Financing College

Financing a child's college education is often one of the largest expenditures a parent will make in preparing and launching their young adult into the world. This brochure is designed to help you understand the magnitude of the expense, assess your own need, and help to develop a plan to finance college.

What is the Cost?

Tuition, room and board costs range widely from community or state schools to the most expensive private colleges and universities.

The costs of college have been increasing about 6% per year in recent years. Use this 6% annual increase as a good rule of thumb to project your future expenses. The current cost ranges for tuition, fees, room and board by type of school are shown below.

Estimated Annual and Four Year College Costs By Type of College*

Type of College Annual Cost Estimate Four Year Cost Forecast
Public College $11,500 - $18,500 $47,000 - $74,000
Less Expensive Private College $18,000 - $21,500 $72,000 - $84,000
Mid-Range Private College $23,500 - $34,500 $94,000 - $138,000
Expensive Private College $40,000 - $49,000 $160,000 - $196,000

* Estimated costs include: Tuition, Average Student Curriculum Fees, Room and Board for undergraduate programs.

Hint: To project two-year graduate school expenses use the Mid-Range Private College annual expense estimate range in the chart above.

College Savings Worksheet

What is Your Situation?

A good way to review and forecast your own costs and establish savings requirements is to use the estimated costs mentioned previously and chart them out. The worksheet below has been provided to aid you in this process. To use the worksheet, simply follow the instructions.

The result is an estimate of what you will need to save to enable your child to attend their school of choice. The worksheet assumes you will have all of your savings in place prior to the first day of school. Remember, however, you also have the four college years to continue to save.

Once the projected costs for college are totaled and you and your student have agreed on the path to take, you can begin
to develop savings and investment plans for the upcoming outlays. Fortunately there are many alternatives available to you and your child to save funds.

How can you plan?

First, Leverage tax advantaged savings programs

Second, Try to leverage college savings strategies

Third, Review other resources

There are many additional ways to reduce the overall costs of college. Some of the most popular ideas are:

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Individual Retirement Accounts

Individual Retirement Accounts (IRAs) can assist most of us in reaching our long-range financial retirement goals. IRAs serve as key planning tools because of their preferred treatment in the tax code. In some cases, your contributions into an IRA are not taxed until withdrawn at retirement. In other cases your earnings within an IRA are tax-free.

There are a number of IRA accounts to choose from, each offering different advantages to different taxpayers, but all of them allow favorable tax treatments on earnings to accelerate compounded growth of your savings. So which is right for you?

Types of IRAs

Traditional IRAs

Traditional IRAs are the cornerstone of individual retirement accounts. Your contributions and earnings are not taxed at time of deposit unless your income is too high. If your annual income exceeds the limits you may still participate but your contributions may be taxed. In either case the earnings on your contributions still compound on a tax deferred basis. Other specifics include:

Roth IRAs

The Roth IRA allows you to deposit funds after paying the tax and the earnings ARE NOT TAXED at the time of withdrawal.

The basics of the Roth IRAs are:

Simple IRAs

Which IRA is Right For You?

An IRA Comparison - 2008
Features Traditional IRA Roth IRA Simple IRA
Annual Contribution $5,000 per person $5,000 per person $10,500 elective deferral
Age 50+ Catch up Provision Add $1,000 per person Add $1,000 per person Add $2,500 per participant
AGI Phase out $53,000-63,000-single
Each participant decides elective deferral as a % of pay or specific $ amount.
Contribution Deductibility *Fully deductible if under income limits; non-deductible contributions are also available for those with excess income. Contributions must cease at age 70 1/2. No; but age limit to continue making contributions Yes
Key Dates / Deadlines Contribution: April 15th of following year
Distributions: Mandatory at age 70 1/2
Contribution: April 15th of following year
Distributions: Non-mandatory
Contribution: within 30 days of the month the funds were withheld from your pay
Distributions: Same as Traditional IRA
Earnings Grow tax deferred Grow tax FREE if held five years Grow tax deferred
Withdrawals Taxed as ordinary income if over 59 1/2

Contributions: Tax free (taxes were already paid)
Earnings: Tax free if held over 5 years and age 59 1/2

Taxed as ordinary income if over age 59 1/2

10% early withdrawal (exceptions: over age 59 1/2, first home up to $10M, disability, death, medical)

6% excess contributions

50% penalty for excess fund accumulation after age 70 1/2 if minimum is not withdrawn

10% early withdrawal (same exceptions as Traditional IRA PLUS no penalty ever on contribution withdrawals)

6% excess contributions

10% on early withdrawal (same rules as Traditional IRA's); 25% if early withdrawal is within the first two years of plan establishment.

10% on excess contributions

50% for excess fund accumulation after age 70 1/2 if minimum is not withdrawn

Comments Self-employed can also participate in a SEP IRA, another form of the Traditional IRA. Annual contribution limits are as a percent of compensation. Rules allowing rollovers from the other plans into a Roth IRA have been expanded after 2007. SIMPLE IRAs are available to the self-employed or via your employer.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Household Budgeting

Establishing a Household Budget

One of the cornerstones to successful financial planning is establishing a workable household budget that manages your expenses, reduces your debt obligations and builds your savings.

This Wealth Builder brochure discusses the principles of budgeting and then provides a straight forward "Household Budgeting Worksheet" to help you establish a workable budget.

What Is a Household Budget?

A household budget is nothing more than a plan that sets spending goals over a period of time (typically one year) and allows monitoring or tracking of how you are doing in following the plan.

First Understand Cash Flow

To successfully develop a workable household budget the concept of cash flow must be understood. To understand cash flow, think of your finances as constantly changing. Money is being received in the form of employment pay checks, dividends, interest income, tax refunds, gifts and other sources. Simultaneously, cash is being paid out to cover regular living expenses like food, transportation, housing, taxes, insurance and supplies. You also pay for unanticipated expenses such as auto repair or medical bills. This ebb and flow of money into and out of your household is your cash flow. Household budgeting can improve cash flow (more coming in/less going out) by successfully managing and tracking the money flow.

How to Begin?

Start developing your household budget by laying out all of your income and expenses by month for the past year.

What's Next?

From this initial picture you can then forecast your expenses for the coming year (up in some cases and down in others), target your goals for reducing your debt obligations, and meet your savings and investment goals.

Hint #1: If you are serious about planning your financial future you should budget to save a minimum of 5% and preferably 10% of your income each year.

Hint #2: Pay yourself first, by writing a check to your savings or investment accounts every time you pay bills.

Hint #3: Reinvest your dividends, interest, and any other investment income rather than spend it and you can realize accelerated savings growth.

Budget to Develop an Emergency Fund

Most successful budgets include the funding of an Emergency Account. This is money set aside to cover anywhere from two to six months of your household expenses. Practically, this money will be ready to cover the unexpected. Often it's not a question of if, but only a question of when you will be faced with unexpected expenses such as auto repairs, household appliance replacement, medical bills or loss of employment. The workable household budget should account for setting aside this emergency cash until two to six months of living expenses are accumulated.

This worksheet is designed to help you organize your cash inflow and cash outflow into weekly, monthly, quarterly or annual frequencies. You'll need to review your pay checks, other sources of income and your checking account(s) you use to pay your bills to collect the budget figures. Notice that many of the periodic expenses such as insurance payments and taxes are relatively larger expenses and can be planned for by setting aside money (preferably in an interest bearing account) on a weekly, bi-weekly or monthly basis.

Call if you have any questions regarding budgeting issues particular to your situation.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Your Net Worth

Often your Net Worth is asked for by a lender in the form of a Personal Financial Statement. Your Net Worth is the total value of what you own (your assets) minus the value of what you owe others (your liabilities).

Your Assets

Assets generally include cash, bank accounts, investments, property you own and other property of value. More specifically, key components of your assets are:

Your Liabilities

Liabilities generally include debts you owe on loans, outstanding credit card balances, mortgages, leases, alimony and child support. Be sure to account for all the money you owe others both short term and long term:

Net Worth is the First Step In Financial Planning

When establishing a financial plan for you or your family a "first step" is usually to take a look at what you're worth.

Examining the components of your assets and liabilities and making projections of their individual values into the future can be helpful in forecasting your financial future and your retirement needs.

Accurately recalculating your net worth every six months to a year will also give you a track record of how your wealth is growing or declining over time.

Necessary Step When Borrowing

Presenting your Net Worth or a Personal Financial Statement will also generally be required by:

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Smart Banking

By paying attention to your bank accounts you can easily save more of your hard earned income and make your savings work harder for you. What can you do to become a smart bank shopper? Here are some tips.

Why Banks?

First, remember banks are in the business to provide three basic services; to facilitate financial transactions, to provide a place to store funds for future use, and to lend you money when you need it. These same services can be provided without a bank if need be, but most of us simply do not think of the alternatives to banks.

Look Into Credit Unions

These non-profit Cooperatives are owned by the members who use them. They often are a source of higher interest for your savings and lower loan rates (including credit cards) than most banks. Banks are so afraid of these institutions that they are constantly trying to get legislation passed to make Credit Unions less competitive.

Borrow From A Non-Bank

Perhaps the seller will carry some financing on the item you wish to purchase. Perhaps a family member or friend would be willing to loan you the money. You can often provide a decent interest rate to a non-bank lender at 2-5% less than what a bank may charge. Standard loan agreements are readily available at your local library or bookstore.

Shop And Negotiate

Almost all banks will negotiate a loan rate and fees, but most of us are reluctant to deal with banks or cross out clauses in their loan documents. Always shop three lenders for the best rate and tell them you are doing so.

Leverage Your Relationship

Banks often give special treatment to customers that are worth more to them. Ask your bank what breaks they will give you if you consolidate your accounts with them. You can often get your credit card interest rate reduced 1-5% by consolidating your card debt.

Get The Most From Bank Products

Understand FDIC Insurance

One of the key selling points of banks is FDIC insurance. FDIC stands for Federal Deposit Insurance Corporation and is funded by premiums paid by the banks.

Bank Savings Accounts Are A Bad Bet

Introduced in the early 70's, Money Market Mutual Funds almost always provide a better rate of return than bank savings accounts. While Money Market Mutual Funds are not FDIC insured, the Treasury Department is offering a voluntary insurance program to insure their balances through 2009.

Never Buy The Bank's Checks

Instead, buy them from a direct mail check printer. In fact, many of the bank's check suppliers also have a direct mail business selling checks directly to consumers at a lower price.

Avoid The Overdraft Checking Trap

Overdraft checking is attached to your checking account and "kicks in" as an instant loan when your checking balance hits zero. There are many versions of this account and it is a nice way to avoid embarrassing overdrafts and fees on your checking account. However, this account is a large profit center for banks because it provides a nice rate of interest and most people do not pay the loan back immediately.

n Look for a bank or credit union that will shift funds from a savings account instead. The foregone savings account interest revenue is always cheaper than the interest you'll pay on the loan.
n Make sure you pay the overdraft loan back immediately.

Use Debit Cards Wisely

A Debit card looks like a Credit card, but the funds come directly out of an underlying checking account. This plastic card has the Visa or Mastercard logo on it so merchants will accept the card anywhere Visa or Mastercard is accepted. Banks love this product because it takes an expense (processing a check) and turns it into revenue (the Retailer pays a fee for the Debit transaction). Many users of debit cards fail to make the entry into their checking account, so the banks collect more overdraft fees. In addition, if the card is lost or stolen your checking account must be closed and you may be liable for up to $500 in losses.

Borrow When You Don't Need It

Ironically, banks want to lend money to you when your financial condition is at its best, but they don't want to lend when you are in dire need of the funds. To solve this problem the best time to apply for credit is when you need it the least. So expand the credit limit on your credit card of choice when your payment history and income is at its best. Or if you have equity built into your home look into establishing a home equity line. Unlike a loan, the home equity line allows you to create a loan when you need one not unlike a credit card. So you can establish the Home Equity Line when times are great without establishing a debt until you need it. Better still, the interest you pay on the line is often tax deductible.

Lower Your Bank Fees

Understand The Calculations

The push for additional profitability at most banks is now focused on generating fee income. Understanding what your bank charges and when can help you save money on fees. For instance:

Work On Lower Fees

You should always be able to find a checking account that is truly free. But beware, free is often only free if you use the account the way the bank wants you to use the account. If you receive a fee, call and try to get the bank to waive some or all of the fee. They will often do so.

Avoid ATM Fees

Many banks are now charging fees for using ATM machines. This $1.00 to $2.00 fee is charged every time you withdraw your funds. Imagine, you give the bank $1 for the privilege of receiving your own money while saving them teller wages. To avoid this, find a bank that does not charge ATM fees for withdrawals from their ATM network.

Find No Fee Credit and Debit Cards

A Visa/Mastercard is a Visa/Mastercard, whether it's issued by Citicorp or by the local bank. The only things that change are the billing cycle, interest rate, and fee structure. So find a credit card that requires no annual fee and charges a low interest rate. But read the fine print. Credit card companies are notorious fee chargers and often change interest rates.

Fees Generating Fees

Ask if your bank's fees generate fees. Common culprits of this fee generating device are large auto leasing companies like GE Capital. For example, say your payment, per the bank, is received (processed) a day late but you thought you mailed it on time, so you dispute and do not pay the late fee. Your next statement would show the unpaid late fee generating another late fee. This despite the fact that your actual payment history is timely and accurate. Read the fine print on all loan agreements and cross out this language or write in the contract that the bank may not charge late fees on late fees. Or ask the auto dealer for an alternative leasing company that does not use this practice.

The Privacy Issue

With the deregulation of the banking industry, many large banks now have business interests beyond banking. It was discovered that banks were using your private financial information to sell you other products and services without your knowledge or consent. Legislation now requires banks to disclose to you whether they are keeping your information private or sharing it among affiliated and non-affiliated parties to sell you products and service. Make sure you review your bank's "Privacy Policy." It is now your "legal" right to "opt out" of allowing them to share your information if you choose to do so.
Banks provide a vital service for each of us, but you can save tremendous amounts of time and money by actively managing your financial relationship with them.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Tax Planning

The concept of Tax Planning is often an overlooked means of saving hard earned income. The laws are complex, the fear of an audit looms in the distance, and tax implications are not top of mind until it is time to file a tax return.

Remember that the Government only requires you to pay the proper amount of income taxes and NOT A DIME MORE. This concept has held true in many tax court cases where judges have noted it is not wrong to take steps to reduce one's tax obligation within the limits of the tax code.

Eleven Common Mistakes

Mistake #1. The biggest mistake made is waiting until too late in the year to assess your tax obligation. Often it's too late to take action or cash is not available to handle the obligation.

Mistake #2. Making a financial decision without conducting alternative tax obligation scenarios. Buying and selling a home, business, or investment are common examples.

Mistake #3. Under or over withholding State and Federal income taxes.

Mistake #4. Not taking full advantage of tax free and tax deferred programs. (i.e. retirement and education savings plans)

Mistake #5. Not reviewing and adjusting your W-4 (withholdings) after a life change (i.e. marriage, divorce).

Mistake #6. Not keeping adequate records of deductible expenses.

Mistake #7. Not protecting your assets from the final tax bite should you pass away (Estate Planning).

Mistake #8. Overlooking charitable donations.

Mistake #9. Using non deductible consumer debt (credit cards and auto loans) instead of deductible, Home Equity debt instruments.

Mistake #10. Failing to take into account changing tax brackets and the AMT (alternative minimum tax) amounts. This is important with the lower tax rates available for certain capital gains and corporate dividends.

Mistake #11. Failing to take advantage of tax credits and all allowable deductions.

Tax Planning Checklist

There are a number of events that should trigger a review of your tax situation. The following is a list of the most common. Seek advice and run alternative tax scenarios prior to deciding the best approach for your situation when:

Tax Reduction/Avoidance Ideas

To benefit the most from tax planning and avoid the common mistakes mentioned earlier, develop a tax strategy for your situation. The strategy should incorporate the following planning principles:

  1. When is the best time to complete a transaction that impacts your tax situation?
  2. How do you reduce your overall tax burden? What options are available?
  3. Defer any tax obligation, penalty free for as long as possible.
  4. Match high income with high deductible expenses whenever possible.
  5. Consider your marginal tax bracket when making decisions. The next dollar you earn could be taxed from 10% to 35%.

Some common tax planning and tax avoidance ideas are:

A Word on Tax Free Yields

When is it better to invest in a lower yield tax free investment versus a traditional taxable investment? It depends upon your financial plan, investment risk profile and balanced portfolio need. Those elements aside, to aid you in comparing the investments, use the following formula:

Tax-free yield / 1 minus your federal tax bracket = taxable yield.

For example: Assume you are in the 25% marginal tax bracket and want to buy tax free municipal bonds with a 6% yield. The equivalent yield you would need in a taxable savings account or taxable investment would be 8.0% (.06/(1-.25) = 8.0%).

The Tax Planning Process

A typical Tax Planning Cycle runs for one year. The best time for review is usually after the new tax laws have been introduced. This is typically in the September/October time frame. The steps in the planning process may go something like this:

Activity Timing
1. Initial Interview/Review Sept./Oct.
2. Conduct a next year tax forecast based upon established objectives November

3. Develop recommendations/ December estimates for:

  • Income
  • Withholdings
  • Deductions
  • Investments
  • Business expenses
  • Credits
  • Retirement (IRAs, 401(k), etc.)
  • Tax reduction ideas
  • Estimated payments (if required)
  • Long-term tax plan
4. File prior year tax return Feb. - April

5. Conduct a mid-year review

  • Assess withholdings
  • Estimate year end situation
  • File quarterly estimates
  • Update the long term document
6. Review of any new tax law changes and situational changes as required. Ongoing

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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