Slaying the Three Headed Debt Monster

May 11, 2015

I recently met with a couple (let’s call them James and Julia) in their early-40’s with two young children. I could feel the stress and tension enter the room before they even took a seat in my office. If you’ve ever been around friends that were obviously not getting along, you probably recognize that feeling as all positive energy exits the room the moment the couple in distress enters. This couple’s debt-related stress was not just affecting their relationship, it was starting to impact their friends. Even more potentially devastating, debt-related stress was starting to take a toll on their physical health and well-being. Continue reading “Slaying the Three Headed Debt Monster”

How to Choose the Best Student Loan Repayment Plan

May 08, 2015

I had a conversation with a young man in his early 20’s recently who had just started his first “real job” and was about 60 days from his student loans going out of deferral. He was panicking because there are a whole lot of options to repay student loans today that didn’t exist when I had student loans. (My son would like to add that they also didn’t have electricity or cars when I had student loans.)

Looking at the options in front of him, I could understand his dilemma.  I had 2 options when I graduated – a straight 10 year term loan and a “graduated” payment plan that started with small payments and increased every 2 years to a level well above the standard monthly payment. Both of those options still exist today, but there are also many other choices. It is a very tough decision, and it can impact the next 10-20 years of cash flow. This is one of the biggest financial decisions a new graduate will make.

The young man I talked to had about $80,000 in student loan debt and had no idea what to do. So he came in and we talked through some options and did some number crunching.  Here are a few of his options, along with some financial highlights:

  • As a starting point, the fixed payment over 10 years would be about $925/month. A graduated payment for him would start at a more manageable $530 and eventually rise to $1,593/month. The flat payment costs $111,000 over 10 years while the graduated would require $119,000 over that 10 year window.
  • He has the option to do extended term payments, either at a fixed payment or a graduated payment. By extending from 10 years to 25, his fixed payment drops to $555/month but the total payments over the life of the loan increases to $166,000. In the graduated plan, he starts at $453 and increases over time to $793, and the total payments are $180,000. Lesson learned:  Extending the payments can help reduce cash outflow for those at the start of their careers, but the total cost of the loan rises substantially!  If there’s any way to afford the higher payments by not extending, don’t extend.  It’s a very expensive extension.
  • A relatively new type of option is an income-based repayment (IBR) plan. These loans are popular because the payment is limited to 15% of the borrower’s “discretionary income.” Discretionary income is defined as the gap between adjusted gross income and 150% of the federal poverty guidelines. For this young man, his IBR payments based on his $50,000 salary would be $400-$900 over the 225 month term of his loan as his income rises. He would pay $155,000 in total, which is more than the 10 year loans but less than the extended term loans. Lesson learned:  IBR is the “hot option” right now, but it isn’t always better than a straight standard term loan. Know your numbers and you may see a better option. This could be a much better option for borrowers who hope to grow their income over time than the extended payment plans.
  • Another relatively new option is the “Pay as You Earn” repayment plan. It is similar to the IBR but with a few differences. It’s more difficult to qualify for PAYE than IBR but the payments are 10% of discretionary income rather than 15%. Looking at his numbers, his payments would start at $270 and eventually move to $825.  After 20 years, he would have paid $121,000 and would have $66,000 forgiven at the end of his term. Lesson learned: This is a tough loan repayment plan to qualify for, but it eases the cash flow and makes the risk of default quite low. Of all the options, this one made the most sense for him. He can qualify for the lower initial payments and he can increase his payments as his income rises. He can also, with a low initial payment, add principal to each payment with the hopes of paying off the loans well in advance of the full term.

When looking at student loan repayment options, know that the world has changed.  These options are available through the Department Of Education and there are other newer options out there like www.SoFi.com, where borrowers can refinance without a bank being involved through peer-to-peer lending. This can be a great way for borrowers to get out of high-interest student loans. What I learned during my conversation with him is that the right answer is going to be different for everyone.  There is no single “best option.” Factors like current income, expected future income, cash flow constraints and other goals (buying a house or car) should be considered as well as things like affordability today, total interest paid over the loan’s life and total lifetime payments. It’s a complex web of options, but if you understand which factors are most important to you, the right repayment option should become clear once you start analyzing your real numbers. This post was originally published on the Financial Finesse column on Forbes.com.

Why You Might Need Umbrella Liability Insurance

April 20, 2015

It is no secret that debt is a major obstacle on the path to financial wellness. Imagine what it would be liked to be saddled with a debt that follows you around for the rest of your life. There are many people that find themselves exactly in that position after a disastrous incident, and it’s not because they weren’t insured. It was because they weren’t adequately insured with the right type of insurance. Continue reading “Why You Might Need Umbrella Liability Insurance”

“Worthless” Hunks of Junk

April 10, 2015

My daughter and I were talking about cars recently.She borrowed mine to “allow me” to drive hers for a few days to see if I could figure out what was the source of a noise coming from her car. After driving it for two days, I couldn’t figure out the noise but I was able to fill up her empty gas tank, check her fluids and inflate her tires.   Continue reading ““Worthless” Hunks of Junk”

It’s All About Perspective

March 27, 2015

Perspective can sometimes be situational. Our perspective today can be very different than it was a decade ago. I have a friend struggling with her birthday right now. She is about to turn an age that ends with a 0. Continue reading “It’s All About Perspective”

Only You Can Prevent Financial Fires

March 24, 2015

Not to date myself, but I used to love the Smokey the Bear commercials about how, “Only You Can Prevent Wildfires.” Well, when it comes to financial fires, the same rule applies. Although everything around you seems like it is out of your control, there are things within your control that you can do. Continue reading “Only You Can Prevent Financial Fires”

Finding Balance

March 20, 2015

I met with a young woman recently who had a few options in front of her and we talked through the choices in front of her.She had just graduated from business school and accepted an offer with her current employer. She is in a two year long leadership development program, and during that program, the company is paying for her living expenses. They do that so that she could maintain her home back in her hometown since that’s where she will eventually live again. This woman had just gotten married and her husband moved to the new city with her and he will look for a job there since he just finished school as well. Continue reading “Finding Balance”

Is Paying Off Your Mortgage Worth Losing The Tax Deduction?

March 12, 2015
Updated June 14, 2017

I recently received a question after one of my workshops from a woman who was wondering if she made a mistake paying her mortgage off early because she no longer has the mortgage interest deduction. I can’t tell you how many times I’ve gotten different versions of that same question (including after a later workshop session that same day). Here are several reasons why this is a classic case of letting the tax tail wag the dog: Continue reading “Is Paying Off Your Mortgage Worth Losing The Tax Deduction?”

It’s Time For Changes to Payday Loans

March 06, 2015

In what is a positive development for many Americans, not to mention society at large, there are some changes coming to the world of payday loans. The CFPB (Consumer Financial Protection Bureau) is rolling out some new regulations for the short-term loan industry that can only be viewed as a good thing by the borrowers. (Maybe not so much for the owners of the lending companies, though.)  Continue reading “It’s Time For Changes to Payday Loans”

Do You Need Life Insurance After You Retire?

February 04, 2015

As part of the financial education we provide on retirement decisions, we suggest a review of your insurance policies as a means of protecting your accumulated wealth.  This includes a review of your homeowners coverage, medical benefits, and long-term care insurance, but we also suggest a review of your need for life insurance. I’ve always taken the stance that life insurance protects against at least three types of risk: loss of income, insufficient liquidity, and high income taxes.  Let’s examine all three to see whether or not you need life insurance after retirement. Continue reading “Do You Need Life Insurance After You Retire?”

Noise Cancelling Headphones Needed

January 30, 2015

 

I recently had a flight to remember. After a mad scramble to the airport and through the security line, all I wanted to do was relax in my airline seat after a long day. I plopped down into my seat next to a guy with ear buds that I think allowed me to hear his music better than he could.

The volume on his phone was probably not that high but I could clearly hear his music and I was annoyed because I was tired, felt a cold/flu coming on, and just wanted to relax. He promptly fell asleep but I couldn’t because his music was keeping me awake. As I was sitting there trying to focus on something other than his heavy metal playlist, I longed for noise cancelling headphones!

Then I thought it would be nice to have something to drown out the noise in the advertising world the way noise cancelling headphones block out the audio distractions. Thankfully, the holiday season is over along with the 24/7 messages to buy, buy, buy.  Of course, these media messages don’t talk about how to pay for all the things we buy…

Now, a month later, the bills are coming due. I heard a commercial the other day suggesting that I don’t have to worry about those bills because I can make them all go away by filing for bankruptcy. Incredible!

That’s an awesome message. Shop till you drop…then file bankruptcy. That’s not exactly the way I’d recommend people handle the holiday season! Then I remembered how nice it would be to have those noise cancelling “financial headphones” to drown out all the fiscally irresponsible messages we all hear so that we can focus on what’s important to be as healthy financially as possible.

I will use my “financial headphones” to drown out the urge to only pay the minimum on my credit card. I will also fight the temptation to buy anything that I will not pay cash for. Next, I’d use my headphones to drown out the financial talking heads who shout their predictions of the economy and the markets. If I had listened to some of the 2014 predictions,

  • We would be experiencing 50% unemployment, a 90% drop in the stock market and 100% annual inflation, as predicted by economist Robert Weidemer.
  • Silver will have a 50% return (it had a -13.84% annual return in 2014)
  • A barrel of oil will be close to $150 (Brent Crude Oil spot price on Dec 31st was $55.27 per barrel)
  • The Fed will be viewed as acting too timidly and Democrats will win control of Congress. (Tell that to all the Democrats that lost their seats.)

My point is that these “experts” don’t truly know more than you or I do so don’t spend precious time listening to them. Put those headphones on! Instead choose your investments based on your goal timeline and risk tolerance.

For example, my friend has a plan to buy a house this year so her down payment is in a bank savings account. Her tolerance for losing money is zero since she needs it soon. Her short term investment goals are far different than her long term investment goals so she has a different approach to long term investing. Her Roth IRA is invested 70% in stocks and 30% in more conservative investments because she can tolerate short term market dips in order to potentially gain longer term. Blocking out the “expert predictions” can be a valuable thing in your financial life.

Lastly, if I had those magical financial headphones, I’d use them to block the constant message that I need new stuff. When my cell phone contract expires this year, I won’t buy a new cell phone just because I can. My current one works just fine. When I move into my next house, I will only purchase what I truly need – which is very little.

I also plan to turn off the TV and the computer to minimize the amount of advertising that I’m exposed to. I’m starting to think that advertising just might be a little bit too effective today! I have a business trip planned next week and I’ll make sure to pack my noise cancelling headphones. I have learned my lesson and am better prepared for my next plane ride as well as for my future goals.

 

You Are Not Your Financial Situation

January 27, 2015

When I tell people what I do for a living, I almost always get questions on how to become financially secure. As I started to talk to people, I noticed that a pattern started to emerge. People started connecting themselves to their financial situation vs. seeing their situation as a temporary situation. Continue reading “You Are Not Your Financial Situation”

Are You On a Crash Course to Disaster?

January 23, 2015

One of the more interesting stories I’ve seen recently in the world of sports is about a guy named Rob Konrad, a former NFL player, who fell off his boat and swam 9 miles to shore.  It took him about 16 hours, he had hypothermia, and he couldn’t walk but at least he survived the ordeal. Along the way, he was circled by a shark and had to fight waves, wind and the dark in order to make it home safely.  Continue reading “Are You On a Crash Course to Disaster?”

What to Do for 2015

January 16, 2015

I usually view “what to do at year end” and “what to do to start the new year” financial articles with great disdain (the same way I typically avoid writing “theme” blog posts for Valentine’s Day, Mothers’ & Fathers’ Day, Independence Day [is there any bigger cliché?], and any other over-played theme). However, I have spent most of my work hours early in 2015 talking to people who want to look at things they can do in the next 12 months in order to make progress toward becoming financially secure.  It’s only because I have been asked so often that I’ll cave in, become part of the crowd and write a “What To Do for 2015” suggestion list. Continue reading “What to Do for 2015”

Doing the Math on College Planning

January 06, 2015

During the holidays, I had so much fun visiting family as did many of my colleagues. So as we all got back into the groove of working, we shared stories of those sometimes amusing family encounters. Tania, our Atlanta-based CFP, talked about how it was wonderful seeing her cousins, who only a few years ago she was bouncing off her knee, now that they are all taller than she is (which isn’t a stretch since she is barely above five feet tall).  Here’s her story: Continue reading “Doing the Math on College Planning”

The Price of Inattenton

January 02, 2015

As we look back at the previous year, I have started thinking about people I’ve talked to this year who have left an impression on me. One of the more memorable people that I was able to have conversations with started with a story that was disturbing on a few levels, but has come to a relatively happy conclusion. The fun part for me was getting updates on her progress and seeing the change in her voice, posture and energy level as things got better.  Continue reading “The Price of Inattenton”

Before the Ball Drops

December 30, 2014

New Year’s Eve is a time to reflect on the past and ponder your future, but many of us spend more time planning how we will be celebrating on the last night of the year instead of planning ahead on how to achieve our New Year’s resolutions.One of the most common resolutions is to improve financial well-being, either by saving more or paying down debt.  So before you head out tomorrow night, reflect on your financial past by taking the time to calculate your net worth so you know where you stand as we head into 2015. Continue reading “Before the Ball Drops”

How Much Progress Can You Make Next Year?

December 26, 2014

One of the joys of being in a role where I can see a person make progress over the course of time is that I can remember where they started and see where they are now. Since they are living in it day to day, they don’t have the perspective that I do as a casual observer. It’s a lot like when my kids were younger, there were cousins we would only see once every year or two. Every time we saw them, I was shocked by how much their kids had grown and they were shocked by how much my kids had grown, but neither of us was shocked by the growth of our own children. Continue reading “How Much Progress Can You Make Next Year?”

Don’t Let Debt Destroy Your Marriage

December 19, 2014

Sometimes when I meet with someone to walk through their finances, I get the distinct impression that our conversation is going to have a significant impact on their life. I had one of those conversations recently with a couple who was very seriously considering separating and divorcing. One of the biggest factors in the stress and tension that is damaging their marriage is how they deal with money or…don’t deal with it.  Continue reading “Don’t Let Debt Destroy Your Marriage”