Insight into the Financial Aid Process

For many parents with children approaching college age, the financial aid process is daunting and opaque.  While most families don’t pay the full college “sticker price,” it was previously difficult to get a sense of what you’d be expected to pay before actually going through the financial aid process. That in turn made it difficult to plan and save.

College pricing is the ultimate form of what economists call price discrimination.  That is, selling the same product at different prices to different buyers in order to maximize profits. This means that your child’s college roommate could be expected to pay an entirely different amount than what the same college is charging for your child.

In 2011 the Obama administration gave parents a bit more insight into what they can expect to pay by requiring all college and universities to post a Net-Price Calculator on their websites.  Net Price, as defined by the U.S. Department of Education, is the amount that a student pays to attend an institution in a single academic year AFTER subtracting scholarships and grants the student receives.  These calculators allow prospective students and families to enter information about themselves to find out what students like them paid to attend the institution in the previous year after taking grants and scholarships into account.  Remember that scholarships and grants are funds you don’t have to pay back.   

It’s never too early to start playing around with these calculators to get a sense of what you’ll be expected to pay. If you want to find a certain college’s Net Price Calculator, click here.

If you’d like to discuss the best way to start a college savings program for your child, please click here to set up a time to chat.

Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial advisor, tax advisor, accountant, or attorney with regard to their specific situation.

Minimize Taxes By Putting the Right Assets into the Right Account

One thing that often gets overlooked when it comes to personal finance and investing is making sure that you put the right assets into the right accounts.  This is also referred to as asset location. Just like storing your leftovers in the right containers in the fridge, it’s important to hold the right types of investments in the right investment accounts. This ensures that you aren’t paying more in taxes than you need to and can defer taxes for as long as possible. 

With the aim of minimizing your tax burden, optimal asset location boils down to holding the most tax in-efficient assets in your most tax advantaged accounts and your most tax efficient investments in your taxable accounts.   This only becomes a consideration if you are in the fortunate position to be filling up your tax advantaged accounts each year and your only option to invest more is in a taxable brokerage account.    

To break it down further, investments that have a high tax burden should go in your accounts that allow you to defer tax such as IRAs and 401(k)s or in those that allow you to escape tax on earnings and growth altogether such as Roth IRAs or Roth 401(k)s.   And investments with a low tax burden are better off in your taxable account if you’ve run out of room in your tax advantaged accounts. 

Let’s back up a moment and talk about the different ways your Investments get taxed:

▪  Long-term capital gains (that is, gains on investments held for more than one year) get taxed at your long-term capital gains rate which can be 0%, 15% or 20% depending on what income tax bracket you are in.

▪  Short-term capital gains (that is, gains on investments held for less than one year) get taxed at your ordinary income tax rate.

▪  Qualifying dividends also get taxed at your lower capital gains rate but non-qualifying dividends get taxed at your ordinary income rate.

▪  Corporate bond interest gets taxed at your ordinary income rate.

▪  U.S. Treasury bond interest is taxable at the federal level as ordinary income but not at the state level.

▪  Municipal bond interest is tax-exempt at the federal level and, if issued in your home state, is also state tax-exempt.

Let’s talk through some examples to make asset allocation a bit more concrete: 

Here are some examples of tax inefficient funds that should be placed in a tax deferred or tax-exempt account:

·      Actively managed equity (stock) mutual funds that have high-turnover

·      Bond Funds

And here are some examples of tax efficient funds that you can place in a brokerage (i.e., taxable account) assuming you’ve used up all the room in your tax advantaged accounts:

·      Index funds or passive ETFs (passively managed means that by their nature they have low-turnover and thus very little capital gains distributions).

·      Tax-managed equity mutual funds (managed to minimize capital gain distributions).

·      Municipal Bond Funds that are free of federal income taxes and, if bought in your home state, are free of state income tax.

To simplify even further: since bond interest is taxed at your ordinary income tax rate and most stock dividends are taxed at your lower qualified dividend rate, as a rule of thumb you want to place any bond funds in your tax advantaged accounts and tax-efficient stock index funds in your taxable accounts once you run out of space in your tax advantaged accounts.

Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial advisor, tax advisor, accountant, or attorney with regard to their specific situation.

How Long Will I Live?

It’s a question we all ponder occasionally... how long will I live? But it becomes especially relevant when planning for retirement. To get a sense of how long you might live, check out this handy free longevity tool from the Society of Actuaries. Click here to run your numbers.

Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial advisor, tax advisor, accountant, or attorney with regard to their specific situation.

Setting Yourself on F.I.R.E.

You don’t have to be planning to retire at 32 to get value out of the F.I.R.E. movement.  For those uninitiated, the acronym F.I.R.E. stands for “financial independence, retirement early” and is about achieving financial freedom at an early age.  

For some people, “financial freedom” means retiring early and to others it’s simply having the freedom to do what you really want to do in life rather than being a slave to a paycheck.  It’s also about unshackling yourself from some of the norms of our consumer driven culture in order to save a large portion of your income each year to achieve financial independence as soon as possible. 

Led by bloggers such as Mr. Money Mustache and Early Retirement Extreme, the concept of F.I.R.E is slowly penetrating the mainstream.

If you aren’t ready to jump all in on the F.I.R.E. bandwagon, getting familiar with some of its champions is a great way to get inspired and stay on track to meet your own financial goals even if they are of the more conventional variety like retiring in your 60’s rather than your 30’s.

One thing that stands out when reading F.I.R.E. blogs is how supportive the F.I.R.E. community is of each other and in spreading the gospel of financial independence.  Another shocking aspect is how transparent they are with their own net worth.  Most of us are more likely to be comfortable getting naked in public than sharing with the world our net worth and retirement savings.  However, that is exactly what these bloggers do each month, sharing the minutia of their net worth and savings and the ups and downs they experience each month.

To that end, here’s a run down of some of my favorite F.I.R.E. blogs beyond the ones you may already be familiar with.

If you’ve ever day dreamed about packing your bags and country hopping all over the world, Go Curry Cracker is a F.I.R.E. blogger actually doing it and living a lot more cheaply than most of us do staying put in the U.S.  Jeremy and his wife retired in their early 30s after living super frugally and have traveled the world ever since—what they call being “location independent.”  His posts, whether on reducing your tax bill, or his best travel mistakes, are equally entertaining.  Not surprisingly, he’s also an expert on travel reward credit cards. 

Budgets Are Sexy is written by a F.I.R.E. blogger who goes by the name “J. Money.”  No one makes talking about money more fun than J. Money.  And he’s not afraid to get personal.  Each month he publicly tracks his net worth and breaks down in detail where he’s up and where he’s down and what financial goals or decisions he’s grappling with at the moment.  The power behind Budgets Are Sexy and why he has such a loyal following is that he’s a regular guy with no particular financial training.  He has slugged it out month after month, including bouncing back from bad financial decisions, to achieve his goals.  In short, if he can do it, we can too. 

Physician on Fire is a F.I.R.E. blog purportedly for doctors but it has really practical advice that applies to a much broader audience including resources on student loan refinancing, step by step guides with screenshots for doing backdoor Roth contributions, and recommendations on the best credit cards for small businesses and cards for those who love free travel.  He also gives out handy Excel-based financial calculators to play around with such as his tax drag calculator.

Another one to follow is The Mad Fientist who does a great job of breaking down complex financial analysis making it easy for everyone to understand and apply like his popular post on safe retirement withdrawal rates which summarizes all the latest research in this area.

There are so many F.I.R.E. bloggers out there and they can all be found on a handy directory on Rock Star Finance. You can sort by category or by different life stages to find various F.I.R.E. blogs and also more conventional personal finance blogs that interest you.

One word of caution is that many F.I.R.E. bloggers do make money off of their blogs by promoting various budgeting apps, books and software which means that they receive compensation if you click on a product or make a purchase.  So they may not be totally unbiased in their recommendations.  But as long as you know that you can still enjoy their content and find inspiration on your own road to financial independence.

Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial advisor, tax advisor, accountant, or attorney with regard to their specific situation.