Don’t Gloss Over the Cost of College

If you have a high school junior at home, you may have spent the week of spring break touring a few college campuses. It’s the perfect time to kick off the college selection process with your prospective college student.

You want the world to be your child’s oyster, and no one wants to talk about expenses when dreaming about the future. However, as you reflect upon the tours, it is a good time to bring a dose of reality into the equation.

College is expensive no matter where your child chooses to go, but some choices will set you back farther than others. The following chart shows the average cost of college for the 2017-2018 school year from the College Board.

Average Cost of College

While most parents want to send there children to college, only about 57 percent of them save for it. The average household savings for college was only $16,380, according to Sallie Mae. That means the money must come from somewhere else. The following chart shows how America pays for college, also from Sallie Mae.

How America Pays for College

A full 28 percent of the cost of college will be paid for with loans. The average student loan debt per borrower from the class of 2016 was $27,975. At the current Federal Direct student loan interest rate of 4.45% for undergraduates, over the standard 10 year repayment period, payments on loans of that amount will be about $289 per month.

That can be a significant piece of a new graduate’s entry level job income. It’s no wonder that 30 percent of college graduates with student debt move back in with their parents. With money like this on the line, it is important to sit down with your future college student and cover the facts.

Here are five things to discuss with your child before she chooses a school.

  • Tell your student how much you will be able to pay. This includes what you have saved and what you are willing to commit to out of your income. The converse of this is how much should she expect to pay. Only 70 percent of parents of teenagers have discussed their expectations with their child.
  • Outline options for raising the extra money. In addition to student loans and scholarships, your student may be able to raise some money through part-time or full-time work. Taking a gap year to work and save up for school is a reasonable approach.
  • Help your student understand the implications of their choices. Student loans may be hard to avoid, but they can certainly be minimized if you understand your trade-offs. You can calculate the monthly payments given different loan amounts on the Federal Student Aid web site.
  • Provide context for the information. Estimate the kind of monthly salary your student might earn given her career interests. Payscale’s College Salary Report is a good place to start. It wouldn’t hurt to also talk about average living expenses. Career Trends has a cost of living calculator. Don’t forget to show the impact of taxes. How much of her take home pay will be left after student loan payments?
  • Consider starting school at a community college. The average cost per year at public two year colleges is only $3,570 assuming your student can stay at home while she attends.

If you don’t have enough saved to pay for college, think carefully about the impact of paying for school out of your current income. If you are behind in saving for your own retirement, paying for college should not be your top priority. Your child has time to recover from the expenses of school. You do not.

A college education can substantially improve your child’s ability to earn a living. But taking on a lot of debt to pay for it can weaken her financial stability. Help her understand that her choices have implications for her lifestyle after school. Before she makes her final decision, she should know what she’s in for.

 

Your Credit Score Demystified

Credit scores are an important number. They will determine whether you can get a loan and how much interest you will pay. They can also determine whether you can rent an apartment, and it is becoming more common for employers to check your credit score before they hire you.

Unfortunately, the credit score carries a lot of mystery and mythology for many. So, in this post, you’ll learn all you need to know about them.

The credit score was invented in the 1950s by the Fair Isaac Corporation. It didn’t catch on initially as a tool, but in 1970, the Fair Credit Reporting Act was passed, which standardized data collection and reporting. The FICO score (from the Fair Isaac Corp initials) gradually gained prominence as a tool for assessing credit worthiness from there.

Your credit score has five factors, each weighted according to their importance in determining whether you are likely to repay your loan. The following table summarizes the factors, weights and what they mean.credit scores

The biggest factor in determining your credit score is your payment history. So the most important thing you can do to raise your credit score is to make your payments on time. The second biggest factor is how much debt you have outstanding, and the next easiest way to improve your score is to pay down your debt.

Opening and closing accounts can have an impact on your score by shortening the average length of time your accounts have been open, but it will be minor compared to whether your payment history is strong and your balance is manageable.

A friend, who tries to maximize her travel rewards to minimize the cost of travel, opens credit card accounts for the bonus miles and then cancels them once she has what she’s after. She continues to have a stellar credit score, because she always pays on time and never carries a balance. If you have paid off a credit card balance, don’t hesitate to close the account if you no longer use the card.

Checking your credit score has no impact on it. While credit checks to establish new accounts can influence your score under the new credit factor, simply getting a credit report or viewing your score on-line does not change your score.

Regularly reviewing your credit report is an important defense against fraudulent activity in your name. I recently found a credit card account I had not opened on my credit report. Through a little correspondence with the credit agency and the lender I was able to get the account shut down. Debt established in your name is payable by you unless you actively work to close down accounts you didn’t open.

You can actually live without a credit score. If you are committed to living debt free, a credit score is not necessary. Even if you want to get a mortgage, but have no other debt, you don’t need to open some credit card or buy your next sofa on credit to establish a credit history. The things you do all the time will be enough.

If you pay your rent, utilities, cell phone and other bills, on time, and you have a down payment, you have what you need to get a mortgage. However, without a credit score, you may need to work with a smaller mortgage lender and allow more time. The larger lenders like the efficiency of seeing your character summarized in a single number.

Credit unions, independent mortgage brokers, on-line lenders and smaller banks may all be willing to provide the customer service needed to assess your credit worthiness without a credit score.  You can get pre-approved before you go house hunting and still be ready to jump on the perfect place when you see it.

You won’t be negatively impacted by having no credit score with other credit checkers. Having no credit score means you have no debt, which is a profound statement these days. Your future landlords will be happy to review your history with prior landlords. Employers looking to judge your character by your credit score will get the information they need by its absence. Certainly no score is much better than a bad one.

Your credit score is an important number, and the best ways to keep it strong are to pay your bills on time and pay down your debt. If you can accomplish that, the other factors play a minor role. You can live without a credit score, so don’t take on debt simply to establish one.

The New Withholding Calculator is Here!

The 2018 Tax Reform bill will have a significant impact on families’ income taxes for 2018. The bill went into affect as of January 1st, and employers received guidance on how much to deduct from employee pay in February. The guidance was designed to line up the new tax rates with the prior withholding tables, so employees didn’t need to file a new form W-4 with their employer.

But you still may want to review your payroll deductions to make sure you are not having too much or too little withheld from your pay.  I’ve been waiting to do this post until the IRS withholding calculator was available, and now it is!

According to the IRS, the average tax refund, before tax reform, was over $3,000. That is a lot of money that could be going to build your emergency fund, your retirement savings or to reduce debt if you weren’t paying it to the government. Now, with lower tax rates and a higher standard deduction, your current deductions might exacerbate the over withholding, or in some cases leave you under withheld.

The new tax law increases the standard deduction for everyone, but eliminates the personal exemption. So for many, you will have a lower taxable income due to the increase in the standard deduction, but if you have more than one kid, the loss of the personal exemption will increase your taxable income, unless you have more than the standard deduction in itemizable expenses. The following table provides a comparison.

Standard Deductions

In addition to the changes in the standard deduction, one of the most common itemizable expenses has been capped. The maximum deduction for state and local taxes is now $10,000. That is high for most people, but if you live in an expensive area, it could raise your taxable income.

Several other common deductions are no longer allowed.

  • Casualty and theft losses (unless due to a federally declared disaster)
  • Unreimbursed employee expenses
  • Tax preparation expenses
  • Alimony payments
  • Moving expenses
  • Employer subsidized parking and transportation reimbursement

The deduction for charitable giving is still available, and the amount you can deduct has been increased from 50 percent of your income to 60 percent. The medical expense deduction is also still available, and the deductible amount is now anything over 7.5 percent of your income, down from 10 percent. The mortgage interest deduction is still allowed as well.

Aside from the changes in the tax laws, you should review your withholding regularly anyway. Things change, and it’s important to have the right taxes taken out of your pay. Not too little and not too much. Too little and you’ll have a tax bill that you didn’t plan at the end of the year, and too much will cost you the opportunity of doing other things with your money.

The IRS withholding calculator will walk you through all the things that should be considered when determining how much taxes to have withheld from your pay. It will estimate the taxes you will owe for the year and the taxes that will be withheld if you don’t make any changes. Then it will recommend the correct allowances to enter on a new Form W-4. To get started, have your most recent pay stub and your 2017 tax return available.

If you have your information handy, the calculator only takes a few minutes to complete. Take a moment and make sure you’re having the right taxes taken out of your pay. If you are like most people, you’re likely having too much taken out and could have more money to put toward your goals if you change your allowances. On the other hand, you can avoid a nasty surprise if the tax law changes worked against you.

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America Saves Week 2018

It is America Saves Week once again. During this week, each year, the Consumer Federation of America encourages people to save for their financial security by pledging to save money, reduce debt and build wealth over time. It’s a great opportunity for you to put your action plan in place.

What action plan you say? If you’re struggling with where to start, here are a few ideas.

  • Pick one thing to work on. Maybe you’ll decide this is the week you sign up for your 401(k) through work or increase your contributions. Or maybe you’ll commit to paying down that credit card debt or begin working on an emergency fund. Any of these are good.
  • Put it on your calendar. Whatever action you decide to take, put it on your calendar. If you are working on your 401(k), put a visit to the web site or your human resources department on the calendar. Or put “open a new savings account” for your emergency fund on there. Studies have shown that people are more likely to do something if they commit to it in writing.
  • Decide on an amount. Decide on a realistic savings goal. You want your savings to grow, or your debt to shrink, but you also want your savings to stay saved. Your savings goal needs to be realistic. Don’t worry if it’s small to start with. Even small amounts help and you can increase your savings over time.
  • Decide what behavior you will change. For some, just taking the money off the table through an automatic savings plan is all that is needed for your savings to grow. For others, you may need to figure out how to free up some money so you can save it. How will your behavior change to make the money available? Whatever you decide make it something you can stick with.

Saving money is the only path to financial security, and far too many people don’t save enough. America Saves Week is as good a reason as any to get started, and the Consumer Federation of America will give you a little incentive to do it.

This year, if you formalize your pledge by entering it on the America Saves web site, you will be eligible for a raffle to win $500 toward your savings goal. You can boost your prize by another $250 if you share your goals and story on social media.

When you sign up you will also receive information, advice, tips and reminders by email or text message to help you be successful in meeting your goal. The web site has great tools and resources, including checklists, videos, calculators and more that are free for you to use even if you don’t enter the drawing.

So, go forth this week and save. The future you will thank you.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Four Things Retirement Savings and Going to the Olympics Have in Common

I love the Olympics. Amazing people from all over the world converge to do amazing things. Things that most of us haven’t even dreamed of. But those athletes did. And that is the main reason they are in Pyeongchang.

Their dreams were so important that they set aside hours a day to train. They gave up everyday comforts. In an interview, Adam Rippon, from the men’s figure skating team, talked about living on apples he snuck from the gym, because he didn’t have enough money for groceries. Yet their dreams were so important the sacrifice was worth it.

You may not have your eyes on an Olympic medal, but some of your goals can be just as daunting. Having the financial security to one day leave your job and not worry about money is likely one of them. That goal requires many of the same disciplines as an Olympic dream.

First you must define your goal. Olympic athletes don’t get to there by wanting to be Olympians. They get there by wanting to be the best at short track speed skating, or half pipe snowboarding or cross country skiing. You must define your retirement goal in terms of how you want to live when you stop working for pay.

That can be a tall order. Who knows how you’ll want to live decades in the future. Some may have a vision of it, but if you don’t, how you live today may be a good starting place. From that you can get an estimate of how much money you need to fund your lifestyle. Fortunately there are many free resources on-line to help you do the math. The following are a few you can try.

Bankrate Retirement Calculator

Nerdwallet Retirement Calculator

CalcXML Retirement Calculator

Next you need a strategy. Athletes have training and diet regimens. Similarly, you need to decide what you will do so you can save for the future. Where is the money for savings going to come from?

For some, simply taking the money out of the picture, through an automated savings program like your company retirement savings plan, is all that’s needed. Others may have to figure out how to free up some money first so it can be saved. Creating a spending plan, otherwise known as a budget, will help you sort out what you value and what you don’t in your current spending. Goals have a way of shining a light on your trade offs.

Then you need to practice and monitor your progress. Olympic athletes only get where they are through practicing their skills. They enter competitions to see how they are progressing toward their goals. They compare their performance to other athletes in the same field to learn what they need to improve to be better than them.

You also need to practice and measure your progress. Decisions you make every day will help you stay on your spending plan. Checking your actual spending relative to your plan and regularly reviewing your balance against shorter term savings goals will allow you to make adjustments so you can improve your progress.

You don’t have to do it alone. Olympic athletes usually have a family that supports their dreams and a good coach. Get help with achieving your goal. Make sure your family is on board with saving for your future, and enlist the help of a financial planner if you are not making the progress you want. To find a Certified Financial Planner in your area search letsmakeaplan.org.

Big goals are daunting. Your future financial security is no less of an endeavor than pursuing an Olympic medal, and the path to success is the same. You have to know what you want, develop a strategy for achieving it, practice your skills, monitor your progress and get help when you need it. It takes a long time, so the earlier you begin the better off you are. Decide today to begin pursuing your own dream.

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New vs Used: A Different Angle on Car Buying Advice

In the market for a car? There isn’t much debate when it comes to the question of whether you should buy a new or used one. Most advice you can find says go used. But that is too broad. There is little reference to the cost of the remaining life of the car when discussing the merits of used cars over new ones. This can be a critical miss.

New cars depreciate the moment they are driven off the lot. In the first year the value of the car drops by nearly 30 percent, according to Edmunds. By the time the car is five years old it will have lost half its value. But does that necessarily make buying a car after it has depreciated a better deal?

Even with the depreciated value, used cars valued on a price per remaining mile may not compare well. In a very unscientific survey of local used cars, most actually did not.

The following chart shows 4 cylinder Honda Accords, model years 2014 to 2017, available in the Portland Metro area and listed on UsedCars.com.  These are compared to a brand new 4 cylinder Honda Accord based on an on-line quote from a local dealer.

used cars 200000

Of the used cars currently on the market 70 percent were priced at a higher per remaining mile level than the new car. If you want to own your car for fewer miles, the comparison is even worse. The following chart shows the price per mile if you assume you only want to drive the car until it hits 100,000 miles. Only one of the used cars was a better deal than the new car on this basis.

used cars 100000

Cars have become very reliable. Most can be expected to last for 200,000 miles or more with recommended maintenance. The average driver could easily own a car for 15 years. Whether you plan to own your car until it dies, or you tend to sell your cars when they hit a mileage milestone, what you are paying for the remaining life is an important consideration.

The conventional wisdom to buy a used car instead of a new one may not always be good advice. While you will pay less in absolute dollars, you may not get a better value. Comparing the value given the miles you will be able to drive the car may very well lead you to buy new instead.

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Four Documents Everyone Needs

Have you ever considered what would happen if you died suddenly? It is not a subject at the top of most people’s mind. But it is a real possibility. Car accidents alone kill more than 3,000 people every day.

Because you don’t spend much time thinking about death, preparing for it may not have occurred to you. However, regardless of your financial situation, there are four documents that everyone should have.

Everyone needs a will, an advance healthcare directive, a durable healthcare power of attorney and a durable financial power of attorney. Preparing basic versions of these documents is easy and doesn’t cost much.

A will is a document that records what should be done with your savings and other belongings, also known as your assets, if you die. It can take any form, but to be valid it must be witnessed by two disinterested people. A disinterested person is anyone who won’t benefit from the will.

If you haven’t left instructions for how to deal with your assets, the state where you live will make the decisions for you. Each state has a set of rules for how to distribute them. Regardless of what you might want, or have told your family and friends, the state will follow their rules.

In some states, the rules may be far from what you would want. For example, in many states, your surviving spouse might have to split your assets with your parents and siblings, if you haven’t left a will indicating otherwise. If you have children, and both you and your spouse have died, the state will appoint a guardian according to their rules, and that might not be who you intended.

You can write your will without any help, but for good on-line templates consider Rocket Lawyer, Legal Zoom or another on-line resource. A will you create yourself, using one of these sites, will likely cost less than $100. This may be all you need if you don’t have much in the way of assets and have no children. If your situation is more complex, it is worth speaking with an attorney.

Keep in mind, your will will not govern what happens to your retirement accounts and insurance policies. They are controlled completely by the beneficiary designation on the account. What your will says makes no difference. Make sure you maintain the beneficiary designations with an update whenever you have a life change.

An advance healthcare directive, also known as a living will or a medical directive, documents your wishes regarding the types of care you want to receive. This may include how far you want medical personnel to go to keep you alive, the type of pain medications you wish to receive, and whether you prefer to spend your last days at home or in a hospital.

An advance healthcare directive is done on a state regulated form. You can download your state’s form from Caringinfo.org for free. However if you use one of the on-line legals sites, one should be provided for you with your will.

A medical power of attorney gives a person you name authority to make health care decisions for you in line with your wishes. A financial power of attorney gives a person you trust authorization to pay your bills, and otherwise manage your affairs while you are incapacitated. These are separate documents, and you can name different people for each. These documents are also available for free through the links above.

In addition to these legal documents, record your on-line accounts with your usernames and passwords, and save them in a safe place, such as a safe deposit box. This is so the person who has your financial power of attorney knows what accounts you have and can easily access them.

Make sure that anyone who will be responsible for handling any of your affairs knows where all your important documents are located. You should walk them through your wishes, so they will know what to expect if the need arises.

No one wants to think about death. However, if you take some time to do it now, you will save your family from agonizing over what you would want if the worst happens. Preparing a basic version of these four important documents will ease the burden on your loved ones, and it is easy and inexpensive. Make it a priority.

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