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5 Steps to a Successful College Plan

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My personal bar for my children’s education is modest. I hope they’re happy and successful enough that they won’t need to live at home. That’s it. Sure, I’d love for them to have wealth beyond measure (or at least enough to support ‘ole dad in his golden years), but that’s icing on the cake.

I know for certain they’ll need a solid education to have a leg up when searching for a job. Paying for college isn’t a gift to my kids…it’s a gift to me and my own retirement plan….without children begging me for cash.

If you haven’t thought about how you’ll plan for college, now is a great time.

Here are the five steps you’ll need to navigate to create a successful college attack:

What’s Your Target

If junior is only two years old, it’s impossible to discern whether that giggle means she wants to attend Harvard or the local community college. But because a college degree is so expensive, parents need to decide what they can afford early on to set a reasonable target.

Decide these three points as soon as possible:

– What type of school would you like to afford?

– How much college should your child pay for on their own?

– What are you going to do to help junior find money to afford their portion (assuming you’ll make junior foot some of the bill)

Once you’ve determined the type of school you’d like to afford, now we know what we’re aiming for.

Price Your School

Here’s the single most ugly step in planning for education:  peeking at the price tag.

Unfortunately, it’s impossible to create a successful college plan without knowing what it’ll cost. Visit college websites to determine how expensive your little pride-and-joy’s educational journey is going to be. As I just mentioned, this eye-popping experience may cause you to rethink point #1 above. In my experience helping clients plan, we’d set some lofty college goals, knowing that at the very least, if they miss the top rung, they’d still be able to afford the next lower rung.

According to FinAid.org, it’s a good idea to plan on education costs rising at double the inflation rate. This means that a number around eight percent inflation would work as a conservative estimate.

What does this mean? When you begin putting money aside, you aren’t going to need to save today’s costs of an education. Au contraire, you’re going to need to meet the cost in future dollars. That means that you’ll need to use a calculator add eight percent per year to today’s cost to find out the true goal. Armed with this number, you’ll then backtrack to today to find out how much you’ll need to save per month to reach your future education cost goal. Now you have benchmarks and a target. Game on!

Understand Financial Aid Programs

Many people understand that saving into an IRA plan can damage your retirement plan if you’re going to leave work at age 35. These same people fail to realize that certain ways of saving can severely impact the amount of money you’ll need to save for college for your children.  Most students don’t qualify for scholarships so families use a student loan application for financial help with some or all of college’s costs. Using an online service can help you compare lenders to find the best rate depending on how much you may require.

Simply put, different than retirement–which you want to enjoy–college is an experience to survive. If you can succeed in finding a prestigious institution that will cost you nothing to attend, that’s fantastic. For most, the goal is “maximum education for minimum price.”

To receive the minimum price, you must pay attention to how you save money. Colleges will only subsidize your education if you qualify in one of three areas:

  • academic scholarships.
  • athletic scholarships.
  • need-based aid.

If your child is young enough, you can help junior secure good grades to possibly qualify for an academic scholarship. Qualifying is half of the battle. The other half is actually finding and applying for these opportunities. While colleges try and lure the best and brightest they can find, your child in one of millions who’ll attend college some day. Much like a car dealership has to advertise a good deal, you’ll need to advertise your student.

That sounds awful. I’d just rather focus on grades.

Great. I promise you that someone who markets their grades will find many, many opportunities that the person who just focuses on grades alone will find. Hunt. Search. Show off your honor roll student. Colleges will pay you back by showing you opportunities you may not have discovered if left on your own.

Although every parent would like to think that their gifted athlete is headed for an NCAA Division I scholarship, this isn’t normally the case. There are far more gifted athletes than there are programs available. Even if you do have a child with a natural ability to run, jump or throw, you’ll need to still shop your athlete to schools to make sure coaches know you’re interested.

Scholarships often go to students who successfully market themselves rather than the most qualified individual.

That leaves need-based aid programs. A dollar saved depends on how it’s saved. If it’s saved in the students name, it counts differently than if it’s saved in a parent’s name. Also, money in a retirement plan is counted differently than cash in the bank. How you save is vitally important when a college is counting up how much you have. Do yourself a favor and learn how schools count before filling out aid forms. Colleges use a formula called “expected family contribution” to determine how much you’ll be able to afford. Learn this formula. In fact, if possible, find out before you begin saving for college so you’ll have funds in the most appropriate spots to qualify for the maximum amount of aid possible.

Decide How You’ll Save

Popular savings vehicles such as stocks, mutual funds, 529 plans, pre-paid plans, Roth IRA investments and savings bonds all have distinct advantages and disadvantages. The type of fund you use will play a huge role in your savings plan.

Begin the investment selection process with your time frame. For short-term savings, 529 plan (low-risk options) and savings bonds offer safety that others cannot.  Long term savers may choose more aggressive options, such as stock-based mutual funds, exchange traded funds or real estate investments.

Here’s the big key: sheltering your money is every bit as important as picking the right investment. Because 529 plans, pre-paid options, a custodial account and IRAs will affect a family’s expected family contribution for college, it’s important to understand the affects of these shelters on possible aid packages once junior reaches college age. Also, many plans have penalties for early withdrawals or withdrawals for anything outside of qualified college expenses.

Writer Stephen Covey talks about picking up a stick in his book 7 Habits of Highly Effective People. He says that when you pick up one end of a stick, you also pick up the other end. How does this apply to college savings? It’s simple: it’s every bit as important to know how you’ll withdraw money from a plan when you open it as it is to understand funding methods and available investment options.

Apply for Grants, Scholarships and Aid

Finally, you’ll want to focus on a few opportunities where you know you stand a chance of possibly finding funds to help pay college costs. Generally, people don’t just throw money at college programs. There is often something in it for the organization distributing money. By understanding what they want from the student, it’ll be much easier to secure help than by simply thinking that someone is just going to gift your son or daughter a college education.

Schools may want work-study, banks want interest on loans, companies may want a contract for your student’s work. Create a list of grants, scholarships and aid and learn the process of applying for each of these important programs. Many use a form called the FAFSA (Free Application for Federal Student Aid). Read this form ahead of time to learn what questions will be asked.

Some universities offer financial assistance, depending on the student’s need and his or her academic potential. These students will have to fill out the FAFSA and then set up an appointment with the school’s admissions adviser to discuss potential solutions. Setting up this appointment is also a great idea to find out about scholarships and employer tuition reimbursement programs. If you are already working, speaking with your employer about helping you out with your tuition costs can’t hurt and could benefit both parties in the future if you earn your degree and stay at your current job.

Hopefully, this will help distill your successful college plan process into bite-sized morsels to attack. Clearly, there are nuances in each of these five steps. However, by breaking them down into these pieces, you’ll find that what might have seemed like a Herculean task is really a manageable process that you can navigate if you have a little patience and start right now!

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A Goal Setting Plan that Actually (Gasp!) Works

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When I was a kid, I’d tell my mom proudly that my room was clean. After a quick glance, she’d send me back in, saying something about “my version of clean” and “her version.” While I’m still not sure what she was talking about, many people set New Year’s Resolutions with good intentions, thinking they’re pretty good.

Then they’re disappointed when a few weeks later they’ve failed.

Do you want to be a failure when you practice goal setting?

Of course not.

Let’s find a better way. Today let’s try setting goals the way that financial advisors do with their clients. I can’t speak for everyone, but this method I’m going to describe worked well for me.

Never been in a financial advisor’s office? That’s why we call this site the Free Financial Advisor (irony, huh?). Here’s what I did with my clients in early meetings.

We set goals that stick. Here’s how:

…after we chained people up and made them swear off credit cards, we’d…

…of course I’m joking.

I’d begin a meeting by asking my client “what do you want for yourself?”

Although this is the same question people ask themselves when they make New Years resolutions, I received a much different answer. People would give me the goals they thought I’d want to hear, not what they really wanted.

Most often, they’d say:

1) I want college for my kids

2) I want retirement for myself

After I gasped in feigned surprise from hearing the same answer yet again, we’d dig deeper. gauri_gasp

But let’s discuss these two goals (education and retirement) for a moment before moving on. These two goals aren’t at all the same ones that you give to yourself OUTSIDE of a financial planners office. Outside, goals are exciting. You want a new boat. You want to write a book. You want to quit your dead end job and go work for yourself.

You want to be a masked man in tights, fighting common financial planning mistakes.

Oh, wait. That’s mine.

So here’s step one: Write out your true goals. If you give yourself the goal you think “you’re supposed to have,” do what I did with clients. Ask yourself “what else” until they’re exciting. Then keep searching until you can’t dream up any more.

Goal setting sessions should include both short term and long term goals. I’d make clients outline all their goals. Here’s why:

Every goal affects the other ones. How you plan for college is going to have a dramatic impact on your retirement plan. Whether you join the country club will be affected by how quickly you get your new business off the ground.

By this time, clients think we’re done. This is the end for people who complete a New Year’s resolutions list. We’ve outlined the goals.

We’ve gotten a good start, but we ain’t anywhere near done, sister.

Next, step two: we prioritize your goals. Here’s the question I’d ask to help someone prioritize their dreams during our goal setting session. I’d ask,

“On a scale of one to ten, how important is it that you reach this goal, the way you’ve described it to me?”

Here’s what people would answer…

– Oh, I really really want all of these.

Then, I’d ask: “If you can have goal 1, but not goal 2, which would you pursue?” Using the retirement and college example above, I’d ask, “If you could give your children the best college possible, but it meant retiring later, would you retire late or find other education options for the children?”

Everyone thought I had an agenda and that I knew what they were going to say. The answer was obvious. This was the cool part for me. The answer was obvious, but not to me. It was obvious to them.

At this point, people would give a nice sigh of relief. In their mind, goal setting was over.

But it wasn’t. Although your average New Year’s Resolution was way over, we were now halfway.

My next job? If I’m a professional asking about goal setting, I still don’t know the goal. Sure, for you it’s retirement or your kids’ college. For me, the goal is an amount of money.

We’ve done a ton of work, but still haven’t actually set the goal.

How do you know how much to save for a goal if you don’t know the target? I’m often amazed when I see people saving five or eight percent into their 401k plan at work.

I’d ask, “Why are you saving that amount?” I’d usually hear answers like:

– It’s what I can afford.

– It’s the amount my company match.

– It’s the cap in my retirement plan.

I can’t remember a time someone answered, “Because that’s the amount it will take to reach my objective.”

But isn’t that what you’re really trying to do with a New Year’s Resolution? Aren’t you trying to reach a goal?

Here’s what we’d do next: in step three, I’d ask my client how much they’re saving toward each goal. My goal wasn’t to embarrass them, but it was to make them understand that there’s a lot more to goal setting than just throwing out a list of dreams and prioritizing them.

Quickly, we’d proceed to step four, finding out what each goal costs. Every goal has a simple equation to reach:math joke

Money x Return = Goal

Money can be expressed as either savings or new contributions, and return depends on the amount of risk you want to take. Both factors affect each other. As an example:

If you need to save $10 (yeah, right….but let’s run with it) and achieve an 8 percent return to reach the goal, you now have some numbers to play with.

If you save $11, you could reduce the risk you take on investment.

If you achieve a high return, you can spend money on other things, speed up the goal, or Super Size it!

Once we know these numbers, then we can proceed with step five: create the plan to reach the goal. It doesn’t take long and we’re able to

Here’s my question: how do you know which you’d do until you’ve followed these steps:

1) Write out your true goals. Both long and short term.

2) Prioritize the goals.

3) Write out how much you’re currently saving toward the goal.

4) Find out the cost of the goal.

5) Create a written plan to reach the goal.

And there you have it! You’ve successfully completed New Year’s resolutions that are sticky.

Here’s the funny part: I didn’t do this process for my clients.

I did it for me. Because as their financial advisor, I knew they were going to hold me accountable to the goal, and I needed a clear picture of the goal and what it was going to cost before I recommended a plan of attack.

If the hired help does it this way for your goals, why don’t you?

Okay, now it’s your turn: What’s your #1 priority in 2012?

Mine? Lose 10 pounds. Cost: Weight Watcher’s membership. I work better on a team. Timeframe: 1 lb. per week/10 weeks till finished, then maintain.

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Disability Insurance Optional? I Think Not. – Our Boner of the Week!

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Hey, it’s always fun to say stuff off the cuff with friends, but when you have readers who take your words seriously and act on them….it’s probably best to do some research first. Our Boner of the Week! Is the most outrageous thing I’ve read on the internet in the last seven days.

…and we’re back to personal finance blogs!

A well-known blogger this week described disability insurance as “optional” in an article about types of insurance you should pursue. Really? Maybe it’s “optional” in the same way other insurances may be bypassed if you have other forms of coverage, but I don’t think it’s “optional” like the guacamole on my nachos at Buffalo Wild Wings. Don’t get me wrong, I’m not really a guacamole or disability insurance lover, but I can safely pass on the former. The latter….well, let us see for ourselves…..

When you’re deciding which insurances you need, disability coverage should be at the top of your list.

Here are the reasons why:

– If you can’t work, you can’t feed yourself without income. Unless you’re hoping for that awesome government check every month, disability insurance will protect your family and your things. Know why? You’ll still have income.

– Don’t think it’s going to happen to you? Think again. There’s some great news when it comes to auto accidents. Roads are becoming safer. There were just over 33,000 highway accident fatalities in 2009, as compared to over 43,000 in 2005. Instead of dying, people are just maimed.

seinfeldcd

Gratuitous Kind-of-Funny Picture to Break Up the Post!

Need Statistics? How about these eye-popping numbers on disability:

o As of 2009, persons in the U.S. have a 12 percent chance of suffering a disability. (Cornell University)

o Just over 1 in 4 persons who are 20 years old today will suffer a disability. (Council for Disability Awareness)

o Over 12 percent of the population is currently disabled. (CDA)

o 61 percent of wage earners personally know someone who has been disabled for three months or longer during their working career. (CDA)

Insurance is about odds. I dislike insurance policies as much as the next guy. That’s why my goal is to only buy insurances that I’ll probably need and avoid those that I won’t. Because I’m determining the chance of risk, it makes sense for me to check the probability of the occurance of need.

So, let’s examine the chances of a disability vs. other types of insurance listed in the piece:

Disability: 1:12 (Cornell University, listed above)

Auto: 5.67:100 (collision claims, according to Insurance Information Institute)

Home: 6:100 (Insurance Information Institute)

In fact, the author of the piece acknowledges the high rate of disability but still lists it as optional insurance. I can’t understand this logic.

Life insurance isn’t considered optional in her piece…in fact it’s listed as the third most important type of coverage (behind auto and health). But to express it in the most crude terms possible….isn’t your family better off if you’re dead than if you’re sucking down food and taking up space? They’ll have to cart you to the doctor and help you with basic activities. You’ll use electricity as you watch television or listen to the radio instead of work. It’s not fun for you and expensive for your family.

Not working? Long Term Care coverage isn’t even mentioned in the blogger’s piece and represents a huge hole in the financial plans of retirees who have enough money to protect but not enough to withstand the huge costs associated with custodial care on a daily basis. I won’t go into these facts here, because it’s slightly off-topic.

I’m tired of:

– “financial professionals” describing insurances and listing disability policies as the stepchild of the industry.

– consumers saying “I have disability through work, so I’m all set.” Workplace disability coverage often is capped at a staggeringly low amount of coverage. Why? Because a disability is expensive and insurance to cover a disability is expensive. Do your homework before flippantly deciding that “my insurance through work is enough.”

Still, maybe the blogger is off the hook. Here’s when you don’t need disability coverage:

1) if you have enough money to cover a disability, you can self-insure.

2) if your income stream comes from places that would be unaffected by your disability, and your health care coverage will tackle additional costs.

I’d like to believe that when she wrote “optional” next to disability insurance she meant to write “optional” next to every insurance coverage. Otherwise, I’m sure she meant that you should explore disability insurance as thoroughly as you would health, auto, home and life insurance.

Dearest minions,

When some professional writer, television talking head, or paid advisor tells you to look past an insurance type, always reach for statistics. Although I’m as bad at math as the next personal financial blogger, the numbers will usually find a way to lead me to the truth. The truth in this case: find adequate disability coverage.

Now it’s your turn. What insurances aren’t “optional” in your life? Which do you skip and take the risk?

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What Did 2011 Teach You About Money?

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What’s one of my favorite activities this last week before the New Year? Once I’ve finished watching the Swamp People marathon, I like to turn the mirror on the preceding twelve months and determine what lessons I should remember to avoid future pitfalls. We won’t count lessons like “always check your fly before you walk into the bank” or “some people don’t appreciate grocery store coupons as stocking-stuffers.” Those are lessons we should have learned long ago, but refused.

No, there are bigger lessons that we should have learned in 2011. Not all of them had to do with money.

Here are five of my favorites:

Protect Your Downside

When I was a financial advisor, I was appalled by the sheer number of people who wanted to avoid insurances. 2011 taught us that bad things happen when we least expect it. Whether it’s the awful house fire in Connecticut this weekend, massive tornadoes in Alabama and Missouri, or the nuclear meltdown in Fukushima, Japan, we were reminded in the media that bad things happen suddenly. Because we don’t know when or where disaster is going to strike, it’s a good idea to put your financial house in order while times are good.

Related Ideas for Next Year:

– Build an Emergency Reserve

– Review Insurances

– Finish the Estate Plan

Know Your Money Managers

If you didn’t believe it when Bernie Madoff ran off with carts of other people’s money, the situation at a money management firm called MF Global should be another wake up call. After over $1.2 Billion (with a B) dollars went missing, the head of the firm professed to Congress that he has no idea what happened to the money. While I’ll admit that it’s impossible to know how a manager is keeping your assets safe, handing all of your money to one person is asking for disaster.

This doesn’t mean you should keep all of your funds in an FDIC insured savings account, but it does mean that you should perform due diligence.

2011 Here are some good questions you should be asking yourself:

How many different funds is my money spread among?

If all of your money is under the umbrella of one mutual fund, one asset manager, or one trader, you’re asking for trouble. This isn’t the same as having a single advisor. Good advisors will recommend you spread your money among many different managers, partly to ensure your safety.

How are your dollars protected against someone running off with your money?

Insurances such as SPIC cover investors, but you should know how it works.

What is the objective of each manager?

This question won’t help your funds from being stolen, but it can help you identify whether your advisor is actually recommending investments with your end goals in mind. If a fund is too aggressive, you may lose

How long have the managers of my funds been around?

Asking these questions won’t guarantee that your money won’t get stolen. Nothing can stand against a crafty criminal who’s working hard to steal your money. But you don’t have to make it easy for him. And, with a little planning, you can minimize your losses.

Related Ideas for Next Year:

– Meet with Your Advisors and Ask Questions

– Go to the FINRA BrokerCheck website to review your advisor’s record

– Diversify Your Financial Managers

Don’t Wait on Legislation to Make Decisions

Wow. Was there ever a more politically contentious year? Although there have always been (and will always be) fights between political parties, Washington has divided into two well-armed camps and compromise is a dirty word. It seems that the only legislation being passed are stop-gap measures to keep the government open. For the most part, these same issues will be voted on again in a matter of months.

When I have discussions with people about financial planning, I’ll frequently hear that someone is “waiting to see who wins the next election/whether the bill passes/how taxes are going to shake out/what the market is going to do.”

These are excuses.

There will always be new legislation, new market conditions, new headlines. An effective financial planner doesn’t wait to see what’ll happen. He adjusts to change.

Related Ideas for Next Year:

– Review Your Financial Plan

– Put a New Savings Plan in Place

Your Diploma Won’t Buy You a Job

Whether you agree with the Occupy movement or not, we’ve learned that there are many, many people out there who paid money they didn’t have for a degree, only to find out that there wasn’t a market for their services. Historically, people follow their dream through college and then beginning thinking about which career to enter. Sadly, it’s been proven to us now that before seeking a degree, we have to consider a cost-benefit analysis before deciding on a degree.

This doesn’t mean that you shouldn’t follow your dream. Certainly, you stand a better chance of being successful in your chosen profession if you love what you do. Following the theory that we only have one life to live, you owe it to yourself to establish yourself in a fulfilling career. But you should do some research about the career and how you plan to enter the market before you take on lots of debt.

An example: If you were to open a Mexican restaurant in a town full of other Mexican restaurants, you’re bound to fail to the leading establishments unless you can quickly identify how you’re different and how the competition is vulnerable. Armed with this knowledge, instead of taking out a loan to build another “me too” restaurant, an entrepreneur may decide that a Tex-Mex offering with live entertainment and only waiters fluent in Spanish is a better idea. You may change the hours or the decorations to stress your strengths. Will these moves guarantee success? Nope. But it’s a far better plan than taking out a loan and hoping to succeed, which is what many college applicants now do.

Related Ideas for Next Year:

– Review cost/benefit when taking on debt

– Build written plans to evaluate major financial decisions

Your Banker Might Not Be Your Buddy

Ah, my favorite topic: Bank of America. Like Darth Vader on steroids, BofA decided (without any thought about their reputation) that a five dollar debit card fee was a good idea. This time, protests by consumers and bloggers helped block the move. But the message is still clear: banks are searching for creative ways to replace income lost in failed mortgages and new credit card oversight rules.

Historically, bigger banks have been able to help you in ways that smaller firms couldn’t. Before I woke up, I used Bank of America for one reason: they had a larger network of ATMs than other banks. Then I discovered a little bank that would pay other bank’s ATM fees (I’d give you the name, but they no longer do this for new customers). Online banks are becoming highly competitive. As we move into the mobile banking age, the need for a ready ATM machine is dwindling. It’s time to review your bank and decide if it’s still competitive.

Related Ideas for Next Year:

– Review Your Bank Fees

– Explore Other Banks to Determine If There’s a Better Fit

There you have it. These were the five big lessons I learned in 2011. I’m sure there were many, many more.

Now it’s your turn: What were your biggest financial lessons from 2011?

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Life Insurance: What’s the Right Type of Life Insurance?

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I’m not a big television watcher, so I’m sorry to say that I don’t see much Dancing with the Stars. I know, you had such high hopes for me. My wife watches the show, so sometimes when I’m playing around on “the Twitter” I’ll sit with her on the sofa. On more than one occasion, I’ve half-witnessed a total breakdown by the “star” because the workouts were too hard. What’s interesting is that these “stars” end up achieving nothing on the show while the harder working pairs continue on. Even if they don’t win, those stars that worked hard talk about how rewarding it was to learn something new.

That’s what we’re going to do today: throw out rules of thumb and learn how insurance works. I am totally an analogy ninja.

He did so well last time, The Other Guy is back to write another scintillating post on insurance. If you missed his last one, you may want to start here: Find the Right Amount of Life Insurance in 10 Minutes.

Everyone wants to use rules of thumb, or “what I heard from my friend” to decide which insurance is best. Why throw a dart when it’s nearly as easy and far more profitable to just do the homework?

I hear experts tell us to always buy term insurance. Or they moan that universal life coverage is a rip-off. I agree that there is one type of insurance that’s best for everyone, but:

The best type depends on what you’re going to use the coverage for and how long you’ll need it.

Decisions …so before you believe someone telling you that one type of insurance is better than another, minions, know the available types and how they work! Last week I shared a quick formula to determine how much coverage you’ll need. Let’s use another quick method to understand your choices when it comes to life insurance.

Just as a carpenter needs to know the difference between a hammer and a drill, you’ll need to know all the types of insurance to pick the best kind. Don’t worry, I’ll keep it entertaining.

Term Insurance is probably that most well known type of coverage. Because it’s stripped down coverage, it’s often the only type available in workplace plans. Term insurance is nearly as easy to understand as first grade math: you pay for a specific amount of insurance which covers a set amout of time, called a ‘term’.

Helpful example: Barry Manilow purchases a $250,000 10-year term policy. If he dies during the term, Mandy, his beneficiary would receive $250,000 tax free simoleons. If Barry expires one minute after the term ends, the insurance company owes Mandy nothing.

Whole Life Insurance is equally well known. These plans began decades ago as an alternative to term coverage mainly because the coverage lasts…wait for it…your whole life. Awesome, huh? I know. Marketing and naming wizards, those insurance companies. Most whole life policies contain a “cash value” component that can be cashed in by the owner. Whole life policies require payment for their…drum roll please…whole life, unless you buy a policy that can be “paid up” early. Generally speaking, whole life = coverage for your whole life and premiums for your whole life.

What’s awesome about whole life insurance? Guarantees! If you continue to pay the premium to the insurance company and keep your account in good standing, it’s guaranteed to last. The cash value grows at a guaranteed rate, so you don’t need to worry about interest rate fluctuation much. It’s a wonderful policy type for the super-nervous people of the world.

Universal Life Insurance is a variation on whole life – at some point insurance people said, “Wouldn’t it be cool if the payments to the policy and death benefit could be partially flexible?” Maybe they didn’t ask that exact question, but it makes the point. People who own this insurance pay extra (just like with whole life coverage) to add money to a cash value portion of the policy.

Once enough cash value accumulates, you can sit back and let the cash cover the costs instead of paying more money from your wallet. Many policies allow you to raise or lower the amount of coverage without having to purchase another one.

What’s another key difference between universal life and whole life insurance? Okay, I’ll tell you: universal policy interest rates on cash often float with interest rates. Awesome during 1980 when CDs were paying over 10 percent. Now, though, with the value of savings through the floor, universal policy rates are Coyote Ugly. And no, that’s not code for awesome, like the model-bar.

Variable Universal Life is the newest of the 4 major types. Those crazy insurance companies were getting smoked because the average saver decided to invest money into the financial markets. Marketing people said, pulling their hair out, “what will we do to keep business coming in?” Once again, the phrasing is off, but VUL policies (as they’re known in insurance lingo) were a reaction to the widespread use of mutual funds and other investment tools.

Initially developed in the late 70’s and early 80’s, these types of contracts allow for investment in various stock/bond accounts (similar to mutual funds, but not the same). The major draw of VUL? Flexibility of investments became the name of the game – and the opportunity to have market-like returns right inside your very own life insurance policy. In the go-go 1990’s, this was awesome. Since then, many investors have had middling returns and unpredictable results.

Which is best for the salesman?

In the interest of fair disclosure, I’m going to let you in on a little secret. Life insurance is a BIG commission check…I mean GIGANTIC. You wouldn’t believe how much. Let me give you an example: If you’re a 40-year old man buying a term policy that costs $100/mo; your insurance sales person gets around $850-$900 cash for the first year of your premium payments. Yes, you read that right, you basically pay a year’s worth of premiums to cover the commission amount. I don’t mean to infer that this is bad…it’s just how things operate.

Just thought you’d like to know.

Whole Life, Universal Life, and Variable Universal Life are even bigger payers. I remember receiving a check for over $25,000 for a single $400,000 Variable policy I sold early in my career. I also remember a $70,000 commission check for a $2 million policy. Big money.

My goal isn’t to make you angry. It’s to help you know the broker’s game.

…which brings brings us to the “One Question You Should Ask Before You Buy Anything”:

“Mr. Broker, how much money are you going to make if I buy this insurance?”

I was never ashamed to admit to my clients how much money I’d earn…a good advisor has no reason to be deceptive. But, if he hems and haws…maybe this “complex insurance investment strategy” that sounded pretty cool benefits him more than you. In my opinion, the actual commission is irrelevant – it could be $2 or $20,000, I don’t care – it’s how he answers the question.

All Insurance Types Cost The Same

Sometimes insurance agents will mention that permanent policies, such as universal or whole life, are less expensive than term insurance. I’ll lay it out and let you decide:

Sure, like some margarines are saltier than others, some carriers offer better premiums for smokers, race-car drivers, or 45-year olds. That’s true. However, insurance ‘costs’ among competitors are far closer than you’d initially imagine.

In the above example you’ll see the differences between permanent and term. Notice additional fees (in the right chart, 5 percent is deducted as an additional charge—this fee can be higher or lower depending on the carrier).

Here’s how all insurance costs are similar:

Insurance is sold in $1,000 increments. Imagine pulling up to the insurance store drive thru and ordering 500 $1,000 units of insurance. The cashier calculates the cost based on two factors: your age and the number of $1,000 units you’re purchasing. I hate to disclose this secret: actuarially you’re more likely to die every year you age.

With permanent life insurance, your “cash value” grows over time, reducing the amount of life insurance you buy from the insurance company – which makes it seem like you’re paying less for coverage.

A second handy example: if Jeff Gordon races to buy $500,000 of coverage and he stuffs $50,000 of cash into the policy – his beneficiary would receive $450,000 of insurance and $50,000 OF JEFF’S OWN MONEY to total $500,000.

Permanent life insurance is only cheaper because you’re paying extra into cash when you’re young, which lowers the amount you’re buying later on when it’s expensive.

Whole life, UL and VUL insurances in many ways are forced savings accounts added to life insurance.

Which Should You Buy?

So…which one is best? Well, that’s a loaded question – but here’s what I think. Start by determining how long you’ll need coverage. For the vast majority of savers, maxing out a Roth IRA and 401(k) plan and buying term insurance is the right answer. If you have a long term need and have a maxed out Roth IRA, 401(k) and you still have money left over…well then maybe a permanent policy may be a better choice.

For this reason, using term insurance for succession planning needs at work or estate liquidity needs to cover estate taxes usually ends in disaster. These policies need to be in-force when you die, so permanent insurance works best.

If you’re a worrier about outliving your insurance and want forced savings, whole life, UL and VUL aren’t the enemy. I’ve had clients purchase permanent insurance only because they wanted security and were comfortable paying a lot of money for it. These policies work, but for a cost.

Because most families need life insurance for a fixed amount of time and have other ways to save money, term is often the best choice.

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Find the Right Life Insurance Amount in 10 Minutes

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Another note from AverageJoe’s Thanksgiving visit to the in-laws:

Dear blog diary,

I’ve just trounced my mother-in-law at Scrabble again. It was absolute luck that the triple word score was open for my play of “austerity.” Of course, I had to hide a U and Y in my sleeve to place a nine-letter score. Luckily, we’ve both had enough “holiday cheer” that she didn’t notice. I know that to be a good son-in-law I should let her win, but not until I get a chance to play the word “bailout.”

Between all this winning and making Rice Krispies Turkey Pop Treats, I totally can’t be bothered to post anything today. Instead, I’ve opened the basement and let out The Other Guy, so named because he’s still a practicing financial advisor and doesn’t understand that being associated with me would totally be good for business. Whatever.

We’ll have a special piece tomorrow, but will completely understand if you don’t have time to read it. Safe travels, everyone!

Now, on to the Other Guy:

 

 

A couple of weeks ago, after being sick for about 10 days, I finally went to the doctor. Apparently, I have ‘walking pneumonia.’ I told the doctor that I don’t do any physical exercise, including walking, so I couldn’t possibly have “walking” anything.

In any event, I didn’t feel well. I began to contemplate my own mortality and then an idea popped in my mind: let’s spend a couple of days talking about life insurance! It’s obviously everyone’s favorite topic…and as a financial advisor who doesn’t like to be sold some insurance, I make the perfect teacher. As AverageJoe did with the “evaluate a mutual fund in 10 minutes” post, I’m going to break it down nice and easy for ya’.

Here goes:

Before anything, let’s not waste time evaluating coverages if we don’t have to. All too often, insurance sales professionals and financial advisors will just make the assumption that you need it and proceed to sell it to you. Here’s an easy way to determine if you need life insurance at all:

Questions to ask:

Does anyone rely on you for financial support, either right this moment or if you got hit by lightning?

If you’re single and/or have no dependents, there’s almost a zero point zero percent chance that you need life insurance. I might be convinced that a small group policy so that someone can bury you is adequate. If you have charitable intentions, there are insurance strategies that work really well….but that’s all. Nothing more.

Don’t let an insurance salesman tell you otherwise.

For those of you who have people relying on you for financial support here’s an easy way to calculate how much you need. Is this the best way? Nope. However, once we walk through these steps you’ll be on your way to making a good insurance decision.

Every life insurance discussion contains assumptions. You’ll need to make some to decide what amount is right for you. At the least, you’ll need to know where assumptions have been made, so you’re able to change directions if you need to.

Here are a few assumptions:

If married, I usually assume with clients that they’ll want the mortgage paid off when they die. Even if both spouses have a full time job and can still afford the house, I’ve seen too many people “go off the deep end” when their spouse dies to determine whether everything will remain stable at work and home. I can understand leaving this out, but at the least I’d evaluate your insurance cost with and without this cost before deciding to drop it.

You may find the additional cost is worth the pain.

If you have children, I assume you’ll want them to go to college, and you’ll want it paid for . Maybe not Harvard or Yale, but you want them to have some level of in-state public university education. Since college costs increase 8-10 percent per year on average, this is one of the most expensive budget items a family can face.

Let’s have the discussion here that we’ll have in client meetings: Maybe you paid for your own college expenses. Evaluate your children and savings and not your personal situation when you went to school. With costs rising quickly, do you want them to have this burden?

Here’s how much life insurance you’ll need…plus or minus the assumptions above plus a few more below.

Add together all of your debts, including your mortgage: $__________________

I’ve done the math on an average in-state tuition in the chart below. Add in these costs: $__________________

Next, we’re going to give your family basic income to live on. Here are where we need to make some large assumptions. Take your annual post tax (take home) income and multiply by 80%. This assumes that your family will live on 80 percent of your current salary if you’ve died. There are better ways to do this. Instead, determine what percent your family would need in the event of your death and use that percentage.

Divide this amount by .05. This means that you’ll need to peel off 5 percent to live on. This single number creates (again) huge assumptions. The biggest? It’s that you’ll continue to live on this income stream even as inflation skyrockets. Once again, we’re trying to get in the ballpark, so if you’re trying to do this the “quick and dirty” way, we’ll be close, but there are better ways.

Place your answer here: $__________________

Add up these 3 lines, that’s how much you need.
$__________________

Now, often, I’ve seen insurance salespeople stop at this point. Not good. Remember, you have some current savings! The goal of insurance in most situations is to replace income that you don’t yet have.

Subtract the amount of money you already have saved from the final number.

$__________________
Buy the difference.

Education Chart

Age$ needed todayAge$ needed today
0$78,855.8711$64,200.32
1$77,395.5712$63,011.43
2$75,962.3213$61,844.55
3$74,555.6114$60,699.28
4$73,174.9515$59,575.22
5$71,819.8616$58,471.98
6$70,489.8617$57,389.16
7$69,184.5018$56,326.40
8$67,903.3019$34,071.75
9$66,645.8320$23,139.91
10$65,411.6521$11,792.45

Later, we’ll have a discussion on the various types of insurance you should consider and the #1 question you should ask before you buy anything from any insurance sales person.

As always, this exercise is more about understanding the variables that go into making a good decision as much as it is about the final product. Plug in your own unique situation and evaluate many types of coverage thoroughly before buying life insurance.

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How to Date Your Bank

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Before I begin my joyous rant, I must comment that I’m sure there’s no correlation between the massive amount of chocolate I consumed last night and the sleepies I’m feeling today.

None at all.

monkey_dancing But, even a bad case of sugar-low can’t stop me from doin’ my monkey dance after I saw the news that Bank of America is dropping their $5 debit card fee.  Much like Netflix recently was forced to step back from plans to split their service, Bank of America miraculously realized that screwing their customers might not be in their best interest.

Better late than never.

Choosing a bank is a little like choosing a spouse. It’s a tough decision. You don’t just walk in one day and say, “Hey, bank, wanna tie the knot?” You’re going to be together in some capacity nearly every day, so it might be better to date for awhile.

My favorite banks are much like my spouse: intelligent and low maintenance.

But you don’t know that at first. I used to be a Bank of America customer. Bank of America was the pretty girlfriend who said all the right things until I found the cap off the toothpaste. Then she became the wicked Bank of the West. When I wanted to talk about the toothpaste, she disappeared behind a phone bank of polite service people who “didn’t do it.”

To get the best bank possible, you have to date. Play the field a little. Sew your wild oats. Introduce a few of your friends over to see how the New Bank acts around the family.

Here are a few of the qualities I look for when deciding on the perfect bank:

1) Fees. Banks have, among others, checkwriting fees, teller fees, debit card fees, wire transfer fees and overdraft fees. I want a complete fee schedule before deciding on a bank.

2) Convenience. Is it easy to deposit and withdraw money? How responsive is the bank if I have questions? I mentioned that Fidelity will allow me to use my smart phone to deposit checks. How much more sexy can it get than that?

3) Range of services. I want to know what online tools are available. I love online banking, so I’m going to wine and dine these features before settling on a mate. Budget tools are also important to me. I need to be able to easily track my expenses. Banks with robust budget tools are going to get a second look from me.

4) Statements. This might not be important to you. My spouse doesn’t care for online banking, and wants a statement mailed to us. It must be easy to read. I know what you’re thinking. We also have an abacus at home to help the children with their math homework. Call us the Flintstones.

5) Interest rates. Is there a fairly high interest rate money market? I don’t use CDs often, but are their rates competitive? Use resources such as www.bankrate.com to decide if this bank is in the ballpark.

Those are the four most important areas to me. Maybe you have others. Much like dating, to some degree the mix of qualities one looks for in a bank boils down to personal preference. But also like finding a mate, it’s vitally important to become comfortable with the wide range of online and local banks to see what’s available. It’s better to be surprised about how lovely your bank still is many years later, holding your hand at age 80, rather than finding out too late that she’s been in your wallet again, stealing your cash or your breath mints.

Or leaving the cap off the toothpaste.  I’m looking at you, Bank of America.

Two Simple Steps to Tax Savings

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What???  What do you mean it’s tax time?  That’s not until January when my W2’s come in the mail, right?

My readers are very, very smart, but on this topic, if you were thinking the above, you’re in for a wonderful surprise.

Not as wonderful as a surprise flash mob at Walmart, but still, pretty awesome.

Tax season starts today. Happy tax season! I know. And you forgot to dress up for it.

Between today and the moment the ball drops in Times Square on 01/01/12 at 12:00 a.m. is the only time you have to make changes to your tax situation.  Sadly, most people begin planning for taxes when there is absolutely nothing you can do to create more tax opportunities.

Well, you’re in luck.

I’m going to bequeath unto you some tax-saving ideas you can easily implement over the next 60 days.

It could save you $725 or more.  Cool?  Let’s begin.

Remember, it’s about execution – not strategy.  You have actually DO something…(I know, I know….I’m a task-master).

Strategy #1 – The easiest way to chop $600 off your tax bill

If you have any investments outside your retirement plan, you’ve seen their values rollercoaster over the last few weeks/months as the market’s been pretty range-bound.  If you have a stock or fund you like, but it’s performance leaves a bit to be desired, consider selling it.  Wait 31 days and then buy it back.  If you have a loss, (up to $3,000 per year) you can claim it on your taxes (first against gains, then you can just use it as a deduction).

Neat, huh?  I love saving money.

If you’re not sure how this works, here’s an example from your favorite blogger:

You bought 500 shares of Ford stock (ticker: F) at about $20/share earlier this year.  That means you invested about $10,000 (I’m crazy about math!).  Today, Ford is trading around $11/share.

You believe in the company so you still want to own it long-term.  Fine.

Here’s what you do:

Sell your 500 shares today @ $11/share.  You just realized a $4,500 loss for tax purposes.  In 31 days, you’ll buy it back.  In the meantime, so you don’t miss out on a potential run-up on Ford shares while you’re out, go buy CARZ, an Exchange Traded Fund that focuses on the auto industry.  When the 31 days are up, sell CARZ and re-buy F.

Congrats.  You just saved yourself ~$600 on your taxes (assuming you pay around 25% tax rate).

Strategy #2 – The most-used deduction plus an extra 8%

On average, the most used tax-deduction is the mortgage interest deduction.  So, how about getting another 8%?

Here’s how:

When’s your mortgage payment due?  If you’re like me, it’s due on the first of the month.  If you use automatic payments, this bill is probably deducted from your checking account each month on the first.

Call your mortgage company and cancel the automatic deduction.

Instead, go online on 12/31/2011 and make your 01/01/2012 payment.  Check with your mortgage servicer to make sure it doesn’t need to arrive even earlier to post by 12/31/11.

Here’s what this five minute exercise created:

Let’s assume your payment is $1,000/mo of which $500 is interest (the deductible part).  Under a normal year, you would have $6,000 of mortgage interest to write off ($500 x 12 mo – $6,000).  By making your January payment early, you added another $500 interest payment.  So now you have $6,500 (or 8% more than $6,000) worth of deductions.  Again, assuming you’re paying around 25% taxes, you just saved another $125 in taxes due.

So, all-in-all, Average Joe just made you $725.

You’re welcome.  Don’t go wasting it on doughnuts.

Have a favorite tax-time tip to share?  Comments are open for our tax-time show-and-tell below!

Ripped from the Headlines: Bad Holiday Economic Mood

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Oh, look! I can overspend! Awesome!

Hey, if it works for Law and Order, “ripped from the headlines” should work for something more awesome like financial planning, right?

The headline on my local paper today reads BAD ECONOMIC MOOD ARRIVES FOR THE HOLIDAYS. That’s nothing earthshattering.

I’d like to focus on the subhead.  It reads, “ECONOMISTS SAY LACK OF CONSUMER CONFIDENCE DOESN’T ALWAYS MEAN LESS SPENDING.”

It should.

It doesn’t take a rocket scientist to understand the severity of the spending problem in America. We’re addicted to buying stuff.

It’s time to break the cycle.

Here’s three signs you’re headed for no-good this holiday season:

1)      You head to the store without a budget. Stores spend all year waiting for the holiday season. With military precision, they lay out displays and aisle end-caps to claw money from your pockets. Need proof? How about this: Walmart has already announced that they’ll meet any price, even if you’ve already purchased the item! That’s how serious companies are about you. You need to be equally serious when you hit the mall to buy gifts.

2)      You sign up for the department store credit card. I’m inundated each holiday season by “10 percent off today’s purchase if I sign up for the Kohl’s Visa!” …and other garbage promotions.  10 percent off is better than chocolate covered peanuts, but the gi-normous interest rate these store cards charge is where companies earn a monster profit.

3)      You buy the holiday season on credit. This next line may sound silly.  Ready?  Here goes:  If you can’t afford it, don’t buy it.  The shame you’ll feel in January when the card statements arrive isn’t worth the fun of picking out that special remote control airplane for your favorite financial blogger and charging it. Almost, but not quite.

I know, not rocket science, but most financial planning concepts are simple. It isn’t that you haven’t heard of a concept, it’s that you don’t practice it.

So, to prep for holiday season, here’s your homework:

a)      Determine your budget. How much are you going to spend on gifts? On parties? On ornaments and decorations?

Don’t stop there. We aren’t done with the budget yet. Check it twice, they say in the song. Can you afford these numbers and also your long term goals? Are you spending money on presents that should be placed into your retirement fund? ….that you should be spending on health insurance?

b)      Place the credit cards “on ice.” I had a client who put her credit cards in a tupperware bowl, filled the bowl with water, and stuck it in the freezer. That way, she had a credit card, but had to think long and hard before de-thawing her funds (talk about frozen assets! Oh, stop, I’m killin’ it!).

c)      Create a separate “holiday fund.” When it’s empty, holiday spending is done. Kaput. Finished.

If you want to get hardcore about it (and I know my readers are hard-core savers, aren’t you?), place the holiday fund at a separate bank with a separate ATM card. Set up direct contributions to the account each month from your primary checking account. This way, you’re filling the tank 11 months of the year and draining it one month.

You have choices around the holidays. The worst choice would be to let retailers control your spending habits. By heading into the mall with a plan and sticking to your guns, you control the economy that’s most important to you:

your own.

–          joe

The Secret “Get Rich” Equation

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My mom used to tell me, “there’s a time and place for everything,” which sounds like good, solid meat-and-potatoes mom-speak until you learn that she followed it up with “and now’s the time for gin!”

But the point holds. There is a time and place for everything, including gin, stocks, bonds and real estate.

Every investment has a proper use.

So, today, we’re going to begin the journey toward the pot o’ gold, friends. We’re going to put on our boots and hunt for the secret “get rich” equation that’ll help us choose the perfect investment.  Like a good doctor, we’ll focus on a patient with a problem.

Luckily, we happen to have one right here.  Julie is a good friend of Average Joe. She’s 32 and wants to retire at 60. She’s in the medical field, and hopes to accumulate enough to have the option to retire even earlier.  On the other hand, she currently enjoys her career and isn’t sure if she’ll even want to retire that early.  Because of this, she’s looking for flexibility.  Good for her. I like to hear stories about people loving their work.

This also helps us eliminate investments.  Hear the word “flexibility?” That immediately eliminates several investment choices, narrowing the field.

Isn’t this fun?

And to go faster, we can chuck any discussion about how much money Julie has already saved or which investments she’s currently using. Sure, both are important, but our goal today is to show you how to start choosing the right investment, not to oogle Julie’s assets.

Get your mind out of the gutter. You know what I mean.

Diatribe:  Countless advisors I’ve met begin this process in the wrong place, as do plenty of online helpers. This isn’t rocket science. We don’t have to start with today’s hottest investment or the perfect opportunity.  Instead, we begin with a simple equation.

I’m back off my soapbox.

The equation is this:  Money (times) Return (equals) the Goal.

It’s painfully simple. Julie is going to need so much money and have it perform to a certain specification to reach her end game. It’s math time, boys and girls. If we know two of the factors, we can solve for the third.  In this case, what do we know?  We already have the goal, and Julie knows the amount of money she currently has stashed away.  At this point, she needs to solve for the minimum return she’ll need (at this current pace) to reach her objective.

Ta-da! Once we know the return we need, it’s time to begin choosing investments.

But, before we do that, let’s not gloss over some problems.

We made some assumptions. If someone else performs an analysis on your behalf, you must understand what assumptions were used! If you don’t you’re bound to forget the entire equation.  Here are Julie’s assumptions:

–          She’s going to continue to save at the same rate until retirement. This could easily change (for better or worse).

–          The tax treatment of her assets will not lessen her return between now and retirement (we’re assuming that her return factor will be an after-tax amount).

There are others, but those are the biggies.

Tomorrow we’ll accomplish a single goal:  I’ll show you free places online where you can complete this equation.  I know, isn’t it exciting?

–          Joe

 

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