Here's a question from smvee. Welcome smvee!
I was great to see UGA on the list of value colleges. But what a list. In CA it looks like in-state tuition can cost almost $30K/year. Wow! I don't think parents really understand how much they will have to save to cover than. Of course, parents don't have to pay all the cost. Studies show that students who foot part of the bill have better grades. That said, students whose parents pay it all have higher graduation rates.
In Georgia I believe you can take a deduction against income for up to $2,000 of contributions to our state's 529 plan, regardless of income.
About opening multiple credit cards: Keep in mind that credit scoring systems look at the total credit you could tap, which could hurt you when you apply for an important loan. It's tempting to get more cards, but keep the amount you charge to about 20%-30% of your total credit line. And remember that creditors like to see about 10 years of experience with credit, so younger people may just not have enough years into the system to get the top credit scores.
The market has been going up for 5 years now so who knows. If this is cash you need soon, keep in bank or credit union. there are such things as ultra short term bond funds, but they still can fluctuate in price slightly.
Smvee, the market is high and bonds might go up in yield but down in price as interest rates rise. Oh, what to do? First of all, my clients are rebalancing now which in most cases is having them sell equities. Sell high and buy low...always a good idea. But let's say you have new money. I suggest you buy both bonds and equities in accordance with your preferred asset allocation but dollar cost average into your new positions (buying a little /month over many months). For bonds, we are just trying to keep the duration (sensitivity to interest rate changes) low. You might want to avoid the long bond and think about paring down on high-yield bonds as both could suffer more than other bonds as interest rates rise.
smvee - where you put the cash depends on your intentions for the future. If you need it in less than five years (for a down payment, perhaps) I don't believe that it should be exposed to market risk. If it's for the long term, then you shouldn't worry too much about near term market fluctuations. The only way that the stock market has gotten to its current level has been by hitting highs over time - I think we have been shocked by the recent bear markets so much that we now feel that a new market high is a sign for a crash rather than a sign of economic progress.
Online banks often offer higher rates for your cash. Check out Barclay's US or Sallie Mae online.
Delia, we also like Ally Bank.
Here's a question that we actually ran out of time for in a previous chat. Would love to get it answered:
After making some financial moves recently--paying off credit card debt, contributing to an IRA to cut my tax bill and boosting the amount I put into my 401k, I've ended up in a bind. My savings cushion has gotten too low and I just got hit with a huge unexpected expense that must be paid very soon. Would it be better to reduce my very high contribution to my 401(k) to free up cash? Or find a low-interest credit card or personal bank loan, and pay it off as quickly as possible?
I like Ally as well, they just pay a bit less than the other two.
K, I see this fairly often which is why I encourage clients to save in several different buckets rather than just in retirement accounts. Yes, you will loose some of the tax advantages of putting the money in the retirement account but this is much better than paying an early withdrawal penalty for taking a premature distribution.
Regarding the big unexpected expense, this person made some great moves but perhaps forgot about the proverbial emergency fund. It would not hurt to reduce 401k contributions or skipping this year's IRA contribution in order to 1) meet this unexpected expense and then 2) build up an emergency fund. Then, the savings to other goals can resume.
So, what about a person who is trying to decide between paying off a student loan and building up a retirement account? Same advice? -- We've seen that question a bunch.
I have a question for other advisors. Are any of you using Bank Loan products like BKLN? And are you including emerging market debt in your portfolios to diversify the fixed income portion?
I am using BKLN. I may use emerging market debt depending on the fund's duration. I think we're all trying to stay short right now.
K - I have often mulled over the pay off loan/save for retirement dilemma. Getting out of debt is important and so is building your savings habit. I think saving into a non-retirement account is more important in this situation (can be stopped or slowed if necessary, savings are available without penalty, and certainly also count towards retirement savings), and should be done in conjunction with a reasonable payment schedule for the student loan. When things are more stable and income is higher, then retirement plan contributions can start or be re-directed from non retirement saving. Saving is saving, a retirement plan provides some tax benefits and withdrawal restrictions but the effect is the same.
I just started using BKLN this year. High-yielding but very short term. And it seems like those loans are collateralized, have few defaults than high-yield, and, if they do default, have been recoveries than high-yield. I think many seniors have flocked to high-yield in excess in recent years and they might be in for a real shock. In the last downturn, high-yield went down by almost half.
fewer defaults, better recoveries.....I need to slow down.
Bobbie -- Nah, we love your enthusiasm!
Kiplinger, funding a retirement plan while carrying debt is a bit like bailing a leaking boat with a spoon. It's great to have access to investments that earn market returns plus company matching contributions and such, but if debt is on the balance sheet it will be a continual drag on the long-term result until eliminated. Big picture, the plan for accumulations needed to meet future goals should include a game plan for eliminating debt, the earlier the better.
Here's a big concern of mine: parents, please don't go deep into debt for your kids' college. I know you want what's best for them, but I'm seeing too many people trying to make it to retirement who have burdened themselves with student loans they co-signed or huge balances on their home equity lines of credit, all to pay for their kids' college.
You know Delia, I have friends that worked full time, raised families, and paid for their own college all at the same time. It can be done. You just don't get to do a lot of eating out or drive nice cars.
+1 for that analogy, James!
Good point, Bobbie. The parents need to model that behavior for their children. It's the way we all learn about money.
Delia, I have a lot of younger clients and we start talking about how to teach their children about money starting at age 5 or 6. The goal is to turn over responsibility over time and let them make their own mistakes while the mistakes are small and won't run their lives. By the time they are seniors in high school, give them a semester of money at a time. Then if they run out DON'T FIX IT, even if it is the prom. The Gallos wrote a good book on this "The Financially Intelligent Parent."
I think that gold is overrated as a hedge against inflation. And based on long-term returns, it is a terrible asset, selling now at a lower inflation adjusted price than it did in the early 80s. Other advisors?
Bobbie, I love the lump-sum approach for kids in high school. A friend's mother used to do that for her clothing allowance. Mom would buy the basics, and give my friend an allowance in the Fall and the Spring for the extras. It really made my friend think through what she really wanted...and it caused her to seek out bargains. She then did it with her own kids.
Kiplinger, I'm sure you've had some good articles on gold in the last few years. It was such a hot topic. In most cases, turn away from "hot" topics.
We generally use some natural resource funds that include an aspect of gold in them, mining, etc, but do not buy specific gold shares. These are always a small part of the portfolio
Bobbie, I agree with your answer regarding gold. Gold has a sort of mythic thing about it - but it's mostly used for jewelry, does not pay interest or dividends, and you are right about the price, it's actually lower now on an inflation adjusted basis, which knocks out the argument that gold is an inflation hedge.
Delia, one of my clients did this with her two girls. One was a thrift shop champion and got the best deals. She always had excess money, partly because she turned her skills into a business buying thrift shop items for friends. The other one had to have everything new and was always low on cash. It's amazing how your children can be so different.
Bobbie, it is amazing. And it helps if the person with little or no money skills or impulse control can be influenced by someone in their life who is, like a spouse. Otherwise, we wind up with couples where there's "no adult in residence" and they're always lurching from crisis to crisis.
Brain, I do believe in adding natural assets or broad commodity baskets (to include metals and things like timber and other agriculture in addition to energy) to portfolios. We do 3-5%
Delia, we have all been in the room with those crisis couples. And, surprising to many, they can be at any income level.