College Applications

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It’s that time of year when wide-eyed high school seniors are beginning to realize that all good things must come to an end. Their comfortable little worlds are about to be shattered, and they will soon be tested to see if they have what it takes to be a small fish in a bigger pond. Applying for college isn’t just about the applicant, though: where someone goes to seek higher education can affect their friends, their family, their family’s finances, their finances, their chances of succeeding academically, their chances of succeeding socially, their ability to get a job after college, and the range of their expected earnings for the next thirty to forty years. I certainly didn’t realize all of this during my senior year at Jonesboro High School, and luckily I came through okay, but as my ten-year class reunion is coming up, I want to pass on some things I now realize in hindsight.

I was more than torn about where to go to college; I wanted to pursue music at the University of South Carolina, I wanted to pursue theatre at Florida State, and for a brief period of time, I even wanted to be a business major at Georgia Tech. After spending a lot of time visiting colleges, talking to older friends, talking to my family, praying, and staring at my childhood bedroom’s ceiling, I became an accounting major at the University of Georgia. Looking back, I’m confident (and lucky) that I made the right decision for me, but it scares me how little I knew then about how much my chosen path would direct my future.

First, all schools do not cost the same. The extra costs of tuition and travel for out-of-state schools can really add up. The difference between four years at Florida State and four years at UGA (with Georgia’s Hope Scholarship at my disposal) was more than $100,000! I was making around $6 an hour back then, so I had no concept of what that much money really meant. I chose Georgia so I could pursue business and continue my love of music with their marching band at the same time, and because of its comfortable proximity to my family (and the future Mrs. Presley), but money had very little to do with it. Perhaps that was best, but if I hadn’t had the Hope Scholarship or had parents who were generously willing to help me through college, I could have walked out with six digits worth of debt! Now future lawyers, doctors, pharmacists and others have to do what they have to do, but I wish someone could have gotten me to understand what significant student loans would have meant to my financial situation right out of college.

Second, all schools are not created equal. Sometimes going to a top-notch, top-cost school is a great idea, but not always. I personally know many people with prestigious diplomas (or at least orientation shirts) who aren’t quite as polished as other people I know who went to less elite institutions. Now I know some ivy-leaguers who are the real deal, too, but my point is that a degree in making widgets might not require a school that costs as much as Harvard. I think the ranking and quality of the particular degree program you will be in (if you know what your major is going to be) should partially drive college decisions, not the prestige of the overall college or the ranking of their football team. I’ve already told you the four colleges I was considering back then, and they were all pretty decent in the areas I was considering studying, but I wish someone could have gotten me to understand that the perceived prestige and the overall cost of the college really don’t have as much to do with the quality of your education as you might think. 

Finally, all majors are not created equal. I might catch some flak for saying this, but I think I have a right to say it considering many of my closest friends and I graduated during The Great Recession. I was fortunate and had a job lined up before everything hit the fan, but even so, my start date was delayed several months. As for many of my friends who weren’t fortunate enough to have a degree in death or taxes (the two certainties in life according to Benjamin Franklin), some of them learned firsthand and shared with me the horrors of realizing that a “Bachelors of Underwater Basket Weaving” wasn’t going to cut it. There are a lot of awesome and very crucial majors out there, some that I probably would have even liked more than accounting and finance, but there are some that are only useful for filling up the professor teaching the major’s classroom. The whole concept of be what you want to be and do what you want to do is great to a point, but it has its limits. Unfortunately, you can’t always be hired when you want to be hired or get paid what you want to get paid!

I thought college was important back when I was applying, but I had no idea about the impact a higher education can have on employment and wages. It may be even more than you think, and I urge you to check out these J.P. Morgan charts showing current unemployment by education level and average annual earnings by highest degree earned.

I bet very few of my readers are currently applying for college, but some of you have children, grandchildren, brothers, sisters, and friends who are. Just as my friends and family were kind enough to let college be my decision, I think you, too, should let someone’s college choice be their own, but I also don’t think there is any harm in gently talking to them about the long-term financial implications of going out of state instead of staying in state, the educational cost versus benefit differences of going to a “T-shirt school” instead of a “sweater with a popped collar school,” and the long-term employment opportunity and earnings capacity of being one major over another. If you talk to them it could drastically change their life, and if you don’t, it could too!

-Tom

Index Funds

Credit: Stuart Miles

An index fund is a mutual fund constructed to try to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500), Dow Jones Industrial Average (DJIA), NASDAQ, MSCI EAFE, or Barclay’s Capital Aggregate Bond Index. This type of fund is very attractive to many people I meet. “Indexing” is a passive management investment strategy and it has, at times, outperformed actively managed investment strategies. There are aspects of index funds that I like, and aspects that I do not. Playing devil’s advocate, let’s see whether index funds are for you.

Index funds provide a good way to make sure your assets are at least somewhat diversified, and with any luck, you should roughly experience gains (and losses) similar to those other investors and companies in the same indexes experience. Index fund investors usually believe that markets incorporate and reflect all information at all times, rendering specific “security picking” futile. Therefore, index fund proponents argue the best investing strategy is to simply invest in index funds. This passive strategy usually results in less buying and selling of positions (which means fewer transaction fees and potentially less-frequent, realized capital gains). Index funds also require fewer resources to oversee, which means they usually have pretty low investment management fees. Keeping up with a particular index, paying fewer transaction fees, potentially paying less in taxes (in amount and/or frequency), and having to pay less in investment management fees sounds pretty darn good, doesn’t it?

People who decide not to go with index funds or are against “indexing” may have a wide variety of reasons. At a very basic level, it could probably be said that people invested solely in index funds are just trying to “keep up with the Joneses.” They want to make the same investment return as their next door neighbors. This is not an acceptable investment strategy for many people. It’s true that if you don’t invest in index funds, you might generate returns less than the index (or even losses when the index has gains), but you could also beat the index and do better than the Joneses! In order to have this shot, you have to do something different than the index and pursue a more actively managed investment strategy. When proponents of passive index fund investments hear the words “active management,” they may quickly cite the lower fees and taxes usually associated with index funds, but active management supporters like to remind index fund investors that if they pay any fees or expenses at all and are only invested in the index, they are actually agreeing up-front to accept a return less than the index every single time!

Most investors seem to go back and forth on whether they like passively managed index funds or not. It seems that when most index funds have recently outperformed their actively managed, competitive funds, they have lots of fans, but when they lag active funds, their support seems to dissipate. I’m like everyone else: I’d love to have owned what has recently done the best and to currently own what is about to do the best, but as always, the super short-term investment crystal ball is in the shop!

What? Oh, you’re going to force me to choose? Look, I respect and understand people who swear by index funds, but I’m personally not a huge fan. I think having some index funds as part of your portfolio is certainly reasonable and it could even be a good idea, but I could not solely invest in them. I don’t want to keep up with the Joneses, I want to pass by the Joneses and move to another neighborhood! It comes down to two things for me: 1) I believe there is almost always a part of every index that I don’t want to invest in, and if I “index,” I can’t avoid that piece, and 2) as a very simple and not-so-technically-versed client of mine told me after we discussed index funds, “I prefer actively managed funds because I know there is at least someone at the wheel as opposed to my investments being on auto-pilot.”

-Tom

Dealing with Debt

Credit: Stuart Miles

One of the most common questions I receive is about paying down debt. If you only have one debt, be it a student loan, a car loan, or a home loan, it’s pretty easy: make the monthly payments and pay a little extra when you can until you don’t owe any more. Paying off that loan will remove a recurring, fixed expense from your monthly cash flow, eliminate your interest expense, and free up some more cash for you to save or invest. However, if you have multiple debts, things can get a little more interesting…

Let’s say you have a car loan for $15,000 at a 4.5% interest rate and a $200,000 mortgage at 4.75%. What should you do? Any financial advisor with any sense at all would encourage you to make the minimum payments on both of your personal liabilities at the very least, but if you ask some of the great financial minds out there which debt you should focus on beyond your minimum payments should you have a little extra cash lying around, you would probably start hearing conflicting answers. What I mean, is that from a longer-term point of view, you should always attack the debt with the higher (or highest) interest rate to maximize your net worth, but from a shorter-term point of view, you should probably go ahead and pay off the smaller (or smallest) debt to lower your fixed expenses a little bit and take some pressure off your cash flow. Every case is different, but if the interest rates of the two debts you are trying to decide between paying more towards are very close AND the amount owed on one of them is significantly smaller than the other one, I’d usually recommend you go ahead and eliminate the smaller debt. The interest rate savings you are giving up are most likely minimal compared to the satisfaction you will feel and progress you will see by eliminating a debt.

Credit card debt is often another matter entirely. Let’s say you have six credit cards with balances on them that you can’t pay off at the end of the month. What do you do? First, read this blog more often, and unless you find yourself in a really, really bad situation, don’t ever rack up a credit card bill you can’t completely pay off at the end of the month! Just say no! Seriously though, what should you do? I’d get a sheet of notebook paper and write down the name of each credit card, the balance you have worked up, the interest rate you will be charged, the minimum payment due, and the maximum credit limit of each card. Make a nice little chart if you like. Either way, I’d advise you to make minimum payments on all of them and then go after whichever credit card has the highest interest rate regardless of the balance you owe. Credit card interest rates have teeth and fangs, so when we’re talking 15% to 25% interest rates or higher, you should really focus on stopping the “interest rate bleeding” as quickly as you can. One other thing probably worth mentioning is that if you have some credit left on some of the cards with lower interest rates, you could potentially take advantage of that remaining credit and try to pay down (or pay off) some of the cards with higher interest rates if your particular credit card(s) will allow you to do so. It’s a creative approach, and you’d need to be careful, but it could work and save you some interest. If you actually resort to this tactic, don’t just pat yourself on the back: go get a pair of scissors and cut that paid-off credit card down its back!

Everyone with debt is in a different financial position with different cash flows and different assets at their disposal, so my proposed debt reduction strategy is not always the same. Whatever path I advise, or more importantly, whatever path you choose to take, I encourage you to take that “freed-up” cash you have every time you pay off a debt and go ahead and put it towards paying down your next debt. This practice is often referred to as a “snowball,” and if you hold true to this strategy, you can really pick up some momentum towards becoming debt-free. 

Almost everyone has debt or has had debt. Please don’t hesitate to let me know if I can help you come up with a plan tailored to deal with your debt.

-Tom

Keeping It in the Family

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A common goal of many of the clients I serve is keeping “it” in the family. No, that’s not a south Alabama reference; I’m talking about keeping heirlooms, assets, and wealth inside the family clan. There are many financial aspects that families need to consider, and some may require complex, technical, and creative solutions to get the intended job done. My intent in this post is to scratch the surface and bring a few common issues I’ve seen to your attention.

Annual exclusion gifting- In 2014, you can give $14,000 or less to another individual, and it will be exempt from gift tax implications. This is a great way to keep assets in the family, as the transfer is exempt from gift taxes and can reduce the assets of older family members that could potentially make up an otherwise taxable estate. However, this practice can also create problems if the recipients start feeling entitled to the gifting or become dependent on it and the donor can’t bring themselves to cut off the giving if their own financial situation becomes less favorable.

Unintended Will Consequences- Leaving things to family members by will is also a great and somewhat obvious way to keep things in the family, but there can still be problems. What if you leave your residence to your two kids 50/50 and one wants to sell it and one wants to keep it? Your bequest just became a family feud! What if your will leaves all of your assets to your second wife and her will leaves all of her assets to her kids from her first marriage? If you have kids from your first marriage and predecease your second wife, your kids could be totally left out if the proper estate planning is not in place! What if you leave all of your stuff to your daughter and she couldn’t care less about your beloved coin collection that your brother would love to have? Without specifically bequeathing personal effects, the possessions that some people in your family view as treasures could be treated as trash, literally!

Forgotten Beneficiary Designations- What if you forgot to change the beneficiary designation of your company’s life insurance policy to your second husband after you remarried and the proverbial bread truck comes by? Forget you look like Wile E. Coyote - your second husband would be left without an asset he could have really benefited from while your regrettable ex-husband would be the recipient of a most pleasant and unexpected surprise! Remember, beneficiary designations trump your will!

The “Tax Bite”- There are numerous strategies that you can employ right before the end of your life (and even at death) to reduce Uncle Sam’s potential income and estate tax bites out of your estate. Less tax means more money to your charities, causes, and heirs. Uncle Sam’s share can be sizable, so tax planning should always be considered if you want to keep as much in the family as you can.

Closely Held Family Business Succession- If there is a closely held family business involved in your affairs, there definitely needs to be a clear succession plan in place to ensure the business entity stays in your family or at least compensates your family. Far too often when a business’s founder or leader passes away, a family disagreement between heirs with different objectives, expectations of the business, and degrees of interest or experience with the business comes to light. If the business just automatically goes to the spouse, that person could be forced into a position they don’t want to be in, or frankly, aren’t good at. Think of how painful it would be for the former business owner looking down to watch the value he or she painfully built up brick by brick fall apart, fail, or become a relationship strain for their family.

Annual exclusion gifting, careful will considerations, proper titling and beneficiary designations, advantageous tax planning, and thoughtful family business succession planning can help keep it in the family. Many people don’t want their heirs to know too much, and I totally get that, but I’d also counter that you don’t want your heirs to know too little either. I’ve heard it said that people spend forty years accumulating assets, twenty years trying to preserve assets, and about thirty minutes figuring out how to distribute their assets. If you want to keep family peace, leave the legacy you intend, and keep as much of your wealth in the family as possible, I’d advise getting together with your financial advisor, estate attorney, and accountant to take a look.

-Tom