April Is National Financial Literacy Month: Week # 1 Topic - The Dreaded 'B' Word....Budget

The basic cornerstone to any family's financial success is having, and adhering to, a working monthly budget.  A budget is a plan, an outline of your future income and expenditures that you can use as a guideline for spending and saving.

Only 40 percent of Americans use a budget to plan their spending. But 60 percent of Americans routinely spend more than they can afford. A budget can help you pay your bills on time, cover unexpected emergencies, and reach your financial goals—now and in the future. Most of the information you need is already at your fingertips.

Start by following the simple steps outlined below to get a clear picture of your monthly finances.

1. Add Up Your Income
To set a monthly budget, you need to determine how much income you have. Make sure you include all sources of income such as salaries, interest, pension, and any other income sources, including a spouse’s income if you’re married. Using the worksheet below, write a dollar figure next to each relevant income source. Make sure that the figure you write down is the amount you receive from each income source on a monthly basis.

If you get a salary, be sure to use your take-home pay, not your gross pay. Taxes are usually taken out automatically, but if they’re not, remember to include them as another expense. If you receive money from somewhere not listed, enter the source of that money along with the amount under "other income."

2. Estimate Expenses
The best way to do this is to keep track of how much you spend each month. The worksheet should divide spending into two categories:

• Non-Discretionary - includes all mandatory expenses for the month (e.g. mortgage, food, utilities) 
• Discretionary - includes all non-mandatory expenses for the month (e.g. dining out, gym memberships)

If some of your expenses for one or more category change significantly each month, take a three-month average for your total.

3. Figure Out The Difference
Once you’ve totaled up your monthly income and your monthly expenses (both discretionary and non-), subtract the expense total from the income total to get the difference. A positive number indicates that you’re spending less than you earn – well done! A negative number indicates that your expenses are greater than your income and gives you an idea of where you need to trim expenses and by how much. 

It is during this exercise that you need to clearly define and understand the concept of  'wants' vs. 'needs'.  If you're running into negative net cash flow each month, look at your expenses and see if some of your expenses are merely wants disguised as needs.  If you are getting every cable channel under the sun, try going to just basic cable for a few months.  If you have unlimited texting with your cell phones each month, look at reducing the number of texts allowed each month to free up some money (much to the chagrin of your teenager, I'm sure!).  After going a few months without some of the luxury 'needs', you may just surprise yourself and realized that life isn't so bad without them!

Well done - you’ve created a budget. The next step is to track your budget over time and make sure you are still on target to achieving your financial goals.

April is National Financial Literacy Month: Time to Improve Your Finances and Your Life

I've been making a big push to get financial literacy into the spotlight not only for today's youth, but for their parents and grandparents as well.

Some of my efforts have been in the form of my book, establishing financial literacy courses this summer at Discovery College, getting articles out in the local papers, and continued facilitation of the Dave Ramsey Financial Peace course at my church.

Here are some sobering statistics illustrating why improving one's financial literacy is so critical:

For adults:
* 43% of working Americans have less than $10,000 saved for retirement. 27% have less than $1,000 saved.
* Out of 100 Americans aged 65 and older, 97 cannot write a check for $600 on any given day of the month (a sign of living paycheck to paycheck)
* 7 out of 10 households are currently living paycheck to paycheck

For students:
* 60% of college freshman with credit cards will max them out before the end of their first year of college.
* The average monthly credit card balance for college students is $4,776
* One in every three college students graduate with at least $10,000 of credit card debt alone (not even counting any student loan debt)
* More students are dropping out of college due to finances than academics
* Overbearing debt/financial issues is the leading cause of suicide among college students.

I will be dedicating even more time during this month to get as much information, tips, and suggestions out in front of everyone. I will also be blogging throughout the month, so please don't hesitate signing up and following my blog so you can be notified when new posts are made

I will try to get the first tip/lesson out tomorrow. If there are any topics you would like to see discussed or explained please let me know. The more information I can get out in front of others the better!

I hope everyone has a safe and enjoyable Easter weekend! 

A Little Hard Work Starting To Pay Off!

Almost a year and a half ago, I made the best career decision to date - making the jump from the corporate world of financial planning to starting my own financial planning and investment management firm.  The transition from being able to count on a steady salary to being completely reliant on building my own client base has not been an easy one.  I have to constantly remind myself of the old adage "slow and steady wins the race every time".  I knew going into this leap of faith that things would be different for a while, and they most certainly have!

Well, some of the hard work started to pay off recently when I had lunch with a reporter for one of the local newspapers.  We talked about my new venture and all I have been doing to promote myself and my business.  I didn't realize it would be made into a large article in this week's edition! 

Here is the link to the article on the paper's website: Local Financial Planner Offers Classes, Releases Book

I would welcome any feedback, comments, questions, etc.!

It's been a while since I last blogged......rest assured, the month of April will be another active month here on my blog.  Please check back later this week for more details!

Potential Estate Planning Blunder For 2010

I was assisting a client with reviewing their estate planning today, and I came across a potentially devastating clause in each of their wills.  This clause is, for the most part, boiler-plate verbiage in all wills so I thought I’d bring it to everyone’s attention.  It may or may not apply to you, but I wanted to put the word out regardless.   What’s at issue:  with the new estate planning laws that went into effect this year, the surviving spouse could end up with none of the deceased spouse’s half of the estate.

The clause in the spotlight is a clause that is normally very effective in transferring wealth to surviving spouses and children/charities.  But, as I mentioned above, with the new estate tax laws that went into effect on January 1, 2010 the clause can actually do more harm than good.

Basically, what the clause says is something like this: “When I die, I direct that my surviving spouse is to receive my entire half of the estate, up to the annual exclusion amount.  Everything over and above the exclusion amount should go to my children” (or other siblings, charities, etc.).  For 2008 and 2009, the annual exclusion amount was $3.5 million.  Therefore, in previous years this clause would take the first $3.5 million from the deceased spouse’s half of the estate, give it to the surviving spouse in trust, and everything else goes to the children/relatives/charities, etc.  By doing this, couples can theoretically shelter $7 million of their estate ($3.5MM for each spouse) from estate taxes.

HOWEVER, in 2010 the ‘death tax’ (the estate taxes paid upon someone’s death) is repealed meaning there is no estate tax due on someone’s death regardless of how much money they have.  Therefore, if Bill Gates or Warren Buffett died tomorrow, they would not have to pay a single dime in estate tax.

Here is where the problem could arise:  since there is no estate tax due on a person’s death, there’s no need to have an annual exclusion amount peeled off the top to shelter it from estate taxes.  In other words, the annual exclusion just went from $3.5 million to $0 for 2010.  With the way the clause is written, the spouse will get $0 and everything else goes to the children.  Not good!!

Now, it is highly unlikely that the government will allow this death tax repeal to exist for the rest of the year.  From what I’ve read and heard, they will re-instate the $3.5 million exemption and 45% top tax rate later this year and make it retroactive to January 1, 2010.  But that still should not preclude you from at least reviewing your estate plan to make sure it is set up to do what you want it to do.

If you have a will and have not reviewed it in the past four or five years, please do yourself a favor and read through it again.  If you are not sure what everything means please do not hesitate in contacting me.  I will be more than happy to read over it and explain what it is set up to do and make recommendations if I see any shortfalls in your estate plans.

If you don’t have a will…..you need to get one as soon as possible.  I’ll be happy to discuss with you how to go about getting this done.  I’ve heard of a lot of people who swear by online vendors (e.g. Legal Zoom), but I should stress that not everyone’s situation calls for online forms.  More times than not, meeting with an attorney is well worth the added cost.

I’ll be happy to answer anyone’s questions……I simply wanted to make everyone aware of the potential loophole I’m seeing in other people’s estate documents.

Tips on Increasing Financial Aid Eligibility

Even if you are still a few years away from the first college tuition bill, there are a few steps you can take, some seemingly counter-intuitive, to increase the chances of receiving some sort of financial aid.

About two years before your child is expected to attend college consider how you might reposition your assets so they are more favorably viewed on the applications for financial assistance.  Why start so soon?  The amount of aid you’re eligible for in a given year is based on the previous year’s income.  Controlling your assets and the receipt of income will have a significant impact on your aid eligibility.  For example, capital gains count both as an asset and income and could have a devastating impact on your eligibility.  If you are able to defer income at work, consider doing so for the years your child is in college.  Another option is to reduce your reportable assets.  It may not make sense to pay off that car loan or credit card balance when tuition bills are on the horizon, but it may actually be a wise decision.  Why?  By paying off that car or credit card you simultaneously lower your reportable assets, such as stocks and cash holdings, and increase your financial need.  Parents with $20,000 in the bank and a $10,000 credit card debt will appear to have more resources than parents with $10,000 in the bank and no credit card debt.  In the end, the parents have the same amount of money, but to the financial aid people they have less.

Another strategy to increasing your aid eligibility is to pay attention to who owns what assets.  Asset ownership is critical in determining how much financial aid a student receives.  College-aid officials assess up to 35% of a student’s assets versus only 5.6% of a parent’s holdings.  Therefore, make sure your 529 Plans, Coverdell plans, etc. are in the parent’s names.  Prior to 2006, prepaid tuition plans, including the Independent 529 Plan, were considered an available resource to students and therefore had a more negative impact on financial aid eligibility than a 529 Savings Plan.  However, recent laws passed by Congress treat all 529 plans as parental assets.  Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.

It always pays to save, but just be careful how you do it.

The Costs & Rewards of a College Education

Part 9 - The Basics of Financial Aid: Loans
Unlike grants, financial aid in the form of loans is required to be repaid.  However, students can take anywhere from 10 to 30 years to repay the loan depending on which loan is involved.

Federal Perkins Loan

Perkins Loans are another first-come, first-served option. The federal government only guarantees each school a certain amount of Perkins Loan money each year. This program is yet another reason for students to fill out FAFSAs as early as possible.

A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school.  Your school will either pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year.

You can borrow up to $5,500 for each year of undergraduate study (the total you can borrow as an undergraduate is $27,500). For graduate studies, you can borrow up to $8,000 per year (the total you can borrow as a graduate is $60,000 which includes amounts borrowed as an undergraduate). The amount you receive depends on when you apply, your financial need, and the funding level at the school.

If you are attending school at least half time, you have nine months after you graduate, leave school, or drop below half time status before you must begin repayment.  This period of time is known as a grace period.  At the end of your grace period, you must begin repaying your loan.  You may be allowed up to 10 years to repay.

Perkins Loans also can be discharged or cancelled in full or in part for various reasons, including for graduates who are employed in specific teaching positions, certain public or non-profit family services jobs, and law enforcement or in military service in certain hostile areas.

Federal Stafford Loan

In addition to Perkins Loans, the U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students) and PLUS Loans for parents and graduate and professional degree students; PLUS Loans will be explained later.

Schools generally participate in either the FFEL or Direct Loan program but sometimes participate in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Funds for your FFEL will come from a bank, credit union, or other lender that participates in the program. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.

Federal Stafford Loans are the backbone of the Department of Education's self-help aid program for students. The advantage of Stafford Loans is that their interest rate is lower than what students or parents could get through a private lender. However, it's usually higher than the rate for a Perkins Loan. Stafford Loans are available to students enrolled in an eligible program at least half time and carry variable interest rates that are adjusted each July 1 for the following 12 months.

A Stafford Loan may either be subsidized or unsubsidized. Subsidized loans are based on financial need, and the federal government pays interest on the loans while the student is in school. Students pick up the payments on loan interest and principal six months after they graduate.

Students who do not show financial need, according to the Department of Education's guidelines, but still need more money for school, may qualify for an unsubsidized Stafford Loan. This type of loan does not offer the interest grace period. The borrower is responsible for interest charges beginning the date the loan is disbursed.

Students may take from 10 to 30 years to pay off their Stafford Loans, depending on the amount they owe and the type of repayment plan they choose. Under certain conditions you can receive a deferment or discharge of the loan.

Stafford Loan Interest Rates:

Academic Year    Subsidized Rates    Unsubsidized/Graduate Rates
2009 – 2010            5.60%                             6.80%
2010 – 2011            4.50%                             6.80%
2011 – 2012            3.40%                             6.80%
2012 – 2013            6.80%                             6.80%


New interest rate cap for Military Members

Interest rate on a borrower’s loan may be changed to six percent during the borrower’s active duty military service. This applies to both FFEL and Direct loans. Additionally, this law applies to borrowers in military service as of August 14, 2008.

Borrower must contact the creditor (loan holder) in writing to request the interest rate adjustment and provide a copy of the borrower’s military orders.


Stafford Loan Limits:

Dependent Students                         Annual Loan Limits
First Year                              $5,500 ($3,500 subsidized / $2,000 unsubsidized)
Second Year                         $6,500 ($4,500 subsidized / $2,000 unsubsidized)
Third Year and Beyond          $7,500 ($5,500 subsidized / $2,000 unsubsidized)

Independent Students                      Annual Loan Limits
First Year                               $9,500 ($3,500 subsidized / $6,000 unsubsidized)
Second Year                          $10,500 ($4,500 subsidized / $6,000 unsubsidized)
Third Year and Beyond          $12,500 ($5,500 subsidized / $7,000 unsubsidized)
Graduate or Professional        $20,500 ($8,500 subsidized / $12,000 unsubsidized)


Lifetime Limits
Undergraduate Dependent      $31,000 (Up to $23,000 may be subsidized)
Undergraduate Independent    $57,500
Graduate or Professional         $138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health             Professionals)


PLUS Loans

The Federal PLUS Loan is a loan borrowed by a parent on behalf of a child to help pay for tuition and school related expenses at an eligible college or university, or by a graduate student for graduate school. The student must be enrolled at least half time, and the parent or graduate student must pass a credit check in order to receive this loan.

PLUS Loans are non-need based, which means you do not have to demonstrate financial need to qualify. Eligibility for the PLUS Loan depends on a modest credit check that determines whether the parent has adverse credit. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.

The primary benefit of the PLUS Loan is that a parent can borrow a federally guaranteed low interest loan to help pay for their child's education.  A Federal PLUS Loan allows a parent to borrow the total cost of undergraduate education including tuition, room and board, and any other eligible school expenses, minus any aid the child is receiving in their name.

PLUS Loan interest rates are fixed for all new PLUS Loans at a rate of 8.5%. These loans will not have variable interest rates.  You may receive a 0.25% repayment interest rate credit when payments are set up for automatic debit from a bank account.  Interest may be tax deductible under the Hope Education Tax Credit.  Repayment on a PLUS loan is 10 years; there is no penalty for early repayment, and consolidating your loans after each academic year is easy. It also lowers your monthly payment.

The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive.  For example, if your cost of attendance is $10,000 and you receive $8,000 in other financial aid, parents could borrow up to, but not more than, $2,000.

The Grad PLUS Loan is a low interest, federally backed student loan guaranteed by the U.S. Government, specifically for students enrolled in a degree seeking graduate program. Like the Parent PLUS Loan, the Graduate PLUS Loan can be used to pay for the total cost of education less any aid already awarded. Also, like the Parent PLUS Loan, eligibility for the Graduate PLUS Loan is largely dependent on the borrower's credit rating and history, as opposed to the purely financial need-based Graduate Stafford Loan.

Although many families prefer not to borrow money at all, it's important to remember that federal loans tend to have lower interest rates and more flexible repayment policies than other types of loans. Families who need to borrow money for college should be sure to exhaust all federal loan options before turning to private lenders.

Federal Work-Study

Federal Work-Study (FWS) provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.

Participants are paid by the hour if an undergraduate. No FWS student may be paid by commission or fee. The school must pay you directly (unless you direct otherwise) and at least monthly. Wages for the program must equal at least the current federal minimum wage but might be higher, depending on the type of work done and the skills required. The amount earned cannot exceed the total FWS award. When assigning work hours, the employer or financial aid administrator will consider the award amount, the student’s class schedule, and their academic progress.

The school might have agreements with private for-profit employers for Federal Work-Study jobs. This type of job must be relevant to the student’s course of study (to the maximum extent possible). If the student is attending a career school, there might be further restrictions on the jobs you can be assigned.

The Costs & Rewards of a College Education

Part 8 - The Basics of Financial Aid: Grants

As nervous as college freshmen may be, their cash-strapped parents are probably trembling more.  Disciplined savings using any or a combination of the options mentioned above may not cover the full expense of a college education.  As they have for the last ten years, college costs rose faster than inflation this year.  For the 2009-10 school year, a college freshman can expect to pay anywhere between $15,000 and $60,000 for a full year of tuition, room and board, books, etc.

But many college students don’t pay full sticker price.  63% of students receive some form of aid, either loans, grants, or both, according to the National Association of Student Financial Aid Administrators.

This year's College Board data on financial aid show that almost $143 billion in student aid was distributed in academic year 2007-08—almost $10 billion more than the previous year. In addition, students borrowed almost $19 billion dollars from nonfederal sources to help finance their education.  On average, undergraduate students received an average of $8,896 in aid in the form of grants and tax benefits.  Graduate students received an average of $20,320 in aid.

College financial aid departments will require the Department of Education's Free Application for Federal Student Aid (FAFSA) form, available at www.fafsa.ed.gov, which provides financial details of the parents and student.  It is important to file the FAFSA form early as some grants are given on a first-come-first-serve basis.

Financial aid is intended to make up the difference between what a family can afford and what college costs. The federal government and all public college financial aid offices use a “need formula” that analyzes a family’s financial circumstances and compares them with other families.  The results will vary by college and by state, but the Expected Family Contribution (EFC) formula assumes family contributions are met with savings, income and borrowing.  If a shortfall of college funds does exist, financial aid is awarded. This aid can be in the form of grants, loans, and work-study programs.

Grants

Gift-aid programs include the Federal Pell Grant Program and the Federal Supplemental Educational Opportunity Grant (FSEOG) Program. These grants are generally available only to students who do not yet have bachelor's degrees. In some cases they might be awarded to students enrolled in post-baccalaureate teacher certification programs.

Pell Grants

A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded usually only to undergraduate students who have not earned a bachelor's or a professional degree. (In some cases, however, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant.) Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and nonfederal sources might be added.

Starting July 1, 2009, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began.  It will increase again to $5,550 for the 2010-11 school year.  The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board.  The increased Pell grant doesn't just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.

The maximum amount can change each award year and depends on program funding. The amount you get, though, will depend not only on your financial need, but also on your costs to attend school, your status as a full-time or part-time student, and your plans to attend school for a full academic year or less.

The school the student is attending can apply Pell Grant funds to your school costs, pay you directly (usually by check), or combine these methods. The school must tell you in writing how much your award will be and how and when you'll be paid. Schools must disburse funds at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.

Federal Supplemental Educational Opportunity Grants (FSEOG)

The Federal Supplemental Educational Opportunity Grant (FSEOG) program is for undergraduates with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. Just like Pell Grants, the FSEOG does not have to be repaid.

You can receive between $100 and $4,000 a year, depending on when you apply, your financial need, the funding at the school you're attending, and the policies of the financial aid office at your school.

If you're eligible, your school will credit your account, pay you directly (usually by check), or combine these methods. Your school must pay you at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.

FSEOGs have a few limitations that Pell Grants don't. For one, the amount of your FSEOG can be reduced if you receive other forms of student aid. Also, each school receives a limited amount of FSEOG money; when it's gone, it's gone. That's why it's very important to apply for financial aid as early as you can. You'll have a better chance of obtaining FSEOG money if you're eligible for it.

Next week I will discuss the other two options of financial aid - loans and work-study programs.