College has now become the largest purchase that a family will make outside of buying a home. The pace of college price increases has been outpacing the increases we’ve seen in wages by a large margin which has made the idea of saving for a child’s college education even more daunting. As advisors who specialize in college funding we’re often asked by the parent’s on when should they start funding for college or if what they have put away already sets them up well for their kid’s future.  The truth of it is you should start early and save often, but no one wants to hear that answer because it’s the obvious one that adds no value to most people. The reality of it is that depending on what stage of life your children are in the answer can vary widely.

Early Planning Stage (0 – 5 Years):

At this stage usually, parents are more focused on paying for daycare over starting to save for college. For those of us lucky to have the extra income, then yes, if you can start now you technically don’t have to save as much over the long haul due to your money having more time to work for you. A $258 per month investment for a newborn can yield $100K by the time a kid is 18. If you waited till that child is 10 years old then you’d be required to put away $814 per month to yield a similar end result.

If you start saving at this stage usually the most prudent way to do so is through what is called a 529 plan which acts like Roth IRA where it’s funded with after-tax funds and comes out tax-free. 529 funds only come out tax-free though if used for education-related expenses. It’s a great way for everyone from grandparents, parents, and friends to put money away for a child’s education. Learn more about how to select a 529 plan from our previous post.

All that being said though for those who can’t afford a large monthly contribution, just opening an account and tossing in extra money when there is some can be helpful in the end. For parents who expect their kids to stay in-state, or pay some of their way towards college, it might make sense to put more money towards their own goals and keep money liquid for other large expenses.

Grade School Stage (6 – 13 Years):

For all of the parents who live around us in Nocatee, FL this is usually a great time to start saving for college because you generally can redirect some of the funds that were going to day-care, that is freed up through public school, to saving for college. You’re also likely making more in income as you grow along in your career, so even if you are utilizing private education you still may be able to begin prudently saving.

It’s smart to start getting a gauge for what kind of student your kids might be. We never know what school our kids are going to attend until they ultimately pick one later on, but as parents we can tell whether our child is very social and likely to attend a large state university, or extremely intelligent and destined to attend an Ivy University, or is extremely artistic and bound to go to an art school like SCAD (The Savannah College of Art and Design). As parents get a better understanding of the type of schools that their kids are likely to attend, we can use that as a signal for them to start funding more or less towards their kid’s 529 plans. It’s important to have a target for how much you want in a 529 plan by the time your child goes to college because we don’t want to overfund those accounts due to penalties on withdrawals that don’t get used for education. Our target amount of suggestion for parents is to have 50%-75% of the funds you want to provide for your child in a 529. If you want to provide for all of your child’s college cost and you’re thinking it’ll be an Ivy League University that number is drastically different than if you only plan on funding 50% of your child’s college cost and they are more likely to go to a state University.

Late Stage Planning (14 – 18 Years):

At this point is when the cost of an upcoming college education becomes real and fast approaching. We find that it’s not until now that most parents start to put real thought into how are we going to foot the tuition bill once our child goes off to school. Even for the parents who have planned well for college expenses, there are savings to be had in this stage whether it’s through financial aid, scholarships, tax strategies, or other avenues. Now is a good time for un-prepared and well-prepared parents alike to really start putting together an actual college payment plan. It absolutely helps when there are some healthy savings to work with but I view putting together all the late-stage planning pieces as the big game and the earlier stages as the practice beforehand. It makes the game easier to handle, but you still have to go out and get a victory (or make sure that you walk away with spending the lowest dollar amount possible in this case).

In late-stage planning it’s important to continue putting money away towards funding college, but the ultimate money saver is lowering the actual net cost of college for your child. If you get around to focusing on this stage as early as your freshman or sophomore year, it allows for an open playbook when we are looking for ways to cut down the net cost of college. Once you pass the fall of your junior year certain options begin to not be available to us, so it’s important to not let it get past that point if at all possible. For parents who don’t plan on putting money towards their children’s college efforts, this is still an important time to sit your kids down and help them figure out their game plan.

Better Late Than Never

As mentioned earlier typically the answer to “when should I start saving for my kid’s college?” is answered by “the sooner the better”, but I think the more helpful answer is “it’s better late than never”. There are even certain tax strategies that can prove helpful when the student is already enrolled in college. Everyone’s situation is unique but understanding your situation and having the desire to position yourself as best as possible can be done at any point with your children and their education.

Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.

Are you a parent considering saving money into a Florida Prepaid College Savings Plan? If so, you won’t want to miss this episode, as Ian and Scott dive into a little known fact about this type of college savings strategy. Tune in to learn how parents can best plan for covering the cost of their kid’s college tuition and other education-related expenses.

20 years later the College Board circled back to improve on their previous intentions through what is known as the Adversity Index. The new index is more in-depth and avoids any inclusion of race as a datapoint. It attempts to help students standout to colleges who may have overlooked them due to the fact that they came from an underprivileged background. The scores are currently being used by 50 colleges and is set to be used by 150 this year. The following year it is planned to be used by all colleges, and major schools such as Yale already view it as a powerful tool for their admissions process. Yale has nearly doubled its low-income and first-generation college students to about 20% of admitted students through implementing use of these scores from the College Board.

The score itself looked to take into account multiple factors across the environment of students’ neighborhood, family, and high school and then provide that information to colleges. The previous adversity score which was given used a scale from 1 to 100. The actual way the score was calculated is kept proprietary and the scores weren’t even being reported to the students themselves. That is

until recently that families spoke of their outrage with the idea of the adversity score. The College Board agreed that they may had overstepped in their ability to simplify someone’s background with a single numerical score, so as of recently they have decided to make small amendments to their adversity scores. They still stand behind their choice to try and amend the inequality that seemingly was perpetuated through SAT scores as seen in the graph, but they made the following changes to try and better the outcome.

One, they will begin to reveal scores to students and families. Two, they are now reporting individual scores for the neighborhood and for the school adversity scores separately. Lastly, they are going to alter the process in which the score is determined. Overall though the idea and principles that the College Board were trying to push are still being implemented.

                With these changes occurring the question becomes who cares? How does this affect me? The reality of it is that upper middle-class areas like ours in Nocatee, FL are put into a hard situation when it comes to getting accepted into colleges of their choice. The Wall Street Journal recently quoted assistant vice president for academic affairs at Florida State was quoted saying “If I am going to make room for more of the [poor and minority] students we want to admit and I have a finite number of spaces, then someone has to suffer and that will be privileged kids on the bubble,”. And that’s coming from FSU, nonetheless upper echelon schools that certain students may be striving to attend outside of the state. This kind of pressure being created from different sources such as the adversity score has placed students, parents, and guidance counselors alike into finding outside help in terms of getting students into their school of choice. This is the kind of pressure that pushed parents into falling victim to the recent college admissions scandals out in California that were so publicized. In turn parents have turned to hiring tutors, test prep assistance, independent educational consultants, and even athletic recruiting aids. The need for extra help is adding to the already exceedingly high price of attending college making the idea of saving on the cost of college that much more important.

                Whether or not you view these scores as an overall positive or overall negative to the admissions process, the reality is they exist and make it harder for students from this area to get into the schools of their choice. The extra help to get into college is well worth it, mainly because it can open more doors from a college selection standpoint and opens more doors to scholarships and other money from schools. If a SAT test prep counselor can boost your score from a 1300 to a 1330, not only will it increase your chances of getting accepted to the University of Alabama, but it can yield you over $20,000 extra over the 4 years of undergraduate education if you came from high school with a 3.5 GPA or higher. Those are extremely meaningful dollars especially when trying to balance paying for a student’s college education versus saving for other goals such as retirement.

Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.

If you’re thinking about buying a home, you’ll likely need a mortgage unless you’re sitting on a large endowment of cash. From pre-approval to interest rates and mortgage insurance, determining and understanding what mortgage suits your needs can be a difficult and complex task. When shopping for a mortgage, it’s helpful to keep a few strategies and stepping stones in mind to help you make the best and most informed choice.

Keep Tabs on Your Credit

When you begin the process of searching for a house, the first step is to make sure that you have good credit (or excellent credit, ideally!). Good credit is necessary while securing a mortgage; lenders will look at your credit score to determine whether or not they are willing to lend to you. Furthermore, your credit profoundly impacts the interest rate you qualify for if approved. Generally speaking, the higher your credit score, the better chances of receiving favorable terms.

Ideally, you would have begun building your credit since you obtained your first credit card. Your credit depends on things like whether or not you make on-time payments and how much you spend below your credit limit. If you haven’t built any credit, you should adhere to good credit-building practices immediately in order to get started. It’s generally a good idea. Credit doesn’t only affect mortgages; it also factors into things like credit card APRs and other loan types.

There’s more than one way to check your credit score, but most people request a free annual credit report from either Equifax, Experian, or TransUnion.

Save Money for a Down Payment

As part of securing a mortgage, you’ll also need enough money for a down payment. Depending on the cost of the house, you’ll typically be expected to pay anywhere from 5% to 20% of the purchase price. The more money you can save for a down payment, the less you’ll have to take out in a mortgage, which equates to less debt and interest.

While this may require a significant amount of money initially, it can save you in the long term. Mortgages typically span 15 to 30 years; you’ll want to keep your mortgage rate and overall cost as low as possible. 

How do you know how much you should save up for your down payment? As a general rule, more is typically better. Mortgage calculators can help you figure out your future payments if you’re curious about the impact of varying down payments.

Research Different Mortgage Lenders in Your Area

Once you’ve determined that you have high enough credit and enough money for a down payment, you’ll need to research and compare different mortgage lenders in your area. Different lenders will have different criteria for lending you money. Some important factors to consider are things like mortgage rates—high or low, fixed or variable—along with repayment terms (15 years or 30 years), rate discounts if any, closing costs, and options for deferment or forbearance should you ever need them.

Once you’ve collected these important facts from each lender, you can sit down and compare them to determine which ones fit into your overall financial plan.

Seek Pre-Approval from Your Favorite Lenders

Once you’ve selected your favorite lenders, you can seek a letter of pre-approval from each lender. In order to be pre-approved, you’ll have to go through the entire process of applying for a loan and letting the lender determine how much they’re willing to loan you based on things like your credit, income, existing debt, savings, etc. By obtaining a letter of pre-approval, you’re preparing yourself to actually secure a mortgage from the lender. In turn, this indicates to sellers that you are serious about buying a house and less likely to back out of a deal.

When Ready, Apply with Your Preferred Lender

Once you’ve got everything in order, you can make an offer on a house. And once you’ve signed a purchase agreement that indicates how much you’ve agreed to pay for the property, it’s time for you to apply with a preferred lender for your mortgage. Even if you’ve already obtained pre-approval from several lenders, it’s still important to review and compare lenders to ensure you find the best fit. If all goes well, your mortgage will be approved, and you’ll be the owner of a new house (and quite a bit of debt)!

Andrew is a Content Associate for LendEDU – a website that helps consumers, homeowners, small business owners, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cats Colby & Tobi.

Are you worried about the impending doom from the inverted yield curve? Find out what we believe investors should do whenever there is an “expected” sharp decline in the stock market. We explain the correlation between recessions and bear markets, and offer further insights about what investors need to be aware of when markets get choppy.

An emergency fund is extremely important. In fact, a 3-6 month cash cushion is fundamental to having a sound financial plan. Without one that person is forced to borrow from high-interest rate credit cards to cover significant financial surprises. When that happens, a common side effect is reduced savings towards retirement and college, as well as delaying other important financial goals. In more extreme cases, retirement accounts are raided in order to cover a significant expense.

A much more enviable position to be in is when someone can simply write a check when the rainy day arrives. Having the ability to do so is much less stressful than being forced to borrow at double-digit interest rates. The root of the problem is most people think that the rainy day financial surprises won’t happen to them, which is rarely (if ever) true. You should bank on them. Literally!

What is the best way to prioritize savings?

Aside from paying down any unsecured debts and saving up to your company match for retirement, building an emergency savings fund is easily the next highest priority for our clients. You never know what kind of curveball life is going to throw your way — losing your job, the roof needs to be repaired, you need new tires on your car, your kid broke their leg, etc. Once people take a step back and think about it, the number of financial surprises that can happen in any given year can mount quickly.

With that in mind, it a lot easier to prepare for those situations when you are in a sound financial position than to react to it after the fact. This is why we emphasize the importance of saving for a rainy day. Credit card debt and personal loans carry such high-interest costs that a person's net worth will go the wrong direction if they aren't aggressively paying down those debts. Unfortunately, in order to do so, it means other financial priorities need to be put on the back-burner. Not to mention, the overhanging burden and stuck feeling people get from being indebted. Being in such a position is when financial stress becomes real.

How do your emergency Savings fund needs change in your 20s, 30s, 40s, and 50+?

An emergency savings account is needed at all stages of adult life. Younger people (20s and 30s) usually have fewer resources at their disposal, therefore, a target of 3 months worth of living expenses is more realistic.

Setting realistic expectations is especially important to ensuring younger savers don't get discouraged by setting too high of a target. On the other end of the age spectrum, we usually recommend that retirees keep 6 months of living expenses in savings because they are living on a fixed income. In addition, business owners and those living on a commission based compensation structure should keep at least 6 months of living expenses saved, and may even want to consider as much as 12 months to play it safe.

The bottom line is that the steeper the consequences and the higher the risks of needing to invade your savings, then the more that needs to be saved for when things go wrong. Sometimes this is easier said than done. Which is why achieving incremental progress is paramount to achieving progress. One strategy we often use with our clients is that every time they get a pay raise, they save an extra $100/month.

When should savings be liquid and when can they be put in Certificates of Deposit (CD) or other investments?

CDs are a good place to park extra cash for things like a down payment on a house in 1-2 years. However, we don't recommend them for an emergency savings type of situation because that money needs to be kept liquid at all times. The problem is that CDs have term limits. If the CD holder needs to tap into those funds they risk forfeiting their interest at a minimum, and in some cases might pay a penalty to the financial institution.

Rather, we prefer our clients to keep emergency funds liquid in high-yield savings accounts. We often recommend any of the online banks who pay upwards of 2%. Savers need to be mindful of account minimums in order to avoid potential monthly maintenance fees.

CDs, on the other hand, are best used for short-term goals (1-5 years) or as part of a bond allocation within a brokerage account. More often than not, there is an event or situation that CD money is earmarked for and if it ends up being that those CD funds are not needed whenever the CD matures, then that money can be reinvested in longer-term instruments such as stocks and bonds.

EMAIL SCOTT A QUESTION

You have probably read the headlines last week about the inverted yield curve and the inevitable doom and gloom of the next economic recession. While we don't take the current news lightly, given that the Dow Jones average finished down 800 points the same day the yield curve inverted, our stance on the matter is pretty simple — business as usual and stick to your plan (assuming you have one).

The question then becomes, "why?" Or quite possibly some of you are even saying #$#% that!

In short, our answer is that investments earmarked for retirement are a long-term strategy and therefore those funds should remain invested in a vehicle that provides higher growth over the long-run. Historically stocks have proven to be one of the best places to achieve this objective. However, we should remind investors that stocks (should) only make up a portion of your overall investment mix.

With that in mind, we feel it is important for the majority of investors to maintain whatever allocation of stocks and bonds that was set forth when the investor originally committed to their investment strategy. More importantly, that investors benefit by staying the course through all economic cycles and only make minor tweaks along the way. The key then is ensuring your allocation (i.e. risk-reward tradeoff) is appropriately aligned with your comfort level and overall objectives. Thereby allowing you to stay true to your plan. This type of mindset works better than “timing the market” because timing when the markets will go up and when they will go down has proven to be an elusive game.

Retirees vs. Accumulators

Taking the importance of proper allocation a step further, let's look at a couple of examples:

1. Retirees should typically have a higher allocation of cash and bonds because doing so allows the retiree to use those safer investments to supplement their income during a bear market. In turn, the retiree is able to wait until the markets rebound to resume withdrawals from the stock portion of their portfolio. Essentially the higher amount of conservative investments acts as a backup parachute during bad recessionary cycles so that growth assets like stocks can remain invested and be given a chance to recover whenever growth conditions eventually return.

2. Younger investors, on the other hand, have the luxury of waiting many decades before their investments are needed to generate income during retirement. This expanded time horizon allows the younger investor to allocate more to stocks. In fact, younger investors are at the accumulation stage of life and therefore, declines in the stock market should be seen as a good thing because when the markets go down that younger investor is buying more shares of stock at a relative discount.

Key Takeaway

The plan (i.e. your investment allocation) should dictate how we invest your money regardless of economic conditions. Impulsively reacting to our emotional response to market volatility is the very reason the average investor consistently underperforms the stock market by nearly 2% every year.

Regardless of what you may think of the rationale outlined above, I have no doubt our skeptical clients out there remain skeptical. When the 24-hour news cycle is constantly feeding us sensationalized storylines for clickbait, it is easy to lose sight of the facts. So what are the facts? Both the good and the bad. Yes, we believe in providing our clients a balanced perspective. Refreshing in today's bipolar world, isn't it.

Facts and Figures

Without further ado, here is what you need to know about the inverted yield curve and other economic buzzwords being discussed during the latest news cycle:

• The S&P 500 finished 2018 at 2,485.74 and closed August 12 (same day the yield curve inverted) at 2,840.60 — meaning the stock market is up 14% YTD.

• According to Avalon Investment and Advisory’s Bill Stone, when the 10-year Treasury drops below the 2-year rate, stocks have had a positive return on average of 9.2%.

• 69 economists were polled in January of this year and not one of them predicted the 10-year treasury rates would fall below 2.5% (it was 2% at the time of their prediction, it's now down to 1.7%). Conclusion -- even the smartest experts are really bad at predicting what's going to happen next.

• Going back to the 1970s an inverted yield curve has been a reliable indicator of a coming recession. The U.S. Treasury market is different than the stock market in that it has a wealth of similarities and correlations to past economic behavior.

• 3 recessions have occurred in the U.S. over the last 30 years — the longest period in which there is a significant source of financial and economic data. The concerning part is that each of these periods show a similar pattern of interest rates (see chart above).

• The average time it takes for the inverted yield curve to actually lead to a recession is 17 months.

• Recessions don't always coincide with a bear market in stocks — 7 of the last 11 recessions either preceded or followed a bear market. The other 36% of the time there was no direct correlation.

• According to a study published by Eugene Fama and Ken French, called "Inverted Yield Curve and Expected Stock Returns," there is no evidence that the yield curve predicts stocks will underperform Treasury bills (i.e. cash) for forecast periods of 1, 2, 3, and 5 years. In fact, the yield curve signaling investors to move their money from stocks to cash underperformed staying invested in the world stock market index in 19 out 24 instances. Conclusion — I would rather play the odds (79%) and stay invested in the market.

• World economic data is weakening, but the US data remains relatively strong (2.6% GDP growth YTD) and is why many sovereign investors around the globe have shifted money into perceived safe alternatives like US Treasury bonds. Consequently, the heavy demand is driving down our Treasury rates, and more specifically longer-term bonds because foreign investors can lock in at a higher rate. This is especially true relative to what's available from a risk-reward standpoint in their home country. Whenever there exists increased demand for our bonds, the US Treasury is able to lower the interest rate they are required to pay back to their investors — laws of supply and demand.

• Time in the market versus timing the market — 5.62% returns versus 2.01% returns. 5.62% is the average annual return an investor received if they stayed fully invested in the stock market from January of 1999 until December of 2018. Compare that to an investor who missed the 10 best days in the stock market and that investor would have earned only 2.01% per year. Conclusion — the worst days in the market are more often followed by some of the best days in the market because that is when traders are most active and volatility is peaking.

• The head of the world's largest bond fund says investors shouldn't read too much into the recessionary signal coming from the inverted yield curve. Investors have become overly anxious in the face of strong US economic indications, such as high levels of consumer spending and a tight labor market.

How Should Investors React Going Forward?

Ironically, if enough people perceive a recession is imminent, it could become a self-fulfilling prophecy. However, the numbers by and large still suggest the US economy is on solid footing. It doesn't mean that a global slowdown won't impact us either. It’s very possible the overall slowdown could creep into the US and inflame an economic recession.

Recessions come and go, but predicting precisely when they will occur is a fool's errand. It's why we believe staying the course is the best thing for the majority of investors. Even though doing nothing is usually the hardest thing to do when faced with adversity.At the same time, we at Mellen Money Management understand that stock market volatility makes all of us uncomfortable. To that end, don't hesitate to schedule a time to speak with us to share your concerns.

One of our core missions is to be relied upon as a trusted advisor during the most difficult of times. Part of that might mean we need to be proactive in making changes for a select number of investors, if and only if the positioning of your current investments are allocated well outside of the boundaries of your comfort level. The best way for us to know for certain is to have a more in-depth conversation and decide how to make proper adjustments from there.

EMAIL SCOTT A QUESTION

Buying a house, especially for first time homebuyers, typically begins with a sense of excitement. However, without a good plan and team around that buyer, that initial excitement can quickly turn into an overwhelming process. This is especially the case in competitive neighborhoods like Nocatee, Ponte Vedra Beach, Jax Beach, and Atlantic Beach, where the bidding wars can get out of hand very quickly.

It’s why having a plan of attack from the beginning is crucial to ensuring a successful outcome. After all, the ultimate goal of homeownership is getting that place you always dreamed of without that awful feeling of being house poor. With that in mind, my top tip for buying a house is this... Only pay for what you can afford.

Sounds simple, right? I’m sure some of you are probably saying “no kidding.” Unfortunately, due to all the moving parts that are associated with buying a home, buying what is considered affordable isn’t as straightforward as it may seem. Most new buyers are usually surprised to hear all of the other expenses that come with home ownership. To that end, a buyer needs to be mindful of such expenses as: the down payment, closing costs, title fees, mortgage payment, property taxes, homeowners insurance, private mortgage insurance (PMI), community development district (CDD) fees, and homeowners association (HOA) fees.

That was a mouthful. Keeping track of all of those various expenses can be confusing, even for seasoned homebuyers. So it’s easy to forget if you don’t write it down or keep a spreadsheet to help you stay organized. Really in order to build a smart plan, a buyer needs to understand how all these various expenses affect their budget and avoid unnecessary surprises. Those lesser known costs can quickly add up without proper organization, and before you know it you are strapped for cash and regretting your home purchase.

Being stuck with a house you can’t afford is stressful to even the most level-headed person in the world. Besides that it makes accomplishing other financial goals, like saving for retirement or putting money away for your kid’s college fund, an uphill battle.

The best way to avoid such regrets is to first set your targets in terms of the total monthly payment you can comfortably make, and then work backwards by adding in each cost to get an accurate estimate of your total monthly housing payment. Notice how I said housing payment, and not mortgage payment.

A great plan doesn’t leave anything out and rounds up any calculations where an estimate is necessary. This seems obvious, but it’s human nature to round down. We have a funny way of “rationalizing” our decisions when we really want something. Truthfully, the most essential part to planning for a home purchase is to set a minimum and maximum range for your down payment and housing payment.

best way to estimate your Housing Payment

Let’s start with the housing payment first. However, it’s important to note that both types of payments go hand-in-hand because the amount you put down will affect your mortgage payment. So the question is what is an appropriate limit for a homebuyer that doesn’t know where to begin? A useful benchmark is a commonly used financial rule of thumb that limits a person’s housing payment (renting or owning) to 28% or less of their total gross income.

In other words, a family making $150,000 per year should limit their monthly housing payment to $3,500. Note that if other substantial debts exist, like student loans and expensive car payments, it is better to reduce this limit to 20% of gross income. That’s because your total debt-to-income ratio should never exceed 36% of gross income. A good example is someone with sizable student loan payments should keep their housing payments reasonably in-check. Otherwise, that person might be making 2 mortgage-like payments.

Once you know your housing payment limitations, you can then back into the purchase price you can afford by using Zillow’s mortgage calculator. Their calculators are a great resource because they capture all of the necessary housing expenses like the mortgage payment, homeowners insurance, property taxes, PMI, and association fees. You can even search by property and use that particular property’s market value data to get a more specific estimate of what that home will cost you.

how much money down is ideal?

In addition to setting limits on your housing payment, it’s also a good idea to set boundaries with how much money you put down. The ideal scenario for a buyer is to put 20% down because doing so ensures the borrower doesn’t pay the dreaded cost known as private mortgage insurance (PMI). Anything less than 20% will likely mean the borrower is paying PMI. This expense typically averages 0.50% of the borrowed amount (it can range between 0.3%-1.15% depending on a handful of factors) divided by 12. However, not every buyer has enough to cover such a down payment, which is why it’s okay to pay PMI if owning a home is the right long-term financial decision.

To put the magnitude into perspective, 20% down on a $400,000 home requires at least $80,000. It’s really going to be more than that because that $80,000 doesn’t include title fees and closing costs - additional fees that get lumped together with your down payment at closing. To anticipate such costs, I recommend using the following closing cost calculator. At any rate, the key to setting a limit with the down payment amount is knowing the price range of the homes you are looking to buy and be realistic about the cash on hand (or will have available from the sale of your old home) to cover such a down payment.

For example, let’s say you are buying a $400,000 house and have $50,000 in savings with little equity in your current home. Under these circumstances it would be wise to limit your down payment to 5%. Why? 20% is simply unrealistic unless the buyer is able to wait a couple years to allow them to save accordingly. Even 10% is too much.

There are 2 reasons: 1) the additional closing costs and title fees will deplete the remaining $10,000 in savings, and 2) it’s smart planning to always keep at least 3 months of living expenses in savings for a rainy day. Unfortunately in this scenario whatever remains in savings won’t cover the surprise expenses that are inevitable in life - like a roof repair or replacing a bad A/C unit.

To help summarize the key points, I created a DIY housing budget guide. Outlined below are the 7 steps you can follow to get a very good approximation of what you can afford to pay. However, for those who want an easier and quicker way to do it online, you can skip the 7 steps and corresponding example by using the following affordability calculator. Either method will help you “buy what you can afford.”

7 Step Housing Budget Guide

1. Calculate Maximum Housing Payment

   • Cap it at 28% of gross income.

   • Total debt-to-income (DTI) ratio to never exceed 36%.

   • If DTI is above 36%, the housing payment needs to be lower than the 28% rule of thumb number so that all debt payments are equal to or less than 36%.

2. Convert Housing Payment to a Lump Sum Mortgage Estimate

   • Quick way to calculate - for every $100,000 borrowed at 4.5% on a 30-year mortgage, your payment will go up by approximately $500 per month.

   • Your monthly payment will also adjust $30 per month for every 0.25% change in interest rate on each $100,000 borrowed over 30 years.

3. Estimate Property Taxes and Insurance

   • Annual Property Taxes (Saint Johns County) = 1.088% of Purchase Price

   • Insurance Estimate = $35/month for every $100,000 in Home Value

4. Convert Housing Payment to a Mortgage Estimate by Factoring in Property Taxes and Insurance

   • Subtract monthly cost of property taxes and insurance from housing payment in Step 1.

   • Convert the reduced monthly payment to an adjusted target price by using the $500/month for every $100,000 borrowed rule of thumb.

5. Calculate Down Payment and Closing Costs

   • Down Payment = [Savings Account + Proceeds from Sale of Home] - [3 Months Living Expenses + Closing Costs]

   • A shortcut way to estimate closing costs is to multiply 2.5% by the price of the home.

   • Commission and variable incomes should keep 6 months of living expenses.

6. Add Back the Down Payment to the Mortgage Amount to Arrive at an Estimated Target Price

   • Target Price = Mortgage Estimate + Down Payment

   • Almost there...other costs like PMI, HOA, and CDD fees are not yet included

7. Research Properties to Fill the Cost Gaps and Adjust Housing Budget Accordingly

   • Search for properties through your realtor or sites like ZIllow to gather actual data

   • Make adjustments to your budget based on the other costs not yet captured, such as PMI, association fees, and community development dues.

   • PMI = [0.75% x Borrowed Amount] / 12

   • Association and community development dues vary by neighborhood.

Now that you have a 7 step process, how do you actually implement all of these budgeting tips? The best way for all of this to stick is to learn from a real life example and show you how to run the calculus.

Example: John and Suzie Jones are married with 2 kids and are looking for homes in the Ponte Vedra area. They are first-time homebuyers. The Jones’ have $75,000 in savings and make a $130,000 combined salary. Unfortunately, in her younger years Suzie switched majors at a private out-of-state college and was on the 6 year plan, therefore she has a sizable student loan payment of $1,200. Total monthly expenses, including all debts and rent, currently run them at approximately $7,000. Interest rates on 30-year mortgages are 4.5%. Given their lack of experience, the Jones’ are not sure what they can afford and need help figuring out their budget.

Step 1 - Take 28% of gross income to calculate the maximum payment, and make sure all debt payments are less than 36% of gross income

• Housing Payment @ 28% = ($130,000 x 28%) / 12 = $3,033

• Debt-to-Income (DTI) @ 36% = ($130,000 x 36%) / 12 = $3,900

• Projected Debt Payments = $3,033 Housing + $1,200 Student Loan = $4,233

• Projected DTI = $4,233 / ($130,000 / 12) = 39% → over the recommended level of 36%

• Reduce Monthly Housing Payment = $3,900 Debt Limit - $1,200 Student Loan = $2,700

• Recommended Monthly Housing Payment = $2,700

Step 2 - Convert the maximum monthly payment into an initial estimated purchase price using the “$500/month for every $100,000 borrowed” rule of thumb

• $2,700 / $500 = 5.4 (multiplier) → 5.4 x $100,000 = $540,000 max target price

• Property taxes and insurance have yet to be included so the target purchase price will get reduced even further.

Step 3 - Calculate property taxes and insurance

• Property taxes = 1.088% x $540,000 = $5,875.20 → Monthly = $490

• Insurance = $35 x 5.4 = $189

• Total Taxes and Insurance Payment = $679

Step 4 - Reduce the maximum payment by taxes and insurance, then convert the payments to a lump sum mortgage estimate

• Mortgage Payment Estimate = Max Housing Payment - [Property Taxes + Insurance]

• Mortgage Payment Estimate = $2,700 - $679 = $2,021

• Mortgage Affordability Conversion = Mortgage Payment Est / $500 = multiplier x $100,00

• Mortgage Affordability Conversion = $2,021 / $500 = 4.04 → 4.04 x $100,000 = $404,000

Step 5 - Estimate the down payment and closing costs

• Initial Down Payment Estimate = $75,000 savings - (3 x $7,000) = $54,000

• Closing Costs = 2.5% x $404,000 = $10,100

• Proceeds Available for Down Payment = $54,000 - $10,100 = $43,900

• This is a little over 10% of the purchase price, which means there will be PMI

Step 6 - Add back the down payment to the borrowed amount to arrive at an estimated target price

• Borrowing Target = $404,000

• Down Payment = $44,000 (rounded up)

• Target Price = $404,000 + $44,000 = $448,000

Step 7 - Research properties and account for other costs like PMI, association fees, and community development dues - adjust housing budget accordingly

• PMI = [0.75% x $404,000] / 12 = $253 per month

• Check listings for HOA and CDD fees → $150 per month

• Total other fees = $403 per month

• Adjustments to housing budget at a 4.5% interest rate for 30 years

  • Mortgage payment target = $2,021 - $403 = $1,618

  • Mortgage amount target = $1,618 / $500 = 3.24 x $100,000 = $324,000

  • Purchase price target = $324,000 + $44,000 (down pmt) = $368,000

RecapPING the key numbers

Purchase Price Target = $368,000

• Down Payment = $44,000

• Mortgage Balance = $324,000

Housing Payment = $2,700

• Mortgage Payment = $1,618

• Escrows = $1,082

  • Property Taxes = $490

  • Insurance = $189

  • PMI = $253

  • HOA = $150

Concluding thoughts

For a lot of readers, crunching the numbers is enough to make your head spin. Which is okay. Developing a well-thought out housing budget doesn’t come naturally. It is why I recommend leveraging the expertise of a realtor, mortgage loan officer, and financial planner, so that you have a team of professionals to help you get it right.

All three experts can help you keep more money in your pocket. A great realtor will ensure you negotiate a fair purchase price and don’t overpay for something. Then a well-qualified mortgage loan officer will help you structure the loan terms in a way that fits your unique situation. And after you find “the house,” it’s wise to have a financial planner confirm your decision by reviewing the short and long-term financial impact.

If anything else, the biggest take away to remember when shopping for a house is to only pay what you can afford. Buying a home is one of the biggest purchases you will ever make. Therefore, it is best to have a very targeted price and remain disciplined during the shopping phase. Doing so can make all the difference in landing your dream home actually becoming a reality.

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Prepaid Vs. Savings 529 Plans

Prepaid Plans

Prepaid means that you’re locking in a certain level of tuition rates so that even if the rates increase dramatically between now and when your child goes to school those increases in tuition won’t affect you. This is an attractive option for people who don’t want to worry if they’ll be able to pay for their child’s future tuition. The attractiveness of prepaid plans speaks to those who don’t want to wonder what if and have a guarantee. The state of Florida backs all prepaid plans which means that as long as the state is solvent then your pre-paid plans should hold up their end of the bargain. Unless prices rise extremely quickly it is likely more suitable for people to utilize a savings 529 plan due to the fact that you have more investment flexibility and the ability to use those funds on more than just tuition. Although there are dormitory plans that are now available as well through Florida’s pre-paid plan. The plan can be portable to other states as they will pay the same amount to out of state schools that they would pay to in-state schools. The issue here is that pre-paid plans don’t pay their own schools a very high number, so the plan becomes less effective once used outside of the home state.

Prepaid plan example: Parents buying their newborn a 4-Year University Pre-paid plan

$186.28 per month over 223 payments = $41,540 (total paid into plan)

The $186 payment is generated by taking today’s general tuition rate and adding a yearly increase of roughly 2.5%.

$41,450/4 = $10,385 Yearly Tuition Average

$6,381 per year tuition rate at UF currently. Applying an annual 2.5% rate over 18 payments yields $9,952 in the freshmen year and $10,717 in their senior year.

Conclusion: If college tuition prices increase more than 2.5% over that time frame then pre-paid saved you the difference. If they increase less than 2.5% then you actually paid more into the plan than you get out by utilizing pre-paid. Over the last 5 years the University of Florida in-state tuition has not changed. If you believe in-state tuition rate increases won’t be in line with national historical averages of 5% before they attend college then a prepaid plan may not be for you.

Savings Plans

A savings 529 plan allows you to save money for college at a contribution rate of your choosing. It is not a contractual agreement like a prepaid plan is. If you want to contribute a certain amount one month and a different one the next you can. This can be a negative, in particular for those who aren’t good savers. So if using a savings plan be sure to use a calculator to help you decide how much to put away to stay on track for your end goal. In a 529 savings plan the money that you contribute to the plan then gets invested among different investment choices that your 529 provider will make available to you. You can choose to then invest that money in a high growth/high risk fashion, or in a more conservative/low risk fashion. Generally, it is wise to become more conservative as you get closer to the date in which you student is about to attend college so the value of the account is less at risk when it will be needed most. Then upon time it is needed to draw on the 529 plan you can either transfer funds directly to the school, or via check to you or the student, to use on a whole list of qualified educational expenses. The value of the account will be applicable in-state as well as out of state as long as the school is an accredited institution which allows the plan to keeps it value independent of which school your student attends.

 Savings plan example: Parents buying a newborn a 529 savings plan

Place $186.28 per month into the plan for the next 223 months until their child attends college.

If that 529 plan yields on average a 4% net return then the parent will end up with $61,491 to use for educational expenses.

Conclusion: The savings plan can yield considerably better results than a prepaid plan, but also comes with its own fair share of risk. Be sure to manage the investments appropriately. Also be careful with over funding the plan since withdrawals not related to education are penalized by 10% on top of being charged income tax on any investment gains.

The thing to note though in using a 529 savings plan is that there will be fees for investment managers, account maintenance, etc. so you want to make sure that you pick the right one as there are many choices.

State(Direct) or Broker sold Plan? Which State plan is the best?

Normally 529 plans are sold are from brokerage companies like Blackrock and Merrill Lynch, or sold directly from the states themselves. Generally, it’s cheaper to work through the states directly, but it’s important to look at the complete set of fees when comparing one plan versus the other. A great study comparing fees showcases how the plans sold directly from the states themselves compare to each other.

Being residents of Florida grants plenty of advantages outside of a long summer. The absence of any state taxes gives investors a lack of incentive to use the Florida 529 plans. In many other states the ability to deduct 529 contributions from your taxes pushes people to utilize their home state sponsored 529 plan, but due to no state income taxes here in Florida we can pick from any 529 plan that best fits our needs. If you don’t live in Florida you can look up whether or not your state’s plan gives tax deductions for contributions to your in state plan.

We often push our clients toward using the my529 plan sold by the state of Utah due to their ease of use and low fees imposed by the plan and its investments. This plan year after year has been rated as a top plan among the many choices. By no means though is this the only plan that makes sense for people to use.

Whether it’s a prepaid plan or savings plan, or a combination of both, make sure to have the conversation early as to which is right for you. The prepaid plan is a great way to hedge against rapid tuition increases while savings plans will grant you more investment choices and opportunities of growth. Just be sure to check the fees and such that come along with the savings plans.

Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.

Find out how you can limit the damage with your student debt through other Federal repayment programs such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Also learn some of the most common reasons why only 1% of borrowers that applied actually get approved for Public Service Loan Forgiveness (PSLF).

Better understand how to best use the various federal student debt repayment options, such as income-based repayment.

Despite the argument being so strong for finishing college quicker most people don’t expedite their college experience. In fact, it’s even rare that people end up graduating within the normal 4-year time frame. At most public universities only 19% of full-time students end up graduating on time. Take that even further and fewer than 6 out of every 10 students graduate 6 years after entering college. When you end up paying for an extra year or two, the cost can begin to really pile up. Many students from the Ponte Vedra area end up going to University of Florida because of the savings on cost and the high-quality education, but the 4-year graduation rate is only at 68% as of 2015. Add on top of that the fact that bright futures no longer is active after your fourth year, and you begin incurring the whole cost of attendance for any extra years after your fourth. So, what can you do to make sure that you graduate on time, or even better yet, graduate early?

4 Year Tuition Versus 6 Year Tuition Cost

1.       Take college credit courses while in High School

Whether it’s AP courses or taking the IB curriculum, there are many options available to receive college credit for a whole plethora of courses during your time in high school. These courses can be challenging but can save you from some entry level classes in college. Be sure to do well on your tests at the end of the year as certain schools will only accept these credits with a certain score from your final test. Also be certain that the schools that you plan to apply to accept these credits, as certain schools like Dartmouth don’t accept AP courses as a college credit replacement. The same often goes for dual enrollment classes which use curriculum approved by a local university or community college and can be taught at the high school.

2.       Using the College Level Examination Program (CLEP)

The CLEP program offers students the ability to take a test in order to gain credit for certain introductory courses. This allows students the ability to showcase their ability that they may hold in certain areas and allow them to save time on a class that otherwise may have taken a whole semester. Again, these types of credits aren’t accepted by all colleges. Generally speaking, the more prestigious the college, the less likely they are to accept these kinds of credits.

3.       Take advantage of the summer

The summer offers plenty of opportunities to save on the total cost of college for students. First, and foremost most colleges offer courses over the summer, and many offer their summer courses at a discount. If you can’t gain a discount on tuition you may be able to gain a discount on housing or other expenses. Some schools offer what is known as “plateau programs” which charges you for a certain amount of credits, but then allows the rest of your credits to be free. If you go home for the summer you can also look to use either your universities online classes or enroll a local community college. In both cases the cost per credit can be significantly cheaper than paying for regular credits, and you also are able to save on housing if you are living back home for the summer.

4.       Accelerated programs

Search for accelerated program options that grant students the ability to graduate in less time than normal. There are a good number of programs out there that are geared toward graduating students within 3 years versus the traditional 4. Often time these programs are also meant to be paired with some form of graduate program. A prime example being Rollins college which offers a 3/2 accelerated management program allowing students to finish their undergraduate and MBA program with 5 years versus what traditionally would take 6 years to complete or the Medical Honors Program at the University of Florida which grants students the ability to get their B.S. degree and M.D. degree within 7 years versus what normally takes 8 years.

Many students don’t have any desire to leave college ahead of the normal 4 years. On the other hand, though there are a growing percentage of students who are either motivated to finish early, or extend their education into a graduate program. In that instance these strategies can be a great way to save on the total cost of education. One thing is for certain you don’t want to drag your feet beyond 5 years, especially since the Bright Futures program will not fund students beyond that mark.  

Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.

Learn more about a riveting topic - budgets. While they can be tedious and annoying, budgets are the building blocks behind any sound financial plan. Why? Because understanding where your money is going will help you maximize your financial resources.

We highly recommend you watch the segment about our shortcut budgeting method to figuring out what you spend on a monthly basis - starts at 8 mins and 24 seconds. It’s truly the quickest way to to calculate the amount of money you spent over the last year. We even provide you a visual aid here!

Time flies. It may be a cliche, but it certainly applies to 2019! Now that we’ve passed the halfway point of the year, it’s an ideal time to take a look at how the economy and markets are faring following the tumultuous end to 2018. Here’s a bird’s-eye view of how the economy is faring in 2019 so far.

The Markets Are Soaring

Thankfully, the first half of 2019 has been a breath of fresh air for investors, who got the wind knocked out of them at the end of 2018. Not only have markets managed to recover from the tailspin that started at the end of September, but they have reached new highs. U.S. stocks were up 18.59% after the first four months of the year.[1]

Two of the major factors that led to the market drop last year were uncertainty over trade talks between the U.S. and China and fear that the Fed would continue to raise interest rates. Though the trade talks are still an uncertain factor, the strong economy is acting as a buffer and the markets haven’t been as affected. But going forward, this could be a factor in volatility or market drops once again. On the interest rate front, the Fed announced that they would halt rate hikes at the beginning of the year, paving the way for the impressive gains that we have seen thus far in 2019.

Employment Looks Good

The economy has also been bolstered by a continually tight labor market. Unemployment rates continue to hover near 50-year lows. This means that employers are having to increasingly compete for talent, which has pushed wages higher. Hourly wages are up 3.2%[2], which is good for workers but will lower profit margins for businesses.

There was a moment of worry when the February jobs report was released with appallingly low numbers. However, fears were allayed with the March jobs report that exceeded expectations. Overall, the labor market remains robust, with slower job growth due more to a lack of qualified workers than anything else.[3]

GDP Is Growing

Gross domestic product (GDP), which measures our nation’s economic output, continues to grow. While there has been concern that the rate of growth is slowing down, first quarter GDP surprised analysts by growing at an annualized rate of 3.2%.[4]

Interest Rate Hikes Paused

Both the stock market and the economy owe some of their current success to the Federal Reserve. The Fed has been helpful not because of what they have done, but because of what they haven’t done.

After five successive quarters of rate hikes, the Fed finally pushed pause in March. Instead of continuing to raise rates, they indicated that they will hold off for 2019 to see what happens with the economy. This was enough to renew investor confidence and drive the impressive stock market gains that we have seen so far this year.

The World Isn’t Too Far Behind

While the U.S. economy continues to chug along, the rest of the world isn’t doing too bad either. There were concerns that China, the world’s second largest economy, was slowing, but some strategic moves by the Chinese government and a surge of industrial production led to better-than-expected GDP growth of 6.4% for them in the first quarter.[5]

Brexit is still a thorn in Europe’s side, as it seems the British government cannot agree on an exit plan. However, the negative economic effects have been minimal so far, especially with regards to the stock market. Thanks to continued growth worldwide, the MSCI All Country World Index is up over 15% so far this year.[6]

Change Is Coming…Eventually

There is no doubt that we are now in the late-cycle phase of the expansion. Several months ago there was a real fear that the end was here, but concerns over a global recession have lessened. While we are seeing slowing in some quarters, the underlying economic fundamentals remain strong. We may be near the end of this expansion, but it’s still quite possible that this ending could last for several more prosperous years.

How We Can Help

You may be breathing a sigh of relief after reading these optimistic updates, but what’s more important than how the overall economy is doing is how your personal financial situation is doing. If your financial plan needs some attention or you want to make sure your plan is set up to weather the market ups and downs, Mellen Money Management would love to help. Set up your free introductory phone call online today.

eMAIL sCOTT A QUESTION

SOURCES

[1] http://news.morningstar.com/index/indexreturn.html

[2] https://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-april-8-2019/

[3] https://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-april-8-2019/

[4] https://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-april-29-2019/

[5] https://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-april-22-2019/

[6] http://news.morningstar.com/index/indexreturn.html

Financial aid is utilized by about two-thirds of full-time students each year through the forms of grants and scholarships, and yet only 75% of families actually fill out the necessary FAFSA (Free Application for Federal Student Aid) forms to garner that money. The most common answer as to why parents and students didn’t is that they felt they wouldn’t qualify for any aid. Sadly, there are a lot of people who fall victim to this assumption and leave free money on the table that could otherwise go towards reducing the price of college tuition.  

Income is the quickest way that someone will typically disqualify themselves out of financial aid, but at what point does that happen? To answer this question let's first try and understand exactly how financial aid is calculated. Plainly put the amount of financial aid that someone qualifies for when looking at any specific school is determined by two main variables; the quoted cost of attendance to that school (including tuition, fees, room & board, books, etc.), and your families EFC (Expected Family Contribution), which is calculated by a standard federal formula.

                  COA (cost of attendance) – EFC (expected family contribution) = Financial Aid Qualification 

So how does income play into all of this? It tends to be the variable that most drastically affects your EFC calculation. A large percentage of parents' "discretionary" income, anywhere in the range of 22% to 47%, is taken into account towards your EFC. There is an amount of the parent's income that is not taken into account ranging from $18,580 to $39,430 (refer to Table A3 below) which depends on the total amount of kids and how many of them are in college. Once income goes beyond those allowances it starts lowering your financial aid qualification.

Here are a few rough guidelines that can help you understand how your total income will affect aid:

1.     For any amount above your income protection allowance, roughly every $10,000 in extra income lowers your financial aid qualification by another $3,000.   

2.     Once the income is above $100K roughly 1/5th to 1/4th of income will be counted towards your EFC. As your income increases that fraction of your income also increases and can even creeps towards 1/3rd or more.

3. With only one child attending college normally an income above $125K will be disqualify you from financial aid qualification at a public university, and about double that, or $250K in income will disqualify you from garnering financial aid.

Impact of Family Size on Financial Aid

Another very important aspect to note is that if you have multiple kids attending school at the same time, then you as a parent can split your EFC number between each of your children. So, if your EFC was $30,000, however another one of your children began attending college, their respective EFC numbers would now be $15,000. If you didn’t qualify for financial aid before your other child went to college, it may make sense to apply again now that you have more kids in college.

Higher Tuition is Better for the EFC

The other factor in this equation that will allow you to make more money while still qualifying for financial aid is the cost of attendance to the school that you are applying to. If you are applying for a school that has a cost of $65,000 versus a school that costs $25,000 you can make a lot more money and still qualify for financial aid at the more expensive school, where the cheaper school may not grant you any.

Mind the Details

Another factor that it is very important to note the timing of income received. Income on the financial aid form is pulled from the prior prior year to the filing. So, a student attending their first year of college in the fall of 2019 would have to use their parent's income from their 2017 tax filings.

The mismatch of timing grants people the ability to purposely receive bonuses, inheritances, retirement plan distributions, and even capital gains distributions in certain years to maximize their ability to qualify for financial aid. So be sure to avoid any artificial increases in income that can negatively impact financial aid. You can attempt to delay receipt of those incomes or offset gains with losses as a couple ways to defray the effect of extra income on financial aid.

Once your child is beyond their second semester of their sophomore year income received becomes irrelevant to their financial aid, but be aware of how it may affect younger children if you have any. In order to illustrate some of these principles we’ve laid out a simple example.

Example:

A couple living with two kids makes $162,000 per year. Their oldest is in college finishing his freshman year and currently doesn’t receive any financial aid going to a school that has a cost of attendance of $30,000. Their second child is a rising junior and looking at attending a school with the cost of attendance of $60,000. The oldest in his first two years of college didn’t receive any financial aid because of the following:

$30,000 (cost of attendance) – (¼ * $162,000 = $40,500) = -$10,500 (financial aid qualification)

The EFC estimate is purely based on income and no other assets. This is purely an estimate using the general rule of thumb stated earlier. Now when the second child is going off to college if we go through the same exercise for both kids the financial aid qualification comes out positive:

Child 1

$30,000 (cost of attendance) – (¼ * $162,000 = $40,500/2= $20,250) = $9,750 (financial aid qualification)

Child 2

 $60,000 (cost of attendance) – (¼ * $162,000 = $40,500/2= $20,250) = $39,750 (financial aid qualification)

Here we can see how not only more kids in college can help qualify for more financial aid, but how the cost of the school selected can greatly alter your financial aid qualification. A family that previously didn’t qualify for any financial aid with their first child in college by himself, now qualify for up to $48,950 between their two children. Their income limited them initially, but this showcases how much certain factors can alter the idea that their income excluded this family from qualifying for financial aid.

If this couple was expecting a large bonus payment, let's say in the realm of $30,000, in the current year I'd suggest them to delay their bonus to the following year if possible to ensure that their oldest child can still qualify for financial aid. Utilizing the rule of thumb stated earlier a bonus of that size could eliminate around $9,000 ($30,000 X .3) worth of financial aid.

Biggest Takeaway

The easiest way to tell “when do I make to much” is by taking the total cost of attendance between the schools your kids are attending and seeing if 1/4 of your income is greater than that amount. In the example above the total cost of attendance for the two children is $90,000 (30,000 + 60,000). So someone who has a $360,000 income (4 X 90,000) is likely making too much money to explore any financial aid strategies.

Once you’re above and beyond that mark then it may be time to look towards other strategies to aid with the net cost of college. Understanding that along with the fact that it's important to always apply for financial aid even if you are beyond those amounts is critical. Life circumstances can change on a dime, so ensuring that you filled out the necessary forms can leave the door open to receiving aid, should your financial situation change.

Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.

When a loved one dies, you may be the one responsible for making funeral arrangements and settling their finances, on top of grieving and adjusting to a new life without them. Settling the finances of a loved one can be a daunting process, and it can be difficult to know exactly what to do. Below you’ll find advice on how to pre-plan for the death of a loved one, as well as how to settle assets upon their death.

Before Death: Pre-Planning

Once you realize a loved one’s health is failing, start financially preparing for their death by doing these four things.

1. Track Expenses

You can break expenses up into two categories: recurring expenses and final bills. Recurring expenses may include mortgage payments and utilities that you’ll continue to pay until you settle the estate. Final bills may include the deceased’s medical bills, credit cards, and student loans.  

2. Gather Important Documents

Gather important documents now, so you can locate them when it’s time to settle the estate and file tax returns. These documents include:

• Original estate planning documents (such as a will or trust)

• Certificates (such as birth, marriage, and divorce certificates)

• Financial documents (such as insurance policies, previous tax returns, and retirement accounts, to name a few)

3. Update Beneficiaries

Double-check beneficiaries and update them if needed, especially if your loved one has immediate family. Certificates of deposit, bank accounts, and brokerage accounts may need to be set up with a transfer on death (TOD) designation. A TOD designation states who gets ownership of the account upon the primary holder’s death.

4. Name Durable Power Of Attorney & Estate Executor

Have your loved one name a durable power of attorney and an estate executor, if they haven't already. A durable power of attorney handles affairs while your loved one is alive. They can make decisions about health, finances, and legal matters. (1) The estate executor handles affairs upon their death.

After Death: Settling Assets

If you were able to pre-plan for your loved one’s death, settling the estate will be more straightforward. If you weren’t able to pre-plan, go back to those steps and try to gather as much information about their finances as possible.

How you'll settle the deceased’s assets depends on whether they named beneficiaries. This checklist outlines what the process looks like for assets with and without named beneficiaries.

Property without a named beneficiary may have to pass through probate—the legal process of distributing property and assets. (2) This process is initiated by the executor of the estate and takes place under the supervision of a probate court. Probate can be a lengthy process, but the four basic stages include: (3)

• Filing a petition with the probate court and notifying beneficiaries

• Notifying creditors of the estate and taking inventory of the property

• Paying the deceased’s debts and taxes

• Distributing assets to beneficiaries

After Death: Receiving Inheritance

If you receive non-qualified annuities or a retirement account as part of your inheritance, you may be confused about what to do with it. You may have the option of taking a lump sum, rolling it over to an existing account, or annuitizing the annuity. Your options also depend on whether you’re a spouse beneficiary or non-spouse beneficiary.

If you find yourself with an inheritance and you’re not sure what to do with it, seek counsel from a financial advisor. This person can help you decide which option is best for you based on your financial situation and long-term goals.   

Your First Step

A financial advisor is the first professional you should contact when a loved one dies. An advisor can guide you as you settle your loved one’s estate and move through the grieving process. Even after you settle the estate, an advisor can help you adjust your financial goals. At Mellen Money Management, we specialize in walking our clients through the many milestones and transitions they face in life. To learn more about how we can help you handle your loved one’s finances upon their death, set up your free introductory phone call online today!

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SOURCES

(1) https://www.seniorliving.org/law/durable-power-attorney/

(2) https://www.nerdwallet.com/blog/investing/how-to-handle-finances-when-someone-dies/

(3) https://www.legalzoom.com/articles/the-probate-process-four-simple-steps

For those who opt for college instead of a trade school or another option, student loans are an enticing way to cover the cost of education. With over a trillion in student debt distributed among the students of America and wages stagnating, however, the student loan picture for those seeking higher education is relatively bleak.

For this reason, most students are better off avoiding student loans altogether if possible.

First, What's Wrong With Student Loans?

Student loans come with some inherent problems. They affect a borrower’s credit; those with a higher debt to income ratio may find borrowing for other things later much more challenging.

In fact, according to statistics, student debtors are less likely to buy a home early in life. They’re more likely to move back home with their families to avoid significant bills like rent alongside their student loan costs. Up to 34% of students with debt put off building a savings fund, and 29% delay saving for retirement. Even after paying off their loans, students who had loans were more wary to take on further debt, which discouraged them from buying houses and building their net worth.

The national default rate for student loans rests at 10.8% according to the US Department of Education, meaning that around 1 in 10 students see their loans default. This significantly impacts credit, making it nearly impossible to seek further funding—which includes for homes, cars, and even credit cards.

In addition, unsubsidized federal loans accumulate interest throughout school, so the amount owed at the end of your education will be more than what you originally borrowed. As if this weren’t enough, some private student loans require repayment during school, which can place a significant burden on students (and increase the likelihood of default).

What Are Your Alternatives?

One of the best alternatives to student loans is seeking a scholarship (or better yet, multiple). Unlike loans, scholarships do not have to be repaid. In addition, scholarships target certain niche opportunities that may be relevant to you and put you ahead of the pack in terms of application success. These niches might include your major, your personal history and achievements, or sometimes even your demographic statistics. You can look for scholarships throughout the year, so you will always have new opportunities to fund your education.

To see the most success when you apply for scholarships, begin strong. Make sure you’re sending the application to the right address, make sure it’s completed fully, and ensure that you are happy with the application packet. Think from the perspective of the judges to see if you’ve communicated everything. Remember that they are strangers, so it’s best to be clear and informative.

On top of scholarships, students have a number of other options for school funding that don’t rely on loans. Consider federal work-study programs, Pell grants, and other grants. These don’t require repayment either and are typically preferable to student loans.

Re-Thinking Financial Aid

Remember—you don’t have to rely on student loans to attend school. Given their issues and the rising cost of college, few students will do themselves any favors by taking out excessive student loan debt. There are multiple other solutions that can help students avoid being burdened with such debt so early in life.

You have the power to determine your own opportunities. College debt is a big issue, and education is important. How do you toe that line? Remember that if you work hard, you will have opportunities, and don’t rule out non-standard routes like trade school or getting an associate’s degree before transferring to a four-year school.

Not everyone can get full-ride scholarships, and sometimes college truly is too expensive, creating a funding gap that can be hard to bridge. You may indeed have to take out a student loan and deal with it. Just remember that scholarships, grants, and numerous other opportunities can help to avoid this to a large extent, reducing your debt significantly. And starting out your adult life with as little debt as possible is nothing but a positive thing.

By Andrew from LendEDU – a consumer education website. Andrew has been writing about financial aid for several years now, and he regrets not looking into scholarships or student loan alternatives.

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By Scott Snider

You made it! Whether you’re just finishing up high school, graduating from university, or transitioning out of an apprenticeship—taking the leap into a new career is an exciting step. It’s one of the biggest markers of adulthood. You’ve prepared your whole life for this moment. Congratulations, you’re now a contributing member of society.

However, starting a career isn’t just about climbing the ladder, collecting paychecks, and finally being able to upgrade from “dorm life.”

There are important financial planning tasks that should be addressed when starting your career. Unfortunately, these tasks are often overlooked, causing problems down the road.

But that won’t happen to you, will it? You’re going to get everything taken care of right off the bat, and your future self will thank you for it. By having a clear plan of attack from the get-go, you’ll be equipped to make decisions to accelerate your growth and avoid common pitfalls.

So, let’s get started. When creating your financial road map, here are some important things to consider.

Financial Rules Of Thumb

To begin, let’s go over a few important rules that should make up the backbone of your plan.

Emergency Funds

When your paychecks start streaming in, it’ll be tempting to treat yourself to an immediate lifestyle upgrade. After all, you’ve worked hard to get here, you deserve it.

While that may be true, you’d be wise to start off your working life by building up an emergency fund. This fund should be three to six months’ worth of living expenses. Obviously, building a “rainy day” fund isn’t as exciting as leasing a stylish new car. But when faced with an unexpected financial emergency, you’ll be happy you have it.

Savings

But how much of each paycheck should you be setting aside for your emergency fund? Do you need to continue living a “ramen noodle life” until it’s taken care of?

The answer is no. You can still enjoy your life. But you should shoot for saving 10% of your income each month (15% would be even better).

If that seems too difficult, just remember, starting small is better than not starting at all. Even if it’s just 5%, you can increase it by 1% increments over time as your budget permits. Set specific goals to save X% by a certain date. Continue doing this until you reach that 10-15% target savings goal.

Debt Ratios

This one is important. If you’re not careful, this could lead to financial disaster. We live in a culture built on credit and debt. You’ll likely have to pay for things with money you don’t have (if you haven’t already). This isn’t necessarily a bad thing. You just need to stay in control.

Here is what it looks like to be in control:

• Consumer debt payments do not exceed 20% of net monthly income.

• Monthly housing costs are less than 28% of gross monthly income.

• Total monthly payments on all debts must stay below 36% of gross monthly income.

• Student debt repayment should be under 15% of gross monthly income (in most cases).

By following these guidelines, you can be sure things never spiral out of control.

Economic Support From Mom And Dad

There’s no need to be ashamed if you still need your parents’ support when just entering the workforce. It’s a different world than it was a couple of decades ago. And the reality is, independent financial survival after college is harsher than ever.

If you feel like you’re unable to make ends meet, it’s okay to get temporary help. Just be sure to keep open lines of communication with your parents, set realistic expectations, and create a plan to gradually wean financial dependence over time.

Create Separate Bank Accounts

This is Personal Finance 101 and easy to do, but many people never take the time to do it. First off, you need a separate checking and savings account. But this is only the first step.

If you really want to get organized and make sure you’re staying on track, consider opening multiple savings accounts. That way, you can designate each account to one savings goal (down payment on a house, buying a car, other large purchases).

Own It

If your dream is to buy your own home, there is a right way and a wrong way to do it.

First, you need to consider the timing. Are you in a healthy financial position for buying a house? To determine this, review the financial rules of thumb we discussed earlier.

Secondly, don’t do it alone. We live in a DIY society with access to unlimited amounts of information at our fingertips. But sometimes it’s best to consult with an expert (mortgage officer, banker, financial planner, etc.). Buying a house is one of the biggest decisions you’ll ever make. You want to make sure you’re doing it right and not overlooking anything important.

Retirement Plan

Here’s another one that, if started right when entering the workforce, can be enormously advantageous. It’s easy to procrastinate. After all, retirement is several decades away. But by being proactive now, the compound interest you’ll build up will put you light-years ahead of the procrastinators when you retire.

Keep in mind, opening a retirement account is just the first step. After that, you need to make regular contributions (this can be automated). If your employer offers a company match, be sure to take advantage of it. By contributing at least up to the company match, you’re basically receiving free money (while simultaneously reducing taxable income).

Private Student Debt

If you’re like most U.S. college graduates, you have a fair share of student debt. When it comes to paying it off efficiently, it’s important to remember that not all student debt is created equal. If you’re able to make extra payments, do so with your private student loans first. These generally carry higher interest rates.

It’s also important to review the terms of your promissory note. This is basically the “rule book” for your loans. By understanding the ins and outs of your loans, you’ll know how to pay them off in the quickest way (and avoid breaking the rules and suffering the consequences).

One easy way to reduce your loan is to investigate your options for refinancing the loan at a lower interest rate. Another way is to check your employee benefits to see if they offer student loan repayment assistance.

Just remember, nobody is going to do these things for you. There are ways to reduce your loans. You just have to take the initiative to go out and find them.

Federal Student Debt

Finding the best plan of attack to pay off your federal student loans can also save you significant amounts of money. The first step is choosing the most appropriate repayment program for your situation.

For example, Income-Driven Repayment (IDR) plans are best for those with entry-level incomes or high debt ratios. You’ll pay more interest in the long run, but it is a good choice if you’re struggling to make your monthly payments.

On the other hand, if you have a higher income and can afford it, consider switching to a 10-year repayment plan. This requires higher payment amounts but will save you the most on interest.

Other ideas to consider are the Public Service Loan Forgiveness program if you are a public employee, and refinancing your loans if you’re not.

There are many different options available. It’s your job to decide which one is most beneficial to you.

Your First Step

One of the biggest mistakes people make when entering the workforce is diving in without a plan. This is a recipe for wasted time and setbacks. Without clearly defining your goals (and a step-by-step path to reach them), it’s easy to get distracted and pulled in different directions.

It’s true, there is a lot to consider. It can be overwhelming. But the good news is that you don’t have to do it alone. At Mellen Money Management, we have over a decade of experience helping people define their financial goals and creating easy-to-follow plans to achieve them. If you’d like to learn more about how we can help, set up your free introductory phone call online today!

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By Scott Snider

Retirement may sound like something that is way off in the distance for you. It may seem even incomprehensible to think about at your current stage in life. While these are common thoughts and feelings for many people, we hope that this article explains why it is so critical to start planning for retirement today. Below you will find several tips about important aspects of retirement planning.

Seek Positive Outlets And Keep A Sense Of Purpose

For all of your life, work has been how you spend most of your waking hours. In this new, foreign stage of life called retirement, you will have the ability to no longer work—period. Everyone is different, so for some, no longer working may be an easy thing to transition into. For other people, it might be scary in that they’ve lost a sense of their identity and may not know how to spend their time. Wherever on this spectrum you fall, it is important to think in advance about how you want to spend your retirement.

Even though work is over for you, you can still find ways to find a sense of purpose and fill your time with meaningful endeavors. A few ideas on how you can spend your time in retirement include traveling, volunteering, part-time work and consulting, starting a new business, spending more time on hobbies or with loved ones, helping family members, increasing physical activity, etc.

After many years of putting in the work, you deserve to enjoy this next stage of life. In order to fully enjoy it, start creating a vision of how you want your retirement days to be spent.

Insurance

There are many different types of insurance, and when it comes to planning for different life stages, insurance is certainly something you should consider.

Life Insurance

During your working years, it made sense to have life insurance for yourself. You were earning income that helped support your children and spouse, so it was prudent to make sure that they were covered in the case of your death.For most people that enter retirement, their children are usually self-supporting. Therefore, in the life stage of retirement, it is important that you review all of your in-force policies. It may be the case that you are over-insured. Finally, it may make sense to use cash value to pay premiums.

Large Estates

The recommendations above on life insurance may make sense for most. However, for large estates, above $11.4 million, it could be more advantageous to actually increase life insurance coverage. When it comes to business owners, especially family-owned businesses, insurance planning done right is a critical piece to a financial plan.

Long-Term Care (LTC) Insurance

Often overlooked is the cost that is associated with long-term care. This is the expense incurred for the assistance with basic personal tasks of everyday life. There will be a time when you will not be able to take care of yourself independently. Many individuals go about this in different ways: senior living centers, home healthcare, or maybe family members handle it.

One important financial planning tool that can help alleviate some of this expense and potential burden is long-term care (LTC) insurance. There are different types of policies, including traditional LTC policies or hybrid LTC policies. When thinking about your insurance needs before entering retirement, we highly recommend doing research into the best way to cover your long-term care costs.

Pre-Planning Guidelines

It is crucial for the success of your retirement that you thoughtfully take some time to pre-plan your retirement as best that you can. This does not have to be anything too sophisticated, but this is where you’d want to decide how you want your retirement to look and figure out what steps you need to take to get there.

First, you want to think about your life expectancy. What is a realistic time horizon for your retirement given your current overall health and family history?

Next, if we think about a 5- to 10-year time period before you actually enter retirement, you want to think about if you are on-target or off-target. If you are on-target, you may want to consider the risks that may throw you off your plan. If you currently have a job that is less stable, try saving extra money if you can. To reduce volatility, you may want to allocate funds in a more conservative manner. Finally, consider asset preservation strategies and income-guaranteed solutions.

However, if you are currently off-target, you must find ways to fill the retirement income gap. Some ideas for this include delaying your retirement date, saving more, increasing portfolio growth prospects, or getting a part-time job.

Living On A Fixed Income

There’s a complete mindset shift that must be made when you realize that in retirement you must live on a fixed income (for the most part). It is important that you prep yourself for this shift and also prioritize your spending to get a handle on what financial resources you'll have to cover your expenditures. You may want to categorize your fixed and variable expenses into the following three buckets: needs (can’t live without), wants (often where your expenses can be trimmed), and dreams (budget using financial windfall). After categorizing everything, you can now figure out which of your financial resources will be funding each of the items within the three buckets. If you’re like most, your resources will include retirement savings, Social Security, pensions, business interests, and other investment accounts. Alternatively, it may be advantageous to implement other creative planning ideas (if necessary), such as downsizing your home, using insurance as a resource, generating income from rental real estate, and leveraging reverse mortgages or lines of credits.

Distributions From Retirement Accounts

In this new stage of life, it is important for you to be aware of the nuances involved with taking distributions from your retirement accounts. You will certainly want to get a handle on when distributions can be taken without penalty and what taxation will be.

First, there are Required Minimum Distributions (RMDs), which are minimum distribution amounts that the U.S. Federal Government requires one to withdraw annually from traditional IRAs and employer-sponsored retirement plans. These normally begin when the account owner turns age 70 1/2. Once you are required to take your RMDs, make sure that you do not fail to do this, as the IRS enforces a hefty penalty of 50% if you miss the RMD deadline. It is important to note that Roth IRAs are not subject to RMDs.

The next important point has to do with early withdrawals. Currently, early withdrawal penalties apply if you take a distribution before age 59 1/2. This penalty is generally subject to income tax and a 10% IRS penalty. There are several exemptions to this 10% penalty, which include:

• Withdrawal from qualified plan after separation of service when age 55 or older

• Death and disability

• Unreimbursed medical expenses above 10% AGI

• Rule 72(t): Take substantially equal periodic payments.

• IRAs allow up to $10,000 to be withdrawn for a first-time home-buyer.

• IRAs permit distributions for qualified education expenses.

Your First Step

The earlier you start thinking about retirement, the better off you and your family will be. If you’re feeling overwhelmed or unprepared for the many financial considerations of retirement, speaking with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the  milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized, set up your free introductory phone call online today!

About Scott

Scott Snider is the founder of Mellen Money Management, an independent, fee-only financial planning firm specializing in college-specific consulting and student loan repayment advice. Scott has more than ten years of industry experience and is an FPA Northeast Florida board member, member of XY Planning Network and NAPFA, and is part of the Finance Advisory Council at University of North Florida. He graduated with a Bachelor of Science in Finance from Miami University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Retirement Planning Counselor (CRPC) designations. He lives in Nocatee with his wife, Emily, their daughter, and their two dogs. He loves animals, spending time outside, and anything sports related! Learn more about Scott by connecting with him on LinkedIn.

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By Scott Snider

Divorce is not something that anyone hopes for or expects to be a part of their story. Because of that, planning for divorce is not a reality, nor should it be. However, when divorce is a certainty in anyone’s situation and it is clear that your states can no longer be united, preparation and preparedness can help keep things civil.

On top of being emotionally charged, divorce can be a logistical minefield. The unraveling of assets can be rife with confusion, frustration, and even more heartache. There's nothing pleasant about going from everlasting to nevermore, but there are ways to minimize the strain on both of your lives. Below are some pieces of advice for anyone that is in (or around) the life stage of divorce.

The Cost Of Disputes

While often overlooked, divorce can be an expensive process to go through. To avoid hurting the future finances of both ex-spouses, try keeping things civil and play nice (if possible). Nasty disputes often create worse financial consequences for both parties as good lawyers don't come cheap.

Estate Issues

Because marriage is legally binding, assets become legally binding to each spouse once the knot is tied. Once the divorce is finalized, it is important that you take care of certain estate planning changes that need to be made. Therefore, to make sure that your estate is in order after divorce, we recommend reviewing the following items.

Update Wills & Trusts

If you established a will and/or trust with your ex-spouse while you were married, it is critically important that you now update or re-establish each of those estate planning documents. While it may seem like a lot of work and hassle, the last thing that you want is to keep those documents as is and then your ex-spouse receives certain things after your passing that you had intended for others.

Power of Attorney (POA)

A financial power of attorney (POA) is “a document appointing someone else to have the authority to manage your financial affairs on your behalf.” POAs come into play when an individual is incapacitated. After you got married, you may have assigned your spouse or someone else as your POA. In either case, now that you are divorced, it is important to update your POA. If your POA was your spouse (which we normally do not recommend for our married clients), you should certainly update and change that. If your POA was listed as someone that maybe was more associated with your spouse, we’d recommend that you also update your POA to be someone that you want.

Also, make sure to cover all of your bases of POA, such as durable, health, legal, and financial.

Retitle Any Jointly Held Accounts

During different life stages, certain titling on accounts makes sense given your situation. When you were single, some of your accounts were titled a certain way. Once you got married, you most likely retitled most of your accounts so that they became joint with your spouse.

Now that divorce is a reality, we recommend that you retitle any jointly held accounts. This is an important piece of estate planning that is often overlooked. Make sure to not just consider bank accounts, brokerage accounts, etc., but also property deeds.

Quit Claim Deed

A Quit Claim Deed is used to retitle real estate property. This is something that would be needed if one ex-spouse is giving their interest in real property to the other ex-spouse.

Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order (QDRO) is a legal document used to divide assets. For any divorce where assets are going to be divided, this will absolutely be needed. In most cases, the QDRO is used for separating retirement accounts by recognizing joint marital ownership in the plan.

Alimony And Child Support

Alimony is a court provision that requires one ex-spouse to pay financial support to the other ex-spouse after a divorce. Similarly, child support is also a court provision where one ex-spouse is required to pay financial support to the other ex-spouse after a divorce. However, child support money is supposed to be used solely for the care of the child. The important difference when it comes to financial planning is how taxes apply to each. Alimony is tax-deductible to the payer ex-spouse and taxable as income to the beneficiary ex-spouse. In contrast, child support is not tax-deductible and is not included as taxable income for either ex-spouse.

Update Beneficiaries

Before your divorce, you most likely listed your spouse as beneficiary to most of your assets. Once your divorce is finalized, you will want to update your beneficiary lists to put someone else as primary beneficiary. After you list someone as primary, you may also want to update your contingent beneficiaries. Make sure to do this for everything you own, such as bank accounts, investments, retirement plans, property, life insurance, and other assets.

Review Financial Plan

After your divorce is finalized, it is important that both ex-spouses review and update their financial plan. In reality, it may be the case that an entirely new financial plan will need to be created. While both ex-spouses were married, their financial plan most likely focused on shared goals and some individual goals. However, after divorce, both ex-spouses have very different financial situations and will need to review/re-create a new financial plan.

Reevaluate Needs And Objectives

Each ex-spouse is now going from a joint household income and asset base to a single income and asset base which is most likely half the size as before. Needs and objectives are certainly going to change because of this. Each individual will now have a financial plan that is based around a reduced household income. This is important to note because it can affect the current standard of living, future retirement needs, and more. The next reality is that each individual now has less assets available to reach their goals across the board. Even if the goals have changed, it is important to reevaluate one’s needs due to this fact. Finally, when thinking about divorce planning, it is crucial to quantify the impact on retirement and Social Security. By showing the new projections, each individual ex-spouse will have a better idea of how to prioritize their needs and objectives in this new life stage.

Unintended Consequences Of Getting Remarried

It is also important to note a couple of unintended consequences of getting remarried. First, once you get remarried, you will lose half of your ex-spouse’s Social Security benefit. This is important to keep in mind when thinking through your financial plan. Second, after remarrying, there may be a potential reduction in alimony and child support. With all things considered and depending on each situation, getting remarried does have the potential for financial impacts.

Altered Life Insurance Needs

Depending on the life insurance policies that you maintained during your marriage, once you get divorced, it will make sense to reevaluate your new life insurance needs. When you get divorced, you may need different coverage than you had when married; and you may actually be able to save money. This is an important piece to your financial plan that should not be overlooked.

Your First Step

If you’re feeling overwhelmed or unprepared for the many financial considerations of divorce, chatting with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the many milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized, set up your free introductory phone call online today!

About Scott

Scott Snider is the founder of Mellen Money Management, an independent, fee-only financial planning firm specializing in college-specific consulting and student loan repayment advice. Scott has more than ten years of industry experience and is an FPA Northeast Florida board member, member of XY Planning Network and NAPFA, and is part of the Finance Advisory Council at University of North Florida. He graduated with a Bachelor of Science in Finance from Miami University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Retirement Planning Counselor (CRPC) designations. He lives in Nocatee with his wife, Emily, their daughter, and their two dogs. He loves animals, spending time outside, and anything sports related! Learn more about Scott by connecting with him on LinkedIn.

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By Scott Snider

Getting married is a very significant life event, where two individuals (oftentimes with very different backgrounds and experiences) come together to start a new life. When it comes to financial planning, marriage is a critical life stage, where it is important to take the time to make sure that your new household is fully aligned regarding your finances and long-term goals. While we know that marriage is built on a foundation of love, it is also essential to start your marriage off right when communicating about money, planning for your future, and creating life and financial goals together. Below are some pieces of advice for anyone that is in (or around) the life stage of marriage.

Estate Issues

Because marriage is legally binding, that also means that once the knot is tied, assets also become legally binding to each spouse. Therefore, to make sure that your estate is in order, we recommend reviewing the following items.

Update Beneficiaries

Before you were married, you most likely listed your parents or a sibling as beneficiary to most of your assets. After you get married, you will want to update your beneficiary lists to put your spouse as primary. After you have your spouse listed as primary, you still have the ability to add contingent beneficiaries as well. There are several benefits to listing your spouse as the primary beneficiary. For example, if you name your spouse as beneficiary, you can potentially avoid income and estate taxes. Additionally, your spouse can roll over your retirement account to his or her own IRA.

Create And/Or Update Any Wills Or Trusts

Most single individuals do not have a will or trust established. However, if you already have one or both set up, make sure to update them after you get married. This is important in the event that you pass away. If you do not update these legal documents, your spouse may be left with nothing.

Alternatively, if you have not created a will or trust, a new marriage is the perfect life event to nudge you in the direction of establishing these important legal documents. As your marriage grows and more assets are obtained, children are born, businesses are built, etc., it is critical to have an estate planning document that outlines your household needs and wishes if anything were to happen to either spouse.

Power Of Attorney (POA)

A power of attorney (POA) is another important estate planning tool that all married couples should consider. A financial power of attorney (POA) is “a document appointing someone else to have the authority to manage your financial affairs on your behalf.” (1) POAs come into play when an individual is incapacitated. As a newly married couple, it is important for you to assign a POA that is someone other than your spouse. The reason for this is because, in the case that you are incapacitated and there is a life event where transferring or selling a joint asset is necessary, your spouse cannot sign for you. The agent that is acting as the POA will have to sign. There are many other factors to consider and situations in which it makes the most sense to not have your spouse listed as your POA.

Retitle Accounts And Property Deed(s)

There are many different ways that your accounts can be titled. For example, you can have an individual account, Joint Tenants with right of survivorship (JTWROS), Tenants in Common (TIC), Transfer on Death (TOD), etc. It is essential to make sure that all of your accounts are titled correctly after you get married, and it is also critical to make sure that the titling aligns with your will and trust.

The importance of titling or re-titling also applies to property deeds. After you get married, make sure you review and update if needed.

Fire Safe Or Deposit Box For Important Documents

With the takeover of technology, computers, and smartphones, you may think that storing physical documents is a thing of the past. That is certainly not the way we look at your most important legal documents, and we hope you agree with us. We recommend to all of our clients that they have a secure fire safe or deposit box in their home to be used to store all important documents or irreplaceable valuables, such as stock certificates, heirlooms, title deeds, and family records. Try to avoid storing items that you will need to periodically access.

Master List Of Accounts And Passwords

Nowadays it is certainly true that we have all accumulated a massive amount of online accounts and passwords. Whether it be our cell phone service account or our 401(k) retirement log-in, the list goes on and on. Once you get married, now you have even more accounts to keep track of. Because of this, we highly recommend that you create a master list of accounts and passwords that both you and your spouse know about. Make sure to keep this list safe and secure at all times. We also recommend looking into password managers such as LastPass, Dashlane, 1Password, etc., to consider as an alternative to a written-out list or something stored in an Excel file.

Establish Or Revise Your Financial Plan

Most young couples may think that financial planning is something that they don’t have to consider until they get older. That is actually the furthest thing from the truth. In reality, the earlier that you create a plan for your financial life, the better off you will be in the long run when it comes to achieving your financial goals. The earlier you start thinking about goals such as having children, buying a new home, paying for your children’s college tuition, saving enough money for retirement, etc., the more peace of mind you will have as you navigate through your marriage.

Now that you are a newly married couple, establishing a financial plan allows you the opportunity to start thinking of the future that you want to create together. This is an exciting time, and planning for the future will help you achieve the dreams that you want for your new family.

Re-Evaluate Needs And Objectives

After you get married, it should make sense that each spouse will have different needs and objectives than they did before becoming married. That is certainly not to say that your individual needs and objectives will have to fall by the wayside. However, now we have each spouse’s individual needs and objectives plus the married couple’s joint needs and objectives. This is a great thing, but next comes the important step of communication and prioritization.

Now that you are creating a new financial plan together, there may have to be compromises on either end. Alternatively, if you have not thought through some of the bigger-picture items that most married couples face at some point (having children, paying for college, buying vs. renting, vacation, retirement, etc.), this is a great time to start those conversations and come together on an agreed-upon plan of attack.

Changes To Your Household Budget

Before getting married, budgeting for yourself is easy in the sense that you have the ultimate say in how you spend your money. Once you are married, it is now not only about your needs and objectives. Therefore, budgeting is an important topic that all married couples should consider right away. To go a step further, you can even get ahead of the game if you begin talking about budgeting even before you say “I do.”

Just as we discussed how compromises will have to be made regarding your new financial plan, the same is true for your new household budget. If you and your spouse have created your financial plan built around agreed-upon needs and objectives, it is vital that you stick to your household budget. You may have to change some of your spending habits from before marriage, but as long as you and your spouse communicate about this topic, you should be able to achieve all of your financial plan goals.

Life Insurance Coverage

Life insurance is not something that most single individuals consider. Now, there are exceptions to this rule, but in most cases, life insurance is most important when you have a spouse and/or children.

If you are a newly married couple, we highly recommend considering Term Insurance. The last thing you want to do is get married, buy a new home with your spouse, and unexpectedly pass away. In this extreme case, you would be leaving your spouse responsible for paying off the entire mortgage with one income. If you have life insurance for yourself, you would alleviate such a risk.

Disability Insurance Coverage

One of the most important assets that anyone has is their ability to work and earn a living. To mitigate the risk of not being able to work in the future, married couples should highly consider disability insurance. Because you are married and now providing income for a household (not just yourself), it is prudent to make sure that you cover the risk of not being able to work due to an injury, accident, or unforeseen complication.

Buying A Home Together

After the wedding, there are many important life events that traditionally soon follow. One of those life events is buying a home. This is a very exciting time, and it is critical that you and your spouse make the best decision given your resources, needs, and goals. There are many things to consider when buying a home, such as credit scores, interest rates, loans, mortgage insurance, etc. Because this is such a major investment into a married couple’s future, being as informed as possible and planning ahead are two tips we always recommend.

Your First Step

If you’re feeling overwhelmed or unprepared for the many financial considerations of marriage, chatting with a financial advisor to review your financial strategies may help you feel more confident. At Mellen Money Management, we specialize in walking our clients through the many milestones and transitions they face in life. If you’d like to make sure your bases are covered and your finances are optimized, set up your free introductory phone call online today!

About Scott

Scott Snider is the founder of Mellen Money Management, an independent, fee-only financial planning firm specializing in college-specific consulting and student loan repayment advice. Scott has more than ten years of industry experience and is an FPA Northeast Florida board member, member of XY Planning Network and NAPFA, and is part of the Finance Advisory Council at University of North Florida. He graduated with a Bachelor of Science in Finance from Miami University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Retirement Planning Counselor (CRPC) designations. He lives in Nocatee with his wife, Emily, their daughter, and their two dogs. He loves animals, spending time outside, and anything sports related! Learn more about Scott by connecting with him on LinkedIn.

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(1) https://www.offitkurman.com/publication/power-of-attorney-why-it-could-be-your-most-important-estate-planning-document/

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