published by JLarocque on January 12, 2010 in Benefits, Financial Education and Financial Wellness. 0 Comments Tags: , , , .

A mainstay of employer Benefits Communications is to preach the virtues of Flexible Spending Accounts.  But is there perhaps a better tax opportunity out there for your dependent care related expenses?

Tax is an important area of focus when it comes to attaining a productive benefits education.  Before digging into the details of this particular tax opportunity, it’s important that you understand the difference between a tax deduction and a tax credit.  Tax deductions are taken “off the top” and ultimately reduce your taxable income, and, of course your taxable income is what ultimately drives the amount of taxes owed.  A tax credit on the other hand, is a dollar-for-dollar reduction subtracted from your tax liability.  If you had a $50 tax credit, it’s sort of like the government saying that they are giving you credit for having already paid them $50 in tax.

You may or may not be aware of the Child and Dependent Care Tax Credit available for work-related dependent care expenses.  This tax credit is calculated by applying a percentage to your total work-related dependent care expenses.  This percentage can be as high as 35% or as low as 20% depending on your adjusted gross income.  Now, there are a couple of rules to be aware of:

  • The work related dependent care expenses that are applied may not exceed $3,000 for one qualifying dependent and $6,000 for two or more
  • AND importantly, you can’t claim expenses for the purposes of the Child and Dependent Care Tax Credit that you’ve directed into your dependent care FSA

This raises an important question to ask yourself.   Should you apply eligible expenses towards the Dependent Care FSA or Dependent Care Tax Credit?  Well, this of course, will depend on your personal situation.

A good first step is to review the worksheet that the IRS has put together on the Child and Dependent Care Tax Credit.  You’ll want to understand eligibility requirements and the amount of the credit, based on your adjusted gross income.  Now, apply that percentage to your projected work-related dependent care expenses for the year (keeping in mind the IRS limits) to come up with your potential tax credit.  You’ll likely want to work with a tax advisor to compare this Tax Credit with what the tax benefits of the Dependent Care FSA Tax Deduction.

It may be the case that you have work related dependent care expenses that exceed the IRS limits for both the Child and Dependent Care Tax Credit and Dependent Care FSA.  In this case, it may be possible to leverage both of these opportunities.  Because tax laws are complex and evolving, it’s important that you consult your tax advisor to understand how these two opportunities apply to your particular situation.

Financial Adrenaline

Published by JS Wolff on November 5, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: .

What motivates someone to change their financial behavior? For example, can someone who is prone to spend every dime really be turned into a saver?

Fear can certainly be a motivator. For some it takes a tangible, in your face type fear like “I will lose my car if I can’t make the balloon payment that’s due in three months”. The force behind saving to avoid losing your wheels can be powerful.  But when the pain goes so away, often so does the temporary positive behavior. But still, something kicked in that worked.  I call this phenomenon, “adrenaline induced” financial behavior change.

Others are learning that adrenaline inducing techniques can work in more sustained, positive ways.

Inspired by a Harvard professor who combined the attraction of winning prize money with a savings program, a group of credit unions in Michigan created the “Save to Win” program. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot.

The outcome?   In a 6 month period the program attracted over $3 million in new deposits – many of which were from people who not been successful saving in the past.

Changing our financial heart rate, whether it’s a chance to lose big or win big looks like it has real possibilities. For me, longer term financial outcomes can change my heart rate if I let myself dream about something of value in vivid detail.

What financial outcome, if you really thought about it, would elevate your heart rate? If you can get really “pumped” about it, change will not be far behind.

Financial Wellness in 2010 – Open Enrollment Tips

Published by JLarocque on October 25, 2009 in Benefits, Financial Education, Financial Tools, Financial Wellness and for Employers. 0 Comments Tags: , , , .

As November fast approaches, you are likely beginning to receive important communications about Open Enrollment. If you’re like many employees, you may have already decided to just stick with your current elections – after all, they seem to have worked out well enough. This year, more than others in the past, taking a passive approach to Open Enrollment may be an expensive decision.

A confluence of events, including substantial increases in the cost of health care and tough economic times have likely resulted in significant changes to many of your benefits. It is of supreme importance that you understand these changes, how they impact your checkbook and ways to optimize your benefits. Keep in mind that without a qualified change of status, you will be locked into your elections until next year’s Open Enrollment period, so the time to focus on your benefits is NOW. Don’t be surprised by the cost provision changes after they take effect and it is too late to do something about them.

Here are 4 tips for making the most of your Open Enrollment period and cutting your health care related expenses:

  1. Get reacquainted with your health care plan options. This may be the most important and likely the most daunting task of all. While employers have largely absorbed the skyrocketing cost of health care (which again will see a double-digit year over year cost increase) you are also likely shouldering some of the burden. Understand the changes that are being introduced and how they will ultimately impact your wallet. Taking the time to dig into the cost provisions associated with your medical plan options will not only help to determine whether you’ve made the right selection, it will also help you to understand how to minimize your out-of-pocket expenses throughout the year. Many employers are introducing low premium/high deductible plans which can be a very cost-effective option for you, particularly if you are not a heavy user of your health care plan. Lastly, if your spouse or domestic partner also has a plan, you will want to incorporate his/her options into the evaluation process.
  2. Use flexible spending accounts. So, you knew this one was coming. Any respectable list of tips for Open Enrollment *MUST* have this in their top 4 and despite this widely held opinion, only about one-third of you actually take advantage of them. Using pre-tax dollars to pay for qualifying health care (including medical, dental and vision) expenses can save you significant dollars. For example, assume a married employee with an adjusted gross income of $100,000 who files jointly and accumulates $4,000 in medical expenses for the family. This employee would save just over $1,300 in Federal taxes for the year by using a Health Care Flexible Spending Account. An added and understated benefit of an FSA is that it actually helps you to plan and save for your health care expenses through convenient payroll deductions.
  3. Optimize your prescription drug benefits. This tip has more to do with saving throughout the year, rather than a decision that you’ll need to make for Open Enrollment. I mention it because it’s a great way to save money and could potentially impact your health care FSA contribution. Generic drugs are copies of brand-name drugs that have exactly the same intended use, effects, side effects, risks, safety, strength… in other words, their pharmacological effects are exactly the same as those of their brand-name counterparts. Taking a proactive approach and requesting a generic substitution for your prescription medication can cut down your copayment significantly. Use of generic drugs may also allow you to waive your deductible and avoid costs that are incurred when you use a brand name drug when a generic is available. Additionally, you may also be able to cut down on prescription copays by utilizing the mail order prescription drug benefit for maintenance medications.
  4. Take advantage of Health Wellness programs. Wellness incentives have become hugely popular. In fact, almost two out of three U.S. companies offer programs to keep employees healthy, and 66 percent of those offering programs use incentives. These incentives come in a number of forms, for instance, a credit toward your health care premiums. It may be the case that your employer is introducing a similar program in 2010, so be sure to understand wellness program features, incentives and consider participation.

Saving For College Not Adding Up Financially

Published by JS Wolff on September 28, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

Several significant trends are signaling a reset of how families plan and think about college costs. The evidence suggests that creative solutions will be required as key economic factors are conspiring to make a college degree financially more elusive.

Let’s look at the new realities of saving for higher education:

  • Trend # 1 – College costs are spiking due to reduced funding
    College costs have traditionally escalated 5%-6% per year already doubling the normal rate of inflation.  But now in many States, budget shortfalls have taken fees increases to a new level.

    California is a particularly dramatic example.  University of California Regents will soon vote on a 32% fee increase which is in addition to last year’s nearly 10% fee hike. This story is being repeated in varying degrees throughout the country. 

  • Trend #2 – Growth expectations of college savings accounts have been unrealized
    According to the Boston consulting firm Financial Research, the value of 529 college-savings accounts sank 21% last year.  For many families whose son or daughter was on the verge of starting school, this loss could easily represent a year or more of college funding.

    While the investment world may suggest that 2009’s year to date market recovery supports remaining in the market, many burned college savers are reluctant. A look at market history suggests that their hesitancy may be well founded. In the last 100 years there have never been two significant downturns as close together as the 2000-2003 tech bubble and 2008’s global meltdown. Especially for those families whose kids are already in their teens, the prospect of another near term sell-off is a chance not worth taking.

  • Trend # 3 – Parents are saving less for college
    Even before the downturn parents were struggling to save for college. A 2007 study by Sallie Mae, the country’s largest source of funds for higher education, found that parents of high school children applying for college had saved less than half of what they needed to cover the expected expenses. What’s more, one in five hadn’t saved anything at all.

    In May of this year, in another survey released by Sallie Mae, 47% of parents reported saving less or aren’t saving at all for their kids’ education due to the current economic crisis.

    While the points listed above may feel like the obstacles are growing insurmountable, there are ways to be proactive in this tough environment. And remember, while there are varying opinions of how much a college degree is worth over a career, there is little debate that it remains a solid investment.

So while a college degree may be more difficult to pay for in the future, here are some strategies to pull it off:

  • Make college planning a family affair – get grandparents and other willing extended family members in the game.  Anyone can make a contribution to a 529 Plan and rather than giving something that will end up at next year’s garage sale, have them contribute to the college account.
  • Use Conservative Asset Growth Projections and Allocations – Obviously stock market exposure is more tolerable the longer you have before your student reaches college. That being said, it may be more realistic and comfortable in today’s world to position college assets for a 6% or 7% long term return as opposed to a 9% or 10% return.
  • Manage Expectations – Young people are very resourceful if they need to be. Let your kids know in their junior high years that getting through college will be a team effort and everyone will be required to pitch in, including them. My son’s college roommate knew well in advance that his parents could only afford a total of $10,000 for college costs. By holding down a couple of jobs he graduated with an engineering degree with minimal outstanding loans and somehow seemed to have a smile on his face in the process.
  • Consider a Low Cost General Ed Track – Employers typically don’t care where a candidate started their degree, but rather where it was finished. By taking transferable community college courses before moving to the graduation school of choice, overall education costs can be significantly reduced. Among other benefits, this allows both you and your student two more years to save.

Raising Financially Responsible Kids Accidentally

Published by JS Wolff on July 6, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

Recently after conducting a financial education workshop for a high tech company, a young lady in her early 20’s wanted to get together to discuss how she could retire early. She had seen an infomercial that described the beauty of passive income and decided it was her ticket to an early exit.

Unfortunately, just after learning of her financial ambitions, she informed me that she had maxed out several credit cards and financed two cars (one for her boyfriend) to the tune of a significant five digit debt.  Even though she was making a good salary as a Human Resource professional, she was unable to pay her monthly bills and had stopped contributing to her 401(k).

Further, responding to the stress, she had just contracted with a credit repair outfit (another TV ad) to whom she had already paid $1,500 for services she was unclear about.  The only thing she knew was that the $1,500 somehow did not offset any of her debt.  Needless to say, it didn’t seem like passive income was going to happen anytime soon.

I wish I could say that I was a perfect dad when it came to teaching my kids about money, I wasn’t. But it looks like my three 20-something kids are avoiding the financial sabotage described above. In hindsight, I think the best idea we transferred as parents was that you don’t keep it all for yourself.  And though none of this was premeditated, the encouragement to give money away resulted in several hoped for financial behaviors and character qualities.  To name a few…

  • Although we were inconsistent about doling out an allowance, our kids figured out ways to make money and still chose to give some of that away. Seemed like it was more meaningful to give money that they had actually earned.
  • Don’ think the word “budget” was ever mentioned but  they seemed to pick up the idea on their own…they only spent what was left over after giving so they had to think more intently about financial  trade-offs early on.
  • The practice of giving apparently drew their attention to needs outside themselves, two of them have spent time working with non-profits and third world countries.

This blog entry is as close to a “raising financially responsible kids” book as you will ever get from this me.  Anything good that happened was purely by accident. But the best part is that accidents can sometimes have surprisingly decent outcomes.  And, as you probably noticed, I think my kids are cool.

As a final thought in keeping with our recent celebration of Independence Day, Thomas Jefferson spoke to the younger generation of his day regarding the wisdom of maintaining personal financial freedom…

“But I know nothing more important to inculcate into the minds of young people than the wisdom, the honor, and the blessed comfort of living within their income, to calculate in good time how much less pain will cost them the plainest stile of living which keeps them out of debt, than after a few years of splendor above their income, to have their property taken away for debt when they have a family growing up to maintain and provide for.”

What’s in Your Financial Constitution?

Published by JS Wolff on May 25, 2009 in Economy, Financial Education and Financial Tools. 0 Comments Tags: , .

Voters in the state of California spoke loudly and angrily last Tuesday. After years of convoluted budget fixes, exotic borrowing schemes and skirting tough issues, Californians just said “no” to another series of band-aid fiscal ballot measures that just seemed like more of the same. Voter frustration has risen to such new levels that now there is even a movement to completely rewrite the State’s constitution to prevent the politicians from operating like credit drunk consumers.

“No Gold In State” was the title of this week’s article about California in The Economist magazine.  The article chronicled, “At one point during his desperate campaign for six ballot measures meant to reduce California’s gaping budget deficit, Arnold Schwarzenegger, the governor, pleaded with voters not to make California ‘the poster child for dysfunction.’ But on May 19th they did exactly that.”

The sludge-like layers of complexity that have become the California budgeting process all seem rooted in the inability of politicians to grasp the flow of money….basically economics 101.  And yet, when was the last time we heard someone running for office talk about their financial education or their qualifications for office because of their responsible economic track record?

Setting better boundaries by rewriting the State’s constitution may be a good start but I’m thinking our future depends upon something a little more homespun.  Let’s get this money thing right in our families. First, raise financially responsible kids and then later as adults we can send them off to run the government.

So parents, consider rewriting your family’s “constitution” to lend the same emphasis to money smarts as you do reading and math smarts. And the sooner, the better.  Scores of college kids get bushwacked by loans and credit card debt before they even graduate. A study conducted by The Project on Student Debt indicated that nearly half of all graduating college seniors enter their careers with 5 digit debt.

Helpful websites are popping up that simulate real life money situations and are targeted at the younger set.  A good example is Savings Quest which looks like it’s directed at the pre-teen – teen crowd.  In a colorful, narrated eLearning format, it walks the viewer through choosing a job, building a budget and saving for both short and long term goals. And importantly, even though it sort of feels game-like, the choices and resulting consequences can create some real life feelings.

Did I think it’s appropriate for pre-teen to teens? Sounds about right for those legislators in Sacramento.

Historical Worst Case Financial Planning

Published by JS Wolff on May 12, 2009 in Economy and Financial Education. 0 Comments Tags: , , .

I’ve talked to some pretty nervous investors recently…even with this latest uptick they’re not sure if they can ever trust the stock market again. With their fears being totally understandable, I decided to research an historical worst case scenario to help them evaluate the length of time they needed to be in the market to be reasonably assured that they wouldn’t  lose money.

This was accomplished by portraying someone who had decided to invest in the stock market just before the onset of the The Great Depression.  If we could ascertain how long it took this unfortunate soul to get their money back including the worst market years ever experienced, then it may be helpful to of us who are nervous to get back in the game.

First let’s look at some the characteristics of the Depression era market.  Interestingly, in the three years after the initial sell-off, there were five “bear market rallies” where the market rose more than 20%. All of these stock market highs were higher than the previous highs, and the following lows were lower than the previous lows.

So this must have been really frustrating and disorienting. Adding to the disorientation is that an average investor lost 35% of their assets six different times is the same three years.  Tragically, the final damage after all was said and done from 1929-1932 was a loss of over 90%!

Looking at this historical worst case, if someone had the great misfortune of buying into the market just before 1929 crash, it took someone about 10 years to get back to where they started. There have also been some great 10 year windows in the last 100 years. For example, there have been three 10 year periods that have produced annual average rate of returns of +18%.

Contrast this with an investor getting in just before 1929 but had only had a 5 year horizon, their average annual return would have been a loss of 16.4% per year!

So for those of us who want to make market decisions based upon the historical worst case, we might want a window of no less than 10 years as a minimum “time in the market” to feel comfortable we have little chance of getting out less than we initially invested.

More About Sleeping at Night…a Personal Financial Stress Test

Published by JS Wolff on April 27, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

All of us have a distinct financial personality or what we call our “Money Pulse”, that is probably different than anyone else’s.  What you do or don’t do with your money in tough times says a lot about your core financial beliefs.  Often we get caught up in a herd mentality and we gravitate toward what others are doing. Consider Bernie Madoff and the famous people who invested millions without asking fundamental questions.  An economic crisis is not a time to follow the crowd…it’s a time to know yourself extremely well.

Very few of us have ever trained for or thought through a financial emergency…or any emergency for that matter.  My wife is a chaplain for the local county Sheriff’s department and through her experience, I have gotten a taste of what it means to be mentally and physically equipped for tough situations.   Last year, after 4 months of preparation, she was a part of the response team at a simulated school shooting.  Everything was planned to look like a real event.  Yes, it’s tragic that this kind of training is necessary and all involved hope they never have to use what they learned that day, but she is convinced that lives will be saved if…

Similarly, commercial pilots spend about 80% of their training time on emergency procedures. A recent example is the remarkable “Miracle On the Hudson”, where 155 airline passengers were saved in January due to Captain “Sulley” Sullenberger’s superior preparation and crisis management skills.  Sullenberger drew upon four key attributes during that eight minute flight which we can borrow to help us manage our money in tough times.  More about those in upcoming posts.