How to Manage Your Finances When You Don’t Have Enough Time

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I started my career as a financial consultant with PwC, one of the Big 4 accounting firms.  While my career ultimately took me down a different path, I have nothing but fond memories of my time there.

At any of the Big 4 firms, you work hard.  Providing excellent service to your clients comes with long hours, sometimes for weeks and months at a time.  And for those in the accounting and tax side of the business, “Busy Season” – the time of year leading up to audit and tax filing deadlines – are exponentially more grueling.  During Busy Season, a 70 hour work week might be considered relatively light for the time of year.

Working long hours over six or seven days of the week isn’t unique to the Big 4 firms, of course.  But, given that we are heading into the Big 4 busy season, I wanted to take a look at strategies for keeping your finances on track when barely have any time to do anything other than work.  And to that point- I’ll try to keep this article as succinct as possible.  After all, if this is in any way relevant to you, you’ve probably got to get back to work!

Set Goals Ahead of Time

If you’ve ever had a few weeks or months when work has been all-consuming, you know how easy it is to not make time to think about your finances.  By the time the dust has settled and you check your bank accounts for the first time in a few months, you realize that you haven’t made any progress toward your goals.

There are ways to avoid this.  And it begins by setting goals for yourself before busy season starts.  Ask yourself, “What’s something that I could achieve with relatively little time involved that would make me feel great about the state of my finances three months from now?”.  For example, “I want to save an extra $50/week in the next two months because my firm is paying for dinner every day”.

Setting these goals up front is the best way to make sure you actually make progress.

Let’s take a look at some tips for how to manage these goals around certain financial topics:

Cash Flow and Budgeting
  • Set calendar alarms on relevant dates as reminders to pay the bills and credit cards every month. When you’re swamped with work, it can be easy to miss a rent or credit card payment.  Set up alarms for yourself in advance  to make sure you don’t forget!
  • Utilize software and apps to their fullest potential. Whether it’s free app like Mint or a more comprehensive solution provided by your financial planner, set up a system to automatically track your spending and provide alerts to notify you if you’re spending more than you planned in a particular category.  Plus, having an easy way to view all of the pieces of your financial picture on your phone can’t be beat when you’re busy.
  • Know your budget. As annoying or boring as it may be, you have to know your numbers. Know how much you can afford to eat out every month.  Know how much transportation will cost you.  I’m not one of these people who tells you that you need to give up your $4 cup of coffee a few times a week or you’ll never be able to retire.  Get real.  Focus on the large categories in your budget (rent, transportation, and food), but monitor for irregular expenses and big chunks of your budget going to small purchases (the ones that really add up each month).
Savings
  • Automate, automate, automate. In this day and age, there’s no reason for your saving habits to rely on you remembering to manually transfer money from your checking to your savings accounts each month.  Based on your budget, take 10 minutes to set up your direct deposit to put a set amount per paycheck directly into your savings account.  Or, set your savings account to automatically debit your checking account each month.  In addition to saving time, it’s a great way to increase your chance of actually hitting your savings goals.
  • Multiple savings accounts are your friend. I encourage all of my clients to have multiple savings accounts for each of their goals.  It’s easier to track your progress toward building an emergency fund, saving for a vacation, money for a down payment on a home, etc. if you have a dedicated account for each of them!
  • Block off ten minutes each month to do a quick check in on your goals. And yes, I literally mean that you should send a meeting invite to yourself and have the time blocked off on your calendar.  Have you ever noticed that even when we have more important things to get done on any given day, we still tend to show up for any meetings that are on our calendar, even if they’re about a low priority task?  Why is that?  Because we tend to prioritize things that are set in stone in our calendar.  Do the same for your finances, a little at a time every month, to review your progress.  It doesn’t have to take long, but blocking off ten minutes to review your budget and savings progress can work wonders.
Investing
  • Review and rebalance before busy season begins. I know better than to try to schedule meetings with my clients who work for Big 4 firms from mid January to April. So, we sit down in December instead and make any adjustments to their investments at that time.  You can do the same thing on your own, particularly if you are a proponent of passive investing.  Rebalance your accounts before busy season starts, and when it ends.  If you have a well diversified portfolio of low cost ETFs or index funds, you (usually) can get away with not checking your accounts regularly when things are busy if you take care of them before and after.
  • Consider stop loss orders… at your own risk. If you are the type who can’t bear a drop in your investments and are particularly nervous about monitoring them less frequently than usual when you’re busy, stop loss orders may be a potential solution for you.

For those unfamiliar- stop loss orders essentially allow you to automatically sell your investments once they fall below a certain price.  If the stock in question never falls to that price point, you keep your investments. As such, they can be a good way to limit your losses if the market plunges.

However, be warned- this is not generally a strategy I recommend for busy people.  While stop loss order can be effective in selling your investments before the market plunges, if you aren’t paying attention to when to buy back into the stock, you can end up losing – big.  For example, say that from January to May of this year, the S&P 500 Index falls 15% from January to February, and then rises 20% from February to May.  If you have a stop loss order to sell your S&P 500 ETF if it falls 5%, you would automatically sell the S&P fund once it drops 5%.  This essentially saves yourself 10%… at the time.  But, if you don’t check your account until May, you wouldn’t buy back in when the market is low, and you would lose out on the 20% growth.

So, stop loss orders could be an option for you- but be careful with them.

Delegate

Managing all of these things on your own is doable, but it is still hard work.  There’s nothing wrong with delegating some of these tasks to a professional if you don’t have time to do them!

Anything from a traditional asset manager to a robo-advisor (or both!) can handle your investments for you when you’re busy.  That’s right, you just read a financial planner recommending you to use a robo-advisor.  I do things a little differently than most planners in the industry.

A financial planner can also help you monitor your spending and budget, progress against your goals, and keep you up to date on market conditions.  If you think that would be helpful to help keep yourself on track, we should talk.

Post Busy Season

After busy season settles down, block off a full hour to take stock of where you’re at. Review your progress against the goals you set for yourself before busy season.  Correct any issues you’ve identified.  And consider how you might approach next year’s busy season similarly, or what changes you will make.

Rising Interest Rates and Student Loans- What’s the Impact?

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Interest rates are going up.  In December 2016, the Federal Reserve announced their decision to raise interest rates by .25%.  Not only that, but the Fed also indicated that they intend to raise rates three times in 2017.

For most student loan borrowers, this will not make a huge impact on your payments.  However, it’s critical to review your loans for any privately-issued student loans that have variable interest rates.  In a rising interest rate environment, variable interest rates translate into owing more on your loans.

Make a plan to address this gap on your own, or schedule a free consultation here.  It’s your call.  But if you have variable rate loans, the time to revisit your student loan payment plan is now.

Generally, Rising Interest Rates are Good

The Fed’s decision to raise rates, broadly speaking, is a good thing.  The Federal Reserve raises interest rates when the economy is gaining strength.  Rates have been held at historically extreme lows ever since the recession in 2008-2009.  Increasing them is a great sign that unemployment is low, jobs and wages are expected to grow, and that we are finally getting back on course following an unusually slow recovery from the recession.

While the Fed raises interest rates when the economy is good, the flip side is also true.  They cut interest rates when the economy is shrinking to encourage consumer spending. We should be cheering rising interest rates now to allow for this to happen later.  When the economy does inevitably turn south again sometime in the future, the Fed needs to be able to cut interest rates to help spur growth.

Quite frankly, the Fed kept rates so historically low for the better part of the past decade that many experts were concerned about the possibility that if another recession were to strike soon, the Fed wouldn’t be able to cut rates any lower.  Raising the rates now, while the economy is growing, will protect us in the future.

And finally, higher interest rates will (eventually) mean higher interest rates in your savings accounts.  While it’s true that the first rates to go up will be on loans and mortgages, eventually the bump in interest rates will carry over to your savings.  If you’re sick of earning next to nothing in your bank accounts, there’s some good news ahead in the coming months!

…But Not for New Borrowers or People with Variable Rate Loans

Of course, just because something is good for the economy as a whole, doesn’t mean it will necessarily benefit you.  And rising rates are a great example of that.

For starters, people who take out new mortgages or student loans will have higher rates in 2017 than if they had borrowed in 2016, assuming the Fed proceeds as advertised.  New loans are issued in accordace with the new interest rates.  So, borrowing the same amount of money will cost more this year than it would have if you borrowed last year.

But more importantly for this article, borrowers who have variable rate student loans will be impacted as well.  When I say “variable rate” loans, I am referring to student loans that have their interest rates tied to the current market rate.  As in, a loan whose interest rate will fluctuate over time depending on decisions made by the Fed.

Most student loans, and all loans backed by the federal government, are fixed-rate loans.  For these loans, the decision by the Fed will have no impact. (Although, as previously stated, a new federal student loan borrowed in 2017 will have a higher rate than one borrowed in 2016, all else equal).

But certain privately-backed student loans are issued with variable interest rates.  And if you have these loans, you will be paying more in interest as a result of the Fed’s decision.

There’s no rhyme or reason as to whether your private student loans are fixed or variable rate.  You need to grab a copy of your statement, or Master Promissory Note, and check.  I’m here to help with this step, if you need it.  But you absolutely have to check to determine whether you are impacted.

What to Do If You Have a Variable Rate Loan

Ultimately, there’s no one-size-fits-all solution here.  But there are certain options you have to address this scenario, the most common of which is to refinance the loans.

Through refinancing, you are in essence exchanging your current loan for a new one.  You still owe the same amount left on the loan, but the issuer who lends you the new loan will subject you to different terms than your previous lender.  This can include a different loan term and repayment options, but the key one here is that your loan will have a new interest rate.

This new rate largely depends on your credit score.  Has your credit score improved since you originally took out your student loans?  Then great news, you can (probably) qualify for a better interest rate.  What’s more, you could qualify for a fixed interest rate, rather than a variable rate.

Which means, through refinancing your loans into a new, fixed rate loan, you’ll no longer be subjected to the rising interest rates that the Federal Reserve has indicated are coming in 2017.

Of course, things change.  If economic conditions change later this year, the Fed could decide to hold off on the raise.  But all signs at the moment point to multiple interest rate increases this year.  If you have variable rate loans, the time to review your plan is now.

If you want more information on whether this might make sense for you, let’s schedule a free consultation.

WARNING

This is critical. Be very careful in evaluating your options before deciding to refinance your loans.

For the most part, refinancing privately-issued student loans won’t do you major harm.  But keep your overall goals when it comes to your loans (are you trying to pay them off as quickly as possible, or minimize your monthly payments?) before you decide to refinance.  Review the new terms for the refinanced loan carefully before you accept the offer.

But most importantly, think two, three, four, five times before refinancing any federal student loans that you have!  While you may be able to get lower interest rates on private loans if you have a great credit score, keep in mind that refinanced federal loans in most cases will lose all the flexible benefits associated with them.  For example, refinanced student loans aren’t eligible for Public Sector Loan Forgiveness or for the various income repayment plans that are available for federal loans.

In short, it can be a big mistake for certain borrowers to refinance.  Student loans are much more complicated than they appear at first glance.  If you want a second opinion, reach out and let’s talk.

What Student Loans Aren’t Eligible for Public Service Loan Forgiveness?

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Student loans are back in the news again. The Government Accountability Office (GAO) released a report earlier this month detailing that the federal government is expecting to forgive over $100 billion in student loan balances in the coming years. While there are many loan forgiveness programs, the Public Service Loan Forgiveness program is one of the most common.  If you’re interested in this program (or any of the others) download our free 30-page student loan guide to learn the ins and outs of each of these programs.

Doctors working in nonprofit hospitals, teachers, government employees, and more can all be eligible for Public Service Loan Forgiveness (PSLF).  But, there’s a catch, and it’s one that many people don’t find out about until it’s too late.

Only specific types of student loans will qualify for PSLF.  Many loans aren’t eligible for the program at all.

Unfortunately, your student loan servicer will not notify you of this.  It’s on you to make sure you are eligible for PSLF, and the sooner you take action, the better.

 

What is PSLF?

Public Service Loan Forgiveness (PSLF) is available to individuals with specific kinds of federal loans who work for the government or a 501(c)3 Non-Profit, including charities and non-profit hospitals, among others.

It’s important to note that it’s your employer that determines whether or not you are eligible.  If, for example, you teach at a for-profit school, you wouldn’t be eligible for PSLF.  So, make sure your employment qualifies before pursuing PSLF.

In order to obtain forgiveness under this provision, you must fulfill two provisions.  First, you need to make 120 payments while on an Income Repayment Plan.  Note that this is not the same as having the loan for 10 years! You must actually be making the payments in order for a month to count toward your total.  At the end of 120 months where you have made a qualifying payment, you are eligible for forgiveness.  Secondly, of course, you must make these payments while holding a qualifying job.

There are many more important details about PSLF that you should review if you seek to pursue this forgiveness plan.  You need to be sure you are on the right type of repayment plan, as I mentioned above.  While not required, you should file a form indicating that you hold a qualifying job with your servicer each year.  To get more information on these other items to consider, schedule a free introductory call or download my free student loan guide.

For now, the important question I want to highlight revolves around what types of loans do not qualify for PSLF.   And, of course, what can be done to fix the situation if you have these loans.

 

Which Loans are Eligible, and Which Loans Are Not?

Any Federal Direct Loans are eligible for PSLF.  Common types of Direct Loans include Direct Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, and Direct Consolidation Loans (more on that last type in the next section).  Typically, the information on your monthly statement may not always be enough to determine the specific loan type you have.  Not to keep tooting my own horn, but you can find a step by step approach to confirming what types of loans you have in my free student loan guide.

Unfortunately, not all loans are eligible for PSLF.  If your loans were issued by a private lender, this may come as no surprise.  Regrettably, private loans have very few of the flexible “perks” that federal loans have, and that includes forgiveness provisions.

More subtly, there a few types of federal loans that aren’t eligible for PSLF, either.  One of the most common mistakes I see around PSLF is individuals who have been making payments for years while holding a qualifying job, but aren’t actually eligible for forgiveness at all.  Solely because of the types of federal loans they have.

The main types of federal loans that are NOT eligible for PSLF are:

  • Federal Family Education Loans (FFEL)- Federally-backed loans issued by private banks. The government discontinued this program in 2010, so this typically only affects people who graduated college in 2014 or earlier.
  • Perkins Loans- The federal government funds these loans, but your individual college distributes the funds. Perkins loans aren’t quite as common as Direct Stafford loans, but many colleges include them in financial aid packages.

If you are pursuing PSLF, review your loans to confirm that you don’t have either of these types.  Unfortunately, the current PSLF plan does not allow forgiveness of these loans.

 

What to Do if You Have FFEL or Perkins Loans and Want to Pursue PSLF

Thankfully, you still have options if you have FFEL or Perkins loans and want to work toward forgiveness.  There is a way to qualify these balances.

In order to do so, you must consolidate the other loans through a Federal Direct Consolidation Loan.  In this process, you can combine the federal loans you currently have, including Perkins and FFEL loans, into one direct loan through the federal program.

The purpose of getting a Federal Direct Consolidation Loans isn’t to cut your interest rates.  The rate for the new consolidation loan is a blended average of all the loans you consolidate.  Instead, a major benefit of consolidation is that all of your consolidated loans are eligible for PSLF.  So, if you roll your Perkins or FFEL loan into a Federal Direct Consolidation Loan, the balance may now be forgiven through the program.

Two important caveats, though.  First and foremost, there are a number of unique benefits for Perkins loans specifically that do not transfer over to the new consolidated loan.  If PSLF is a high priority for you, this may not matter, but it is something to consider before deciding.  Work with a financial planner who specializes in student loan planning to review the pros and cons before taking action.

Second, and most importantly, consolidating your loans in this way will “reset” your 120 payment counter for forgiveness on any direct loans you are consolidating with the Perkins and FFEL loans.  The US Department of Education says it best (emphasis added):

If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated. In this situation, you may want to leave your existing Direct Loans out of the consolidation process.

That’s a very critical point.  Consolidation has huge benefits for PSLF because it can qualify balances originally issued under Perkins or FFEL loans.  But, if you have other direct loans as well, make sure you only consolidate the needed loans if you have already begun payments to avoid resetting your 120 payment count.

 

Student Loans Are Complicated

There are many different types of student loans, and all of them are eligible for different benefits, including PSLF.  Even in a 1300+ word blog post, I wasn’t able to touch on all of the potential complicating factors.  Download my student loan guide to learn more, and if you are contemplating pursuing PSLF, consolidating your loans, or making any other adjustments to your particular loans, it’s never a bad idea to get a second opinion.

Why It’s Critical to Negotiate Your Salary

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Why It's Critical to Negotiate Your Salary

Just about anyone I’ve ever spoken with remembers the feeling they had when they accepted their first job.

I certainly do.  Getting ready to graduate college, signing on the dotted line to join a great and growing firm.  It was a wonderful feeling.

But before you accept the contract, there’s a critical step that many of us miss.  And it can come back to haunt you if you aren’t careful.

I started Pacesetter Planning as a firm dedicated exclusively for millennials for many reasons, but one of the biggest was that nobody ever taught us about financial topics in school.  Certainly, nobody ever taught me about this critical step to accepting your first (or second, or third…) job.

You absolutely have to have a strategy in place to negotiate your starting salary.

I’m not just talking about going in and blindly making demands.  No, there’s a lot of strategy involved.  I can help you develop and implement a negotiation plan.

But, it’s so important that you actually do it.  If you don’t, you could be literally costing yourself hundreds of thousands of dollars.

Don’t believe me?  Read on.

Millennials are Good at Many Things.  Negotiating Salaries Isn’t One of Them.

The good news is that we can fix this negotiating problem that we collectively have. The bad news is that most of us just aren’t doing it.

A study conducted by NerdWallet last year indicates that only 38% of millennials negotiate salary with their employers upon receiving a job offer.  Over 60% of millennials aren’t negotiating at all, even when they are told that the employer expects negotiating as part of the application process.

The most heartbreaking part?  According to the study, three out of four employers have room to negotiate salary by as much as 10%, if the new employee asks for it.

I get it, it feels uncomfortable.  But, the odds are high that your employer is expecting you to negotiate.  Develop a strategy, do you homework, and practice before you ask.  But you absolutely need to try – there’s too much on the table to avoid it.

It’s About Way More Than Just Your Current Salary

Negotiating an increase in your salary when you start a new job, or even in a job your currently hold, is about way more than just increasing your income right now.  That’s a nice benefit, don’t get me wrong, but that only scratches the surface as to why it’s such an important concept.

The key is that your future income is, in most cases, directly based on your current income.  Meaning, that the raise you get next year isn’t completely random.  It’s based on your current salary.  So, if you increase your salary now, your raise next year is going to be for a higher dollar amount than it would be if you hadn’t negotiated.  The year after that, your income is going to go up by an even higher number, assuming you get annual raises at your job of course.  Thus, if you negotiate your salary upwards as early as possible, your income will grow at an exponentially faster rate in the future than it would otherwise.

How Negotiating a 5% Raise Could Make You $220,000

Hypothetically, let’s say a company makes a job offer to two seniors in college, Max and Jess.  Each of them have the same amount of experience, and both are offered a starting salary of $50,000.  They are each 22 years old.

Max, happy with the offer, accepts a starting salary of $50,000.  Jess, however, decides to negotiate, and is able to earn a salary of $52,500 – 5% higher than the initial offer.

Let’s say that they then each get a 3% raise each year.  How do their salaries compare as they get older?

blog-5-negotiating-raise-chart-1

Jess started her career making $2,500 per year more than Max, but by the time they reach retirement age at 65, she’s making over $9,000 a year more.  This difference is only because she negotiated a raise before she took the job offer – there are no other differences in their compensation paths.  And, of course, this doesn’t take into account that Jess is probably more likely than Max to negotiate future raises, further increasing the difference.

At first glance, this might not seem like a huge deal.  Why am I making such a big deal about $9,000?  Because it’s about much more than that.  If you add up all of the earnings that Jess and Max would take home throughout their career, Jess cumulatively earns over $222,000 more than Max:

blog-5-negotiating-raise-chart-2

Seriously.  By making a quick phone call before accepting the job, Jess can earn nearly a quarter million dollars more than she would have if she hadn’t made that call.

If I told you that you could schedule a meeting this week that could earn you a quarter million dollars, would you do it?

Negotiating Isn’t Just for New Hires

Negotiating salaries isn’t just for new job offers.  Depending on your situation, it can be appropriate to negotiate a raise in your current job as well.

Again, there’s a right and wrong way to do it.  Do your homework and be able to back up your request with specifics about your job performance and industry trends.

And if you get pushback, or still aren’t comfortable with going to your boss to talk about a raise?  I’m about to share a secret about how employers base salaries.  It’s not a hard and fast rule, but it applies to many firms who work in competitive industries.

Here it is: most companies pay higher salaries to individuals who they hire away from their competitors.  Think about it – in order to attract the best workers, it makes sense that the company would want to offer “premium” salaries to employees that they recruit from other firms.  If you’re already working in the industry, why else would you consider jumping to a competitor?

Of course, there are plenty of other reasons you might not want to start looking for a new job.  Your company’s people, location, training, benefits, culture… the list goes on and on.  It might not be a good idea to jump around in the industry just to bump your pay.

But, your salary certainly is a factor.  What I’m trying to say is this: if you can see yourself making a change, keep in mind that doing so often comes with an increase in pay.  And if you’re a super savvy negotiator, having another job offer in your pocket could be a great way to get your current HR team to consider giving you a raise to stay!

Plan. Prep. Negotiate.

There are lots of different strategies here, but above all, it’s important to negotiate.  It’s about more than your current salary – any increase in pay today will have exponential effects for you down the road.

But, it absolutely needs to be done in the right way to give yourself the best chance of success.  If you want to learn more, schedule a fee, no obligation consultation to talk about how to do this the right way!

Should I Pay More Than the Minimum Toward My Student Loans, or Should I Save More for Retirement?

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Should I Pay More Than the Minimum Toward My Student Loans?

[Interested in testing out some of these strategies for yourself?  Click here to download our free student loan guide, or click here to use our free retirement readiness calculator!]

Over 40% of people under 30 are currently making student loan payments.  That’s a staggering number.  And while we often think of how these payments affect our current financial picture (I certainly know how it feels to see that withdrawal come out of my account every month!), the effect on our financial future is very much overlooked.

Simply put, how will our student loan payments affect how much we save for retirement?

Well, that’s not a hard question to answer.  If we can’t save as much now, we’ll have less later.  Thanks for that, Bill.

Fair enough.  Let me rephrase the question.  Say you are at a point in your career where you have some flexibility in your budget.  Even after you’re making your loan payments, you’re still able to save for retirement each month.

The question then becomes- is it better for you to pay down you loans quickly by making more than the minimum payment, rather than putting that money into a retirement account?

That’s a much more interesting question.  Let’s take a look.

Research Says…

Earlier this year, HelloWallet (a Morningstar-affiliated company) produced a report on the relationship between student loan debt and retirement.  The results, while not unexpected, were alarming.  They found that student loan balances directly correlated with having less money to spend in retirement.

HelloWallet even puts a number on it- for every dollar in student loan debt you owe, you’ll have $0.17 less in retirement.  Financial guru Clark Howard (one of my biggest influences) extrapolated from the report that because of the negative effects student loans have on retirement balances, “… in most circumstances, it’s better to save more for retirement than pay extra toward your student loans…”

Generally speaking, they’re right.  If we are just looking at two goals- paying off your debt versus saving for retirement-  most borrowers will come out ahead in retirement if they make the minimum student loan payment every month now and put their excess savings toward retirement, rather than trying to pay off the student loan ASAP at the expense of retirement saving.

It’s All About Compound Interest

What to do with the money you save each month comes down to the rate you earn and the length of time you are saving.  Investing more for retirement early in your career has exponential benefits to the money you’ll have available at retirement.

Take a look at the numbers.  The chart below shows how much you’ll have at age 65 if you start saving $100 a month at certain ages, assuming a 6% growth rate:

blog-post-3-chart-1

Notice anything?  Take a look at the difference in retirement values if you start saving at age 25 versus age 30.  For the 25 year old, over 25% of the account value at retirement comes from the $100/month invested between ages 25 and 30!

This idea of compound interest clearly illustrates the perils of paying down student loans at the expense of your retirement savings.  The earlier you start saving for retirement, the exponentially better off you will be when it comes time to retire.  The degree to which your student loans impact your saving will directly impact your retirement picture.

Let’s take a look at an example.

Meet Sarah

Sarah is a 25 year old lawyer who is hoping to retire at age 65.  She has a total of $25,000 in loan debt (point taken, after 3 years in law school, she probably has a lot more than that, but let’s keep the numbers easy to work with, OK?) and is on a standard 10 year repayment plan, paying $265.16 each month.  Her loans have a 5% interest rate.

On top of these loan payments, she’s able to save $200 extra per month to put toward retirement.  Once she’s done paying off her loans in ten years, she will put that extra $265.16 toward retirement as well, increasing her total monthly retirement savings to $465.16.  Sarah’s retirement savings earns 7% a year (about what the stock market has historically made on average).

Sarah is wondering whether or not she should continue to save $200 dollars per month for retirement now, or whether it might make sense for her to, say, put $100 of that money each month as an “extra” payment on her student loans to pay off the loan faster, and keep contributing the remaining $100 toward retirement.

What’s Sarah’s Best Option?

In the first scenario (saving $200 a month), by the end of her 10 year loan payment period, the loan is paid off and Sarah has ~$35,000 saved for retirement.  She then increases her payment amount as scheduled, and by the time she retires, her retirement accounts are worth $853,399.48.  Not too shabby!

But, what happens if she uses half of her monthly savings to pay off her loan faster? She is able to pay off her loan in just over seven years, and the second she pays off her loan, she increases her retirement savings per month from $100 to the full amount of $465.16.  Even though she’s able to contribute more over the first ten years in this example, take a look at her retirement account value.  She only has $823,844.59 at retirement this time.

blog-post-3-chart-2

This is a great example of the power of compound interest.  The more Sarah starts to save for retirement today, the more she’ll have at retirement.  Even if she has to pay a higher amount on her student loans.

Some Caveats

Again, there are a lot of factors at play here.  Not everyone is in the same position as Sarah.  This example doesn’t take into account a few points:

  • If your situation is an outlier, I’d recommend crunching the numbers to evaluate the strategy before you make a decision. What do I mean by outliers?  Cases where one of the factors we are looking at is either very high or very low.  For example, If you have a very high student loan balance, or very high interest rates, or are a very conservative investor (ie, you might not want to invest in a way that will lend itself to a 7% annual growth rate as identified above), carefully evaluate these factors before making a decision.
  • Of course, in this post we’re only looking at two goals: paying down student loans and retirement saving. If you have multiple goals you’re trying to save for at once, a more detailed plan is needed.  In particular, if you are weighing paying down student loans quickly versus a more near-term savings goal (ex: buying a house in five years), this decision is much less clear cut and needs to be evaluated.
  • This whole exercise assumes that you can afford to save beyond your monthly budget. If you can’t, definitely make the minimum payments on your loans.  In addition, you should review whether an income repayment plan may be a good fit for you.  Finally, review your budget to see if there are any ways to trim back on spending or increase your income.
  • We haven’t even addressed that most employers offer a match on funds that you invest in your 401(k). If your employer matches, putting extra money toward your loans at the expense of retirement saving becomes even costlier.  Employer matches on 401(k)s are the closest thing out there to free money, after all!
  • Most importantly, Sarah in the example above is incredibly disciplined financially. Not only is she diligently saving $200 a month (either in her retirement account, or split between retirement savings and making payments on her loans), but she also has the discipline to redirect her entire student loan payment amount into her retirement savings the second her loan is paid off.  This is much harder to do in practice than it is on paper, so it’s important to plan ahead and hold yourself accountable.

A Word on Interest Rates

Interest rates on student loans vary wildly.  Some can be as low as 2-3%, others can be in double digits.

Like I mentioned earlier, the average return in the stock market has historically been about 7%.  If your student loan interest rates are higher than this, it’s not a bad idea to prioritize payments to pay down the high interest rate loans first.

Particularly if these high interest rate loans are private loans, refinancing into a lower rate loan is a great option for those who have good credit scores.  For more information on this, sign up for my newsletter to download a free copy of my eBook on student loans.

Conclusion

There’s some good research out there that recommends to usually save for retirement before making extra student loan payments.  Don’t take that as the gospel truth, but generally speaking, this approach is the correct one.  In most cases, the benefits of having money in your retirement account to compound in value over time will outweigh having to pay your student loans a little bit longer.

Carefully look at your personal budget, student loan balance, interest rates, and retirement goals to make these decisions.  And don’t be afraid to reach out to an expert for a second opinion.

[Interested in testing out some of these strategies for yourself?  Click here to download our free student loan guide, or click here to use our free retirement readiness calculator!]

Trump’s Proposed Student Loan Policy Changes

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Politics is way, way outside the scope of this blog.  But now that the 2016 Presidential Election is behind us, I wanted to quickly highlight some significant changes that President-Elect Trump proposed during the campaign regarding student loans.

Student loan repayment plans are one of our primary focuses at Pacesetter Planning.  As such, I wanted to share an update on some of the changes possible in a Trump administration.

A New Income Based Repayment Plan?

Currently, borrowers who have federal loans are automatically put on a standard 10-year repayment plan after graduating.  However, there are several alternative payment plans that allow borrowers to adjust their payment term and monthly payment amount based on the borrower’s income.

I won’t rehash all the details regarding who qualifies for which plan here since I outline each of these options in detail in my FREE eBook, “13 Things to Do Before You Make Your Next Student Loan Payment”.  Subscribe to our newsletter here and I’ll send you a free copy today!

Mr. Trump proposed a new version of these income based repayment plans in a policy speech in October.  Essentially, the president-elect argued to allow borrowers to cap payments on federal loans at 12.5% of their monthly income.  Even more, Mr. Trump proposes to forgive all debt for borrowers making these capped payments after fifteen years.

To repeat, payments capped at 12.5% of income, and forgiveness for any remaining federal loan debt after 15 years.

Comparison to Current Policy

It’s a mixed bag, but overall, this proposal compares very favorably to the existing options.  While some of the current plans are limited based on your income level and when you borrowed the loans (again, download my eBook for more details), generally speaking the existing policies allow borrowers to do one of two things:

  • Cap borrowers’ payments at 10% of monthly income, and offer forgiveness after 20 years, or
  • Cap borrowers’ payments at 15% of monthly income, and offer forgiveness after 25 years

How does President-Elect Trump’s proposal compare?  Partially, it depends on your strategy around student loan payment.  For borrowers who want to minimize their monthly payment at all costs, one of the existing income repayment plans will probably be a better deal for you, since they cap payments at 10% of monthly income rather than 12.5%.  But, for people looking to earn loan forgiveness, Mr. Trump’s plan could be a huge bargain.

Cutting the forgiveness window from 20 or 25 years down to 15 years is a big deal for borrowers.  By slightly increasing the monthly payment amount but reducing the payment timeframe by five or ten years, many borrowers will be able to save thousands of dollars in repayment costs over the life of their loans.

Unknowns

Of course, none of this is official policy yet.  As such, there are still many things we don’t know about this proposal.

  • Will the proposal apply to all borrowers? Some of the current income repayment plans allow for individuals regardless of income level to sign up.  But many others restrict eligibility to only those who either have a low income level, high loan balances, or both. We don’t yet know how wide-reaching Mr. Trump’s proposal would be if it goes into effect.
  • Will the proposal only affect newly-issued loans? Or, to put it another way, will this proposal only apply to loans borrowed after it goes into effect?  Trump has not offered details yet on whether or not borrowers who are currently in the process of repaying federal loans would be eligible for the 12.5% monthly income payment cap and 15-year loan forgiveness.
  • Will the proposal actually go into effect? As we all know, and we certainly don’t have to rehash here, President-Elect Trump campaigned on many issues with more passion than he did regarding student loans.  Will this be a high priority item for him?
  • If so, will the plan need congressional approval? In the past, President Obama issued changes to student loan repayment terms without needing to go through Congress.  Will the future President Trump seek to do the same?

We will provide updates on President-Elect Trump’s student loan plans throughout the course of his administration.  But, in the wake of a divisive national election, I wanted to quickly highlight this important proposal and its potential benefits to hundreds of thousands of student loan borrowers across the country.

To learn more about how to implement your own student loan repayment strategy, click here to download a free copy of by eBook, “13 Things to Do Before You Make Your Next Student Loan Payment”.

How Exactly Does Financial Planning Work?

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“What is it you do?”

“I’m a financial planner who works with millennials.”

“That’s cool!  But what do you actually do for millennials?”

It’s a great question, and one that I get regularly.  The short answer:

  • I help my clients take stock of where their finances currently stand and work with them to plot out short, medium, and long term goals for the future.
  • We then come up with actions steps to address any potential shortfalls in meeting these goals.
  • I partner with clients to hold them accountable to the plan. Here’s a sample calendar showing how I do so for millennial clients:

sample-client-service-calendar

 

But, how do we come up with a financial plan?  What exactly does that mean?  Let’s go through step by step:

Dream Big

The first step in our financial planning process starts with a big picture discussion.  Talking about where you want your finances to take you is a broad conversation, but it’s that way intentionally.  The beauty of financial planning is that no two people are the same, so everyone’s goals will be different.

That being said, we have a structured process in place to work through the goals discussion.  With each client, we sit down together and develop short, medium, and long term goals.

Long term goals as usually retirement focused, but we don’t stop there.  We talk about savings goals- whether it be for an emergency fund, a new house, or even your child’s college education.  We talk about growing income and monitoring spending.  We talk about goals to pay down debt.  And we talk about goals around credit scores to help make buying your next car or new home more affordable.

This isn’t a comprehensive list of goals that go into a financial plan.  Everyone’s situation is different.  Some of these goals above might not be relevant to you at all, and that’s perfectly ok!  Or, you might have several financial goals that I didn’t mention.  Great! Let’s add them to the list.  My point is that in the process of going through short, medium, and long term goals, I work with my clients to develop a comprehensive picture of where they want their financial journey to take them in life.

People often think of finance as being overwhelming, detail-oriented, and maybe even just plain boring.  But these big picture discussions are often an inspiring way to start the planning process.

Let’s Get Organized!

Now that we know where we’re trying to get to, it’s time to map out where you are financially right now.  The second half of my initial meeting with a new client is to help them get their financial life organized.

I can’t tell you how critical it is to gather all the loose ends of your financial picture in one spot.  When you do, you’ll probably be amazed at just how much you have going for you financially!

And when I say everything, I mean everything.  That money your employer takes out of your paycheck that goes into your 401(k) each month?  Awesome, let’s get a copy of your 401(k) statement and document how much you have saved there already.  Vaguely remember your company sending you a notice about a long term disability insurance plan that you have through your job?  Great, let’s find out how much it’s worth for you.  These details are easy to overlook, but they’re important.

One important note: this is a team activity.  I’ve seen way too many people in my profession begin their first meeting with a client by simply sending them a questionnaire to document what investment accounts they have, how much they want to spend when they retire, how much they owe on their mortgage… the list goes on and on.

Nobody likes to begin a meeting with someone they just met by getting a huge, difficult homework assignment.  I pride myself on helping my clients get organized financially rather than just telling them to do so.  I provide software that helps to aggregate all of your bank and investing accounts in one place.  I’ll help go through your employee benefits with you.  I’ll help you brainstorm other financial items that you may have working for you, but might not even realize it.  Going through these details isn’t always fun, but I do my best to make it painless!

Develop a Plan

After we set some goals and get you organized, we conclude our first meeting and set the next one.  In between, I come up with a draft plan to tie together your goals with the information we got organized to see whether you are on track.  If you are, that’s great!

But usually, there will be a few things that you may need to adjust in order to meet some of your short, medium, or long term goals.  Based on our conversation and analysis, I’ll brainstorm some ways we may be able to help get you to where you want to go.

Plan Discussion

Then, we get back together and walk through your draft plan step by step.  From income to retirement to investments to debt to credit scores- we will cover each of the planning areas relevant to your goals.  We will review where you are now, identify what you’re currently doing to meet your goals, and discuss whether you are on track.

We then will flag the goals you aren’t on track to meet unless we make some adjustments.  I’ll walk you through step by step the potential adjustment options I identified, and invite you to add any that you can think of as well.

Then, we have some decisions to make.  Which adjustment is most important to make?  Which is the easiest to implement?  I don’t believe it’s effective to try to make changes to everything at once.  So, I recommend making one or two changes immediately, and putting together a schedule for when to implement the rest.

Implementation

After our call, I’ll update the plan based on our discussion, send you the “final” version, and set our next check-in meeting.  I put final in quotes, because a good financial plan is a living document.  We will review the plan each year and make updates based on your progress.

The first page of your financial plan will specifically call out the action items to take, in the order you should take them.  You’ll leave our plan delivery meeting with an easy-to-understand list of steps you should take 1) now, 2) in the next few weeks, and 3) in the next few months.  By implementing the changes gradually, not only will you take meaningful steps to improve your financial life, but you’ll do so in a way that will be easier than trying to do it all at once.

Depending on the items in your financial plan, we sit down again anywhere from two to four times a year to review progress and make updates.  See the calendar above for an example of what that schedule might look like.  Regardless of your goals, we will meet at least twice a year to review your budget and rebalance your 401(k). Of course, we’ll also review your progress toward your most important goals and make sure the changes that you implemented are working.

Just like a personal trainer at a gym, it’s my job to do everything in my power to make your financial dreams a reality.  These check-in meetings serve as accountability touchpoints for you, to help make sure you are taking the steps you want to in order to achieve your goals.

And, Of Course…

…you never need to wait until our next meeting to touch base with me.  I’m only a phone call or email away!

I hope this is helpful to show you what working with a financial planner is really like.  Next Thursday’s post will detail an example of how I can help prioritize goals.  If you’re interested in learning more, you can schedule a free introductory call here.

The Pacesetter Planning Philosophy

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Most of the biggest decisions you will make about your finances happen in the first ten years of your career.

Think about it.

Getting a first job.  Deciding whether or not to go to grad school.  Saving up to buy a home.  Building your credit score.  Paying off student loan debt.  Deciding how much to put in your 401(k).  Maybe even marrying and having children.  These are major financial milestones that set the pace for the rest of your life.

There’s just one problem, though.

Nobody ever taught us about money.

Odds are, your high school teachers had you memorize elements on the periodic table, but never taught you the basics of how to invest your money.  You probably learned the difference between sine and cosine in trigonometry class, but weren’t taught how to negotiate a raise.

These items are critically important to our future.  And we are left largely to learn about them on our own.

So, where should you go?

Sure, you can go to one of the big financial companies for help. But for the most part, they specialize in working with our parents and grandparents, not with us.

Many big firms are so focused on retirement planning that it can be hard to get quality advice on building your credit score, saving for a home, how to treat your finances when you get married, and your student loan debt.

I have a friend who recently told me that they went to meet with their parents’ financial planner about their student loan debt, and ended up teaching the financial planner about what types of forgiveness programs their loans qualified for.

Seriously.  They went to a financial planner for advice, and ended up providing advice to the financial planner.

Other companies focus more on financial product or insurance sales rather than actually providing advice.  While the Department of Labor recently issued a ruling that is going to force many big firms to legally put their clients’ interests first when it comes to retirement accounts (a novel concept, I know!), the fact is that none of these firms will be obligated to be fiduciaries for non-retirement accounts.

That might seem confusing, but it’s important.  Many big firms won’t legally be required to put your interests above their own until next April. Even then, it will only be on a portion of your accounts with them.

Finally, many of the best financial planners have high account minimums.  I’ve seen firms that will only work with you if you have a million dollars to invest with them.  Maybe it’s just me, but it seems like financial planning might be more valuable to people who are trying to build long term wealth, rather than for people who already have it.

How is Pacesetter Planning Different?

Finding a financial planner who can give good advice on issues relevant to millennials is a huge problem for our generation.  And that’s exactly why I founded Pacesetter Planning.

I specialize in working with people in my generation to lay the foundation for a very successful financial life.  Financial planning shouldn’t just be about how much you need to save for retirement.  It should be able helping you live the life of your dreams now while also keeping an eye on the future.

We can accomplish this in many ways.  For some people, it might mean developing a strategy to pay off student loans. Click here, and we’ll email you my 28 page guide, “13 Things to Do Before You Make Your Next Student Loan Payment.  It may mean working on your budget to make sure you have room to take that trip to Europe you’ve always dreamed about.  Maybe it means working on your credit score so you can get the best interest rate on that house you want to buy.  Everyone has different goals.  All I know is that to me, financial planning consists of way more than “how much do I need to invest with you to make sure I can retire?”

I am a proud fee-only, fiduciary financial planner.  I don’t want to bore you too much with this, but it’s important.  So, let’s quickly break that down:

  • “Fee-only” means that they only way I get paid is through my clients. Many firms get paid by mutual fund or insurance companies to sell their products. This creates an incentive to use those funds, even if a different fund might be better for their clients.  I think this creates a conflict of interest, so I don’t do it.  This allows me to make the best recommendations I can for my clients, based solely on their needs and goals.
  • “Fiduciary” means that I am legally obligated to act in my client’s best interest at all times. This is so important to me that I put it in writing, on my website’s homepage. Check it out!

I want to help make you wealthy, not only work with wealthy people.  My clients’ needs and goals should determine the amount of work I do for them, not the amount of money they have. I want to help people make decisions that will have enormous impacts on their future, not chase the biggest accounts.

This is why Pacesetter Planning is different.  My goal with this firm is to provide top notch service on the financial issues that matter most to millennials regarding their finances.  I want to help you define and achieve your short and long term financial goals.  I’ll be sharing some insights on this blog every Thursday to help you do just that.

Dust off those running shoes and hop on the starting blocks.   We all have a long financial journey ahead of us between now and the time we retire, and a lot of great things to make happen in the meantime.  That’s why at Pacesetter Planning, we’re all about Financial Planning for the Long Run.

Don’t miss our next event

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A day at the office

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