Skip to main content

Tag: College Savings

Don’t Make These 6 Expensive Financial Mistakes

Written by support@seostats.com on . Posted in Budgeting & Money, Cash Flow, Financial Planning, Goals, Insurance.

What if I told you the world of providing financial advice has greatly evolved in the last decade? Do you know how it has changed and if you’re still taking an “old-school” approach to planning your finances?

It used to be that financial planning was an “add-on” service for wealthier clients with enough assets to be professionally managed. The emphasis was on the return of the assets and not much else. Meanwhile, the average person, especially one starting out in a career, had little to no opportunity to receive any planning advice.

However, some of today’s financial advisors haven taken a new approach—they fully focus on you and your goals, instead of just looking at your investments. Called the fee-for-service model or fee-only , this new model allows financial advisors to weigh in on anyone’s financial life at any income level. Now someone in their early 30’s (which I believe is the most critical time in your financial planning life), who may not yet have accumulated many assets, can receive direction, and start on the best path forward.

When you engage with a fee-for-service financial advisor early, you can avoid costly mistakes and understand your options. Here are a few of the mistakes working with an advisor in your 30’s can help you avoid.

 

Mistake #1: Focus too much on budgeting instead of cash flow planning

 Stop focusing so much on budgeting. Yes, really. Instead, focus on cash flow planning. Budgeting is important, but it implies a scarcity mindset, while cash flow planning looks at the bigger picture—both short-term and long-term goals. Reframing the process of spending as allocating toward your goals instead of cutting costs helps improve your chances of success.

The result becomes the foundation of your financial plan and helps you decide where to make spending changes. Understanding and detailing your cash flow allows you to make sure you are allocating enough for your future goals, like retirement, traveling, education, or purchasing a second home.

 

Mistake #2: Not saving for your kids’ college

Many professionals at the mid-stage of their career still have young children and haven’t yet thought about their college education. Let me be the first to tell you—it’s a major mistake to put off saving for later.

If you haven’t put away funds yet, start now. The sooner you start saving for your children’s higher education, the better. If you can, we recommend funding a 529 plan with up to $32,000 per year ($16k for each parent). This plan type will still qualify you for an annual gift tax exclusion. If you want to get a big head start on your child’s education you can also look to Superfund, or contribute up to 5 years all at once.

Think your children will attend private school? Good news—your 529 fund can help pay for K-12 expenses too.

 

Mistake #3: Putting off buying life insurance

You’re relatively young now, so it may be hard to think about the end of your life. But here’s the hard truth: anything can happen at any time. That’s why buying life insurance is critical to keep your family’s lifestyle and goals on track.

For most people, a term life policy offers the ability to cost effectively replace your salary during your prime earning years. Remember, this is not just income replacement. It’s also intended to cover major liabilities, like your mortgage, student loans, and college costs.

 

Mistake #4: Not saving after-tax funds for retirement

Maxing out your 401(k) or employer retirement plan should be your #1 retirement priority.  This is money that’s saved pre-tax, meaning you don’t have to pay taxes on it until you withdraw the funds after age 59 ½. However, paying taxes on those funds when you eventually withdraw them means that $1 million in your account isn’t really $1 million.

That’s why it’s also important to start saving money after-tax. Open a taxable brokerage account to put in after-tax funds. This is especially critical if you plan on retiring before age 59 ½.


Mistake #5: Not having a “sunny day” fund

You have a rainy-day fund in place (also known as your emergency fund). But do you have a fund for your dreams and goals? I like to call this your “sunny-day fund.”

Once you have an emergency fund with enough to cover 3 to 6 months of expenses, and you’ve maxed out your retirement fund, you can invest for other things. For example, you may want to buy a vacation home one day, or a boat, or take time off of work to travel. Don’t forget to put money aside to invest in life’s opportunities.

 

Mistake #6: Forgetting about tax planning when making financial decisions

When making financial decisions, aim to reduce the amount of taxes you pay this year, and try to reduce the amount of taxes you pay over your lifetime.

While we don’t want taxes to drive our decisions, a strong financial planner should be mindful of how tactical maneuvers can lower your taxes now and in the future. Roth conversions, tax loss harvesting, tax location, and tax-free income saving are just some of the tactics that should be considered as part of your plan.

 

Above all, remember this…

You now have the opportunity to access planning for you and your family that wasn’t available 20 to 30 years ago. We believe your 30’s are the most critical time in your life for setting yourself up for financial success. The right fee-for-service financial planner can help you do this.

If you’re ready to talk to a financial planner, set up a call with us today. We’re here to help you make better financial decisions and build a path forward.

 

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

Why Your Child’s 529 Plan Should Be Direct

Written by support@seostats.com on . Posted in Education, Kids.

The 529 State Plan as a Vehicle for College Savings

With the cost of higher education rising steadily over the past few decades, more and more families are opting to use a 529 state plan to save up the necessary funds for tuition, room, board, and textbooks. In fact, during the year 2016, these types of savings accounts contained over 275 billion dollars in assets.

And while 529 state plans are a fantastic vehicle for many people, the benefits they offer can often be eaten up by the fees that financial professionals charge for administering them. For example, upfront commissions, which typically cost investors about 4.75 percent to manage, are often in addition to the internal expenses involved with the administration of 529 accounts.

The result is that far too little of the savings goes towards the student’s actual expenses. This has led many families to pursue something called a direct sold 529 Plan, instead of the much costlier broker sold versions.

Unfortunately, from my experience, many parents aren’t aware of the differences between the direct and broker sold. They have purchased a broker sold plan without even knowing a much lower cost alternative exists.

What is 529 State Account?

A 529 account is intended to help families save for future college costs by allowing the investments to grow tax-free. They are offered in all 50 states, as well as by certain private universities.

The most popular type of 529 account is known as a college savings plan and functions in the following ways:

•             An account is set up for the student’s college expenses.

•             The money in these accounts is invested in various funds (stock, bond, and money market), usually ones chosen by the account holder.

•             Interest earned by 529 plans is not subject to federal or (usually) states taxes, as long as the funds are used for eligible college expenses.

Keep in mind that these accounts are subject to a variety of fees even beyond the commissions charged by a broker.

Broker Sold Vs. Direct 529 State Plans

Broker sold plans are purchased through a financial services firm where you will have an advisor who can walk your through various investment options. A direct-sold plan (or consumer plan) is purchased directly from the state, often via a website (such as nysaves.org).

If you aren’t sure what plan you have check out Savingforcollge.com and click on your state.

Broker sold plans will be more expensive because you will be receiving the investment guidance and management from a professional vs a direct sold where you will be picking the investments on your own.

While I believe it makes sense for most people to pay for financial advice and handholding (I’m obviously biased) in this case I don’t. The problem is with the advent of age based options you will often end up in a similar type investment regardless if you work with and advisor or not, just paying much more if you went the broker sold route. The age based option investments make it easier for the consumer to choose and invest on their own.

What Is An Age Based Option?

An age-based option is a portfolio of investments (usually mutual funds) that is automatically rebalanced from a more aggressive mix early on in a child’s life to a more conservative one as college nears. You as the investor do not need to make any changes as they are done for you as your child ages.

The age-based option can do most of what an advisor did in the past (manually) in automated fashion at a fraction of the cost.

From the nysaves.org website:

For instance, if your child is 7 years old and you choose the moderate option, you’ll start off in a portfolio with 62.5% stocks and 37.5% bonds and then transition to one with 75% bonds and 25% short-term reserves by the time he or she is ready for college.

Conclusion

Age based options via direct sold plans now make it much easier and cost efficient as you can eliminate or reduce many of the fees involved from commissions, maintenance fees, fund fees, and administrative expenses.

529 plans are designed to incentivize you to save toward higher education expenses, and they remain a good financial tool, just be wary of the many fees that can come along and hinder your growth.