Category Archives: Cash Flow

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Need a reason to prepare the FAFSA? Here are 4.

Many have asked whether, given their family’s level of assets and / or income, they should go to the trouble of filling out the Free Application for Federal Student Aid (FAFSA). If you are a high school or college student (or the parent of one) that plans to attend college in the fall of 2021, the short answer is an unqualified “YES, do it now.” I believe that every student’s family should complete the FAFSA. Completing the FAFSA is a family affair–it involves the collection of data on the student as well as the parents or guardian.

Colleges and universities are run like businesses these days. They are competing for certain students and the admissions departments are busy evaluating students to see who gets in and who doesn’t. They use terms like “holistic” or “comprehensive” to describe the selection process. That means that a certain GPA or involvement in extracurricular activities are not the sole minimum requirements. They consider the whole package, including the family’s ability to pay for the education. The FAFSA shows the college your ability to pay.

Even if you think student loans are the work of the devil and you would not, at this moment, ever think of borrowing for college, submit the FAFSA anyway. FAFSA is also used for other forms of financial aid. The U.S. Department of Education awards $120 billion a year in grants, work-study programs and loans.

Here are some other reasons why you should complete the FAFSA:

When the FAFSA is completed, the Expected Family Contribution (EFC) is generated. Colleges determine financial need by subtracting your EFC from the Cost of Attendance (COA) at their school. Bear in mind, that the EFC is an estimate of your family’s ability to pay. Your ability to pay may actually increase or decrease before the child enters school next year. Life sometimes throws curve balls at the best laid plans. Schools can use professional judgement in their awards. When that happens, the first thing a school is likely to ask for is the FAFSA.

The chief reason for completing the FAFSA is to become eligible for Direct Federal Loans. High-income families will not likely qualify for Direct Federal Subsidized Loans, but by completing the FAFSA, they will become eligible for Direct Unsubsidized Federal Loans. The interest rate for undergrads is low enough to consider this source of capital.

Completing the FAFSA, along with the college application, puts the ball in the court of the admissions office. They don’t have to wait until after the FAFSA deadline (which can vary by state and school) to provide a financial aid award letter. The sooner you get the award letter, the sooner you know the net cost of college, and the sooner you can begin the award letter appeal process if the letter is unfavorable. We will deal with appealing award letters in a later blog post.

Because the Direct Federal Loan has an annual and a lifetime limit, it has become very important to project the entire cost of college from matriculation to graduation. Cash flow planning and debt structuring become crucial parts of a family’s financial plan when their student is headed off to college. Direct Federal Loans for undergrads are usually cheaper than the Federal Grad Plus loans. Therefore, sometimes it makes sense to borrow for undergrad education and save resources for graduate or professional school. A plan for repayment should also be developed before the money is borrowed. Because paying for college is likely to be the second largest expense for a family a complete college financial planning package should include a plan to reduce the cost of college, college cost comparisons, debt analysis, student loan repayment, and public loan forgiveness planning.

Federal funds are limited, and many states award their grants on a first-come, first-serve basis. So do it NOW.

Here is what you will need:

  • Social Security numbers for student and parents if student is a dependent
  • Driver’s license number if you have one
  • Tax returns including forms W2 for student and parents if student is dependent
  • Any records of untaxed income.
  • Asset records for cash, checking accounts, investments, real estate, business and farm interests.

Let us show you how to reduce the cost of college. For a free resource called 4 Keys to Cutting College Costs, click here.

Updated October 1, 2020

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Is this a new normal?

Do you call the time BC (before Covid-19) normal? Do you join me in hoping that life can get back to normal soon, but have serious doubts about that? What if this is normal? I believe we need to talk about what we have learned and how we might think about going forward.

7 Things to think about now

  • Ordinarily we financial planners are demonstrating the value of working longer, i.e. postponing retirement. But this month, we have been more engaged with evaluating those clients who are thinking of retiring earlier than originally planned. If you are eligible and have the assets or guaranteed income to retire now, this could be an attractive scenario. Of course, an early retirement nearly always results in less to spend for the rest of one’s life. I know that it might feel scary to even think about, but now would be a great time to determine the true cost of retiring now. Social security benefits factor into that and a Social Security Timing Analysis would be great place to start.
  • Do you find one of the benefits of being quarantined is that you are spending less and saving more? If you are like many we have talked with, your expenses have dropped a lot over the past three months. (I have bought one tank of gas since February and I still have a fair amount of it left.) Perhaps you have some pent up demand to get back out to restaurants or to travel, but several people tell me that they have been surprised to learn what they can do without. That doesn’t bode well for our consumption and debt-based economy, but it could truly be our new normal. Could these past couple of months be a good representation of what retirement spending looks like? You should add in some fun however, just to be safe.
  • Do you need a vacation? Like many of you, I still don’t feel safe getting on an airplane or cruise ship. The opening up of various countries is going to likely be pretty chaotic. Leaving the U.S. might be easy, but getting back in from some of the hot spots around the world could be harder in the coming months. We’ve heard more than one person plot their vacation with a plan to stay within a comfortable drive from home. Popular U.S. destinations could even get to be crowded, so if this is in the cards for you, plan early.
  • Of course, it’s never fun to think about updating your estate plan, but we are in the middle of a life-threatening pandemic. If not now, when? We can help you review your existing plan by mapping the current estate structure into a flowchart. We would then make suggestions for you to discuss with your lawyer if you don’t like the results. That’s all I will say about that.
  • I think you will agree that insurance of various types represents protection. It would be a good idea to review your current policies and to determine if you have the right type and the right amount. I was able to get my auto insurance premium reduced considerably with a revised estimate of how much I think I will drive in the next twelve months. It took about 15 minutes to save 15% and I didn’t have to switch to that popular company to do so.
  • Is it time to re-finance? Consider how much debt is appropriate for your current circumstance. And while you are at it, consider the kind of debt and the interest rate on any debt that you carry. We heard about sub-3% interest rates on home mortgages this week. Prime is 3.25%. Refinancing current debt loads should probably be high on your list. You are going to hear a lot about personal de-leveraging (paying down debt) as we move into the new normal. We see a lot of people switching from 30 year mortgages to 15 year.
  • Tax laws have changed a lot this year as a result of stimulus measures. Required minimum distributions from retirement plans have been waived entirely. If you have already taken your RMD, you can roll it back into the IRA and avoid paying the tax. You should likely consider a ROTH conversion this year. The first two estimated payments for 2020 have been delayed until July 15th, along with the filing deadline of 2019 returns. Student loan payments and interest have been deferred. The treatment of charitable contributions has changed. If any of these provisions could benefit you, a revised tax projection for 2020 and 2021 is in order.

It is so easy to let inertia set in and avoid any consideration of money issues. But as I’ve often said, “Better decisions today yield better outcomes tomorrow.” Your financial plan is your road map and it should be dynamic enough to handle multiple scenarios for casting a best-case, worst-case, and somewhere in the middle. If nothing else, these last three months should have been instructive in thinking about risk tolerance. We are here to help you with any of these things. Reach out with any questions. We are a phone call or ZOOM meeting away.

June 29, 2020

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COVID-19 and your money

On February 5, 2020, Americans’ views on their personal financial situation were at record highs according to Gallup. 59% said that they were better off financially than a year earlier and 74% anticipated that they will be better off in a year.

Fast forward to March 26, Gallup reports “In a little less than two weeks, the percentage of Americans who believe an economic recession is very likely to occur in the U.S. because of the COVID-19 virus has increased from 38% to 61%. . . just 8% think it will not happen.”

3 Steps to take now

Cash management becomes crucial during a recession. In fact, cash flow has dried up for many. It is important to establish a means to stay on top of your account balances. The Federal government is working hard to come up with a relief bill that will rescue some and hopefully stimulate the economy at the same time.

We have always advised to have a an emergency fund of 3 to 6 months of living expenses. These are the times for that to be used if needed. You probably downloaded the eBook on this site, but if you haven’t now would be the time to put such a system in place. We also have a website that will capture spending by category if you need help with that. A good spending plan that can be updated quickly is critical in these times.

A less obvious benefit of a cash management system is the sense of control that it gives you when everything seems out of control around you.

Know what’s going on with your savings and investments. Now is not the time to be burying your head and avoiding the mail. We heard two big questions throughout the market decline in March. 1) Is it time to buy now that stocks are on sale? Or 2) Is it time to turn everything into cash and wait this out? Those are two sides of the same “uncertainty” coin. These questions demonstrate our brain’s tendency to help us survive. Survival probably isn’t in question right now if you have some savings and investments. Protecting what you have is likely a concern and that is okay. Build in some risk controls that go beyond simply re-balancing your portfolio.

Insurance and benefits may be the last thing on your mind right now, but after cash flow and investments, knowing exactly what you have and whether you need more insurance leads to more peace of mind, especially in times like these.

Obviously, having a plan in place before a crisis hits doesn’t take away the crisis, but it certainly reduces the stress caused by the uncertainty of it all. If you have a plan in place, it should be flexible enough to adjust the parameters for the new reality that this crisis has ushered in.

We are here to help you. If you would like to book an appointment, we can meet on ZOOM while we are practicing safe social distancing.

Leave a comment and let us know how you are handling the crisis.