The Unintended Consequence of the Tax Reform Law for Student Loan Borrowers

Executive Summary

When married couples with student loan debt go onto an Income-Driven Repayment plan, there’s a choice to be made:  is it better to file your taxes jointly (but base your income-capped student loan payments on both you and your spouse’s income) or to file taxes separately (and only count your income when calculating your student loan payment)?

Although it didn’t address student loans directly, the passage of the Tax Cuts and Jobs Act of 2017 has a big unintended consequence for these student loan borrowers.  This decision around whether to file taxes jointly or separately when on an Income Driven Repayment plan should be made by comparing the amount of money you’d save on taxes by filing jointly with how much more you’d need to pay each year on your student loans.  Since the tax reform law cuts taxes for most people, the difference in the amount you’d save on taxes by filing jointly versus separately will shrink for most people.  Which means that you’re now more likely to be better off filing taxes separately and saving money each month on student loans than you were under the old tax code.

Download our free student loan guide to learn more about Income Driven Repayment plans.  And if you’re interested in learning more about how to save money on taxes under the new tax law, check out our list of #taxhacks today!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 9, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

Introduction

Hello and welcome!  Happy New Year to everybody.  Today I want to have our very first weekly chat that we’re going to have on the Pacesetter Planning Facebook Page (and will be published here every Thursday).  Normally we’ll broadcast live at 8 PM Eastern time on Mondays.

Each week, we’re going to do a deep dive into a financial topic.  Typically, these will be driven by questions that people either ask me in person while I’m out and about in Philadelphia, or are submitted through the website or our Facebook page.  And I’ll share my response to these questions here.

So, if you have an idea, anything you’re curious about hearing, shoot me a message or leave a comment on this video or post, and I’d be more than happy to talk through it. I already have a few questions that we’ll be covering over the next few weeks.

Tax Reform and Student Loans

But for today, I want to talk about something that I think is timely, given current events, and that is the potential side effects of the passage of the recent tax reform law that was enacted before the holidays.  There’s a new opportunity that I think is out there for student loan borrowers, particularly borrowers who are on an Income-Driven Repayment plan (IDR).

To give you a heads up in advance, this is going to primarily involve people who are on an IDR for their student loans who are married.  Now, if you’re not married yet but you’re on one of these plans, and you see yourself potentially getting married over the course of your student loan payments, stick around and you’ll pick up on some things that will help you someday down the road.

Before we dive into exactly what this effect is, I think it’s worth pausing to make a quick note.  We did a deep dive into the Tax Cuts and Jobs Act right after it was passed in December 2017.  We’re not going to rehash that today, but just to reiterate:  there were NO direct effects on student loans in the law itself.

There were a lot of rumors going around through the legislative process that there were going to be some changes made to student loan policy, particularly to your ability to deduct student loan interest.  None of that actually happened.  So, everything in that light is exactly the way it was before.  If your income is below a certain threshold, you’re still able to deduct up to $2,500 in interest paid on your student loans from your taxes every year.  Nothing’s changed in that light.

Income-Driven Repayment Plans

What has changed, though, is the ways that we calculate student loan payments under these Income-Driven Repayment plans- or at least it has the potential to change, depending on your circumstances.

What do I mean by that?  The starting point needs to be: what is an Income-Driven Repayment plan?

For those of you who aren’t on one of these plans already, typically when you borrow student loans, you have a six- to nine-month grace period before you need to start making payments.  Your student loan servicer typically puts you on a standard, ten-year repayment plan.  They’ll tell you how much you owe based on how much you borrowed and the interest rate.  You make the monthly payment that they tell you to make, and ten years later it’s completely paid off and you’re good to go.

But for most student loans (note: not all of them, but most student loans will qualify), if you have a particularly high amount of loans compared to your income, you have a few options.  And one of them is going on an Income-Driven Repayment plan.  There are a wide variety of IDRs, but we’re going to treat them all as the same today (even though they are not the same).  There are some pretty substantial differences between them- if you want some more information on this, go ahead and download our free student loan guide. It’s about thirty pages long and it’s the most popular giveaway we’ve ever posted on our site.  It will walk you through exactly what you need to know about all of these different repayment plans, what they consist of, and will help you identify which one is right for you.  Click the link to download this guide.

But generally speaking, these IDRs tie the amount you owe every month on your student loans to your income level.  If you aren’t making a lot of money, or you have much higher levels of student loan debt than your income, it essentially allows you to scale your student loan payments back to a reasonable level based on your income.

How Do Married Couples Calculate Their Income for IDR Repayment Plans?

The question, though, is what actually counts as your income? Now if you’re single, this is pretty straightforward.  Your income itself is your income.  Whatever you make at your job, any other income you have, that’s what they base it on.  Nothing too complicated.

But, when you get married, it’s a little bit more complicated.  You have your personal income, and if you’re spouse works, they have income as well.  So- what does your student loan servicer base your payment on?  Is it based on just your salary, or is it based on you and your spouse’s?

Obviously, if your goal is to lower your student loan payment, you want to have the payments based on a lower amount.  So ideally, you’d just count your salary.

The answer to the question of how student loan servicers treat your income is that they actually let you choose which one to use.  You can either report just your income, or you and your spouses income- you have the choice.

So, that begs the question, why is that not a no-brainer?  Like I said, if you have the option to pay your loans based on a lower salary or a higher salary, your monthly payment is going to be lower based on just your income.  So, why wouldn’t you do that?

Your Tax Filing Status Determines What Income They Count

Unfortunately, there definitely is a catch to it.  And the catch is this:  however you decide to report your income (to base your student loans payment on), you need to file your taxes the same way too.  In other words, if you want to report just your income to lower your student loan payment every month, you need to file your taxes “married filing separately” from your spouse.  Or inversely, if you file your taxes “married filing jointly”, your loan servicer will look at both of your incomes when they calculate what you owe on your loans every month.

For most couples, you’re going to save more on taxes by filing jointly rather than separately.  There are a few big exceptions (we wrote on the blog last year a list of some of those particular exceptions), but particularly for most young couples, you’re going to find that you save more on taxes by filing jointly rather than separately.  But- that means that you’re going to owe more on your student loan payments if you’re on an IDR because you’re filing jointly and they’ll base your payments on your combined incomes.

You can think of this like a balance scale (like the ones we used back in school) where you weigh one thing against the other.  On one hand, we have the amount of taxes you’re going to owe.  If you file jointly, that’s likely going to be a lower number and if you file separately, it’s likely going to be a higher number.  On the other side of the scale, you have your monthly student loan payments.  And that works the exact opposite way:  if you file jointly, you’ll probably save on taxes, but you’ll owe more on your student loans.  And vice versa, if you file separately, you’ll probably owe more on taxes every year but you’ll save on your monthly student loan payments.

You can imagine that there’s a point at which these things will balance out.  For example, let’s say that if you file taxes jointly with your spouse, you’re going to save $2,000 more on your taxes every year than if you filed separately.  But, doing so might cost you an extra $2,000 in student loan payments across the whole year when you add up your monthly payments.  If this is the case, it doesn’t actually matter what you do: you’ll save $2,000 on taxes, and pay $2,000 extra toward your student loans every year.  It washes out.  (Technically, under this scenario I’d recommend that you file jointly and pay more on your student loans, since this method will cost you less in the long run!)

How Does the Tax Reform Law Change Things?

But typically, it doesn’t balance out.  There’s typically a better answer for you whether you should file separately and reduce your loan payments, or file jointly and pay more every month.  Usually, there’s going to be a clear cut answer.

And that brings us back to the tax reform law.

Because what this law has effectively done (it’s not intentional that it worked out this way, but it is the effect if you’re one of the IDR plans) is that the way you calculate your student loan payments hasn’t changed – your income is still the same, the options are still the same – but they’ve reduced  the other side of the scale for most people.  Most people are going to have tax cuts under the new law, which means the gap between how much you’re going to owe if you file jointly vs separately is less than it was under the old tax law for most people.  They’ve taken the equilibrium point between the two and threw it off a little bit.

Which means that there’s going to be more people that are going to be better off filing taxes separately and taking a lower student loan payment every month going forward than there was under the old tax law.  The balance point has shifted, which means that more people are going to better off filing taxes separately than there were before.

To be clear, for most people you’re still going to owe more on taxes filing separately than you would if you file jointly.  That hasn’t changed.

But what has changed is the magnitude of the difference.  If the overall dollar amount of your taxes is going down because of the way they drew the brackets, for most people the gap between what you’d owe if you file jointly vs. separately has shrunk- by a real dollar amount.

Which means, for more people than there were before, you’re going to be better off filing separately and reducing your student loan payments every month.  Not for everyone– there will be still people who are better off filing jointly and paying more on your student loans.  But, you need to go back and revisit the math, because the math has fundamentally changed as of January 1, 2018.

Not Too Late To Change

Now the good news is that you have the ability to decide this every single year.  If you’re already on one of the IDR plans and have been filing your taxes jointly and reporting the higher income number, you can change that every single year.  Every year, you file your taxes and you have to recertify your income level- if you’re already on one of the IDR plans, you’ve gone through this before.  So, I’d invite you to revisit this.  Try to figure it out on your own- are you still better off doing what was right for you under the old tax law, or has it changed?  Because there’s a very real chance that it could have potentially changed.

So, if you’re on an IDR and you’re filing jointly now, take a hard look at this to make sure it’s still the right option for you.  And if you qualify for an IDR, and just haven’t gotten around to signing up for one, there could be a higher benefit to you than there was before.  It might be a little bit more of an attractive option now than it was under the old tax law.  I’d invite you to take a look at this.

A Few Important Details: Other Factors You Need to Consider

Now, a couple quick details that I think are important to note before we wrap up.  I’ve tried to keep this at a fairly conceptual level, but there are some details you need to be aware of.

As I mentioned before, there are several different types of these Income-Driven Repayment plans.  Primarily, there are five different types.  You need to be aware that one of these five main types of IDRs actually doesn’t give you the choice to separate your income from your spouse’s.  We’ve spend this time talking about how you have the choice to file separately or jointly and report your income likewise, but if you’re on one particular type of IDR, you unfortunately don’t have the ability to make this choice.

The plan in question is called the Revised Pay As You Earn plan (you’ll usually see it abbreviated as “REPAYE”). If you’re on this plan, you unfortunately don’t have the option to split your income up- you need to report you and your spouse’s income jointly.  Which means that if IDRs are something that you’re looking into – like I said at the top, if you’re single now but you’re envisioning getting married down the road while you’re still making student loan payments – you might want to think twice about choosing REPAYE.

Now, there are some unique benefits to REPAYE- it’s not worth forsaking it altogether – but it is something you should take into account.  Under REPAYE, you won’t have the ability to separate your income (which might be a more attractive option now than it was under the old tax law).

(Note:  to be clear, the plan is question is REPAYE.  There’s another IDR called “Pay as You Earn”, or “PAYE”, that does give you the ability to separate your income from your spouse’s.  Congress has really mucked up the student loan policy over the past decade or so, with some assistance from the Department of Education.  There’s a lot of different types of IDRs, they all sound the same, but we’re talking today about REPAYE, not PAYE.)

Second key detail:  this principle of weighing the two sides of the balance scale is the right idea, but be aware that the calculation is a little bit more complicated than this.  There’s one other factor that you need to take into account before you decide to file separately and lower your student loan payments.

And that is that when you file separately, you lose the ability to claim the student loan interest deduction that I mentioned up at the top.  Right now, you can deduct $2,500 in student loan interest that you paid over the course of the year from your taxable income.  You can do that if you file jointly, as long as your income doesn’t exceed relevant thresholds.  But if you file separately, you lose the ability to do this.

The concept of balancing the two sides of the scale is the same… but you can almost think of the loss of the student loan interest deduction if you file separately as a “thumb on the scale” in favor of filing jointly.  It makes filing jointly a little bit more appealing.

The principle stands: more people today are going to be better off filing separately and reducing your student loan payments than there were under the old tax law.  But, there is a separate factor that you need to factor into your decision.

Student Loan Analysis is Complicated

To wrap up, this is complicated stuff.  Like I said, the way that we’ve come to the current student loan landscape doesn’t really make sense.  This is something that I help my financial planning clients with on an ongoing basis.  I help my clients do this sort of analysis to help figure out what steps need to be taken.

But, I actually offer a separate, standalone Student Loan Analysis service.  For people who don’t want, can’t afford, or don’t have any interest in doing Comprehensive Financial Planning, I offer this as a separate service.  We would meet via a video conference for 45 minutes to an hour, I’d collect your individual student loan data so we can understand what you specifically qualify for, discuss your goals for your student loans- are you trying to minimize your monthly payment, or are you trying to pay them off as quickly as possible?  Those are two good answers, depending on your circumstances, but they’re completely opposite strategies.  We discuss all of these things, and within two days I’ll send you a list of recommendations for what to do with your loans.

If this is something you’re interested in or would like to learn more about, I do offer free consultations.  Click here to set up a no-obligation, free strategy session to talk through this issue we’re talking about today, or any other issue when it comes to your loans.

In closing, I think there’s a very real, unintended consequence that came about from this change in tax law that really is an opportunity for a lot of people- if you decide to take advantage of it.  I encourage you to do so.

Again, Happy New Year!  We’re going to be holding these chats on our Facebook Page, usually live at 8 PM on Mondays.  If you have any questions or things you’d like me to cover, shoot me an email or leave a comment on this video.  Thanks so much, and have a great day!

 

How Will the Tax Cuts and Jobs Act Affect You?

Like just about everything these days, most of the coverage around the “Tax Cuts and Jobs Act” has been viewed with an overwhelmingly partisan lens.  Most of this has to do with the nature of the corporate tax cuts in the law, perhaps justifiably so.  But in my opinion, there’s been far too little discussion about the actual impact the law will have on individuals and families in our generation.

Now that the political bickering is over (at least on this issue…) and the tax proposal has been finalized, let’s take a look at exactly how this tax overhaul will affect you.  This is a mammoth piece of legislation, so I won’t be able to cover every detail, but we will cover the major pieces.

One note: all of these changes apply to the 2018 tax year, with two major exceptions.  Your 2017 taxes, due April 15, 2018, will be unaffected unless you are itemizing medical expense deductions.  And, the Individual Mandate repeal doesn’t kick in until 2019.

That being said, the change in tax law has created some unique opportunities to save on taxes, both in 2017 and beyond.  I’ve compiled a list of twelve tax hacks to save you money on taxes based on the new law.  Download the list today!

 

[Note:  the day after Congress passed the Tax Cuts and Jobs Act in December 2017, I hosted a Facebook Live chat summarizing the provisions of the bill.  The video is available below.]

What’s NOT in the Law?

Before we dive into exactly what the new tax code says, we need to quickly talk about what it doesn’t say.  There were several controversial elements inside the draft bill that got a lot of media attention.  Several of these were stripped out of the final version- you no longer have to worry about any of these rumored changes.  These include:

  • The provision that would have treated graduate student tuition waivers as taxable income is gone from the final version of the law. This would have increased taxes on graduate students by as much as 400%, but it was removed from the final law.

 

  • At one time, there was a proposal to remove the ability to deduct student loan interest payments from your taxable income. This provision was removed as well.  You can still deduct the amount you pay in interest toward your student loans, up to $2,500 in interest per year.

 

  • There was also a provision that would have caused tuition payments made by your employer to be fully taxable to you. This was also removed- your employer can give you $5,250 tax-free for tuition, which is unchanged from the old tax law.
Tax Rate Changes

Now, let’s talk through the major changes that have been introduced, starting with tax rates themselves.

  • For most Americans, your marginal tax rates will be going down (albeit temporarily- these cuts expire in 2025, although Congress may extend them). Find your income level in the tables below to see how your tax rates compare in the old and new tax code.

  • A few key items to note:
    • While most people will see a decrease in their tax rate, there’s one group of people who will see an increase: unmarried people who have a yearly taxable income roughly between $157,000 and $416,000.  The logic behind drawing the boundaries of the tax rates in this way is unclear.
    • There are also some income ranges, both for individual and married taxpayers, where there is no change in the marginal rate. For example, a married couple with $450,000 in annual income is in the 35% tax bracket in the old tax code, and the 35% tax bracket in the new tax code.  (Although, it is worth noting that even though the marginal tax brackets are unchanged, the total taxes owed is less due to the decreased marginal brackets below the 35% bracket.)
    • There’s a distortion in the tax code if you are married and both you and your spouse make a high income, frequently called the “Marriage Penalty”. For example, let’s say you and your spouse make $400,000 each.  If you were filing individually, you each would fall in the 35% tax bracket.  However, if you’re married filing jointly, you have $800,000 in taxable income as a household, which puts you in the 37% tax bracket.

 

  • Taxes on investment income (dividends and long-term capital gains) have not changed under the new tax law. Depending on your income, you’ll either pay 0%, 15%, or 20% in taxes on dividends or capital gains.
Personal Income Tax Reductions and Pass Through Businesses
  • There’s one other change in how income is taxed, and it’s a big one. The change relates to “pass through” businesses, which are businesses that don’t pay corporate income taxes, but instead “pass through” their earnings to individuals who pay the tax at their individual tax rates. Under the new law, these “pass through” businesses are allowed to deduct 20% of their income (or 50% of the wages they pay, whichever is less) from their total taxable income.  In plain English, if a pass through business makes $100,000 in income, they are allowed to reduce their taxable income by 20%- meaning that the individual who gets the pass through income only pays taxes on $80,000 worth of income.

 

  • This is a bigger deal for you than you may realize. A pass through business doesn’t have to be a big company; in fact, more often than not these businesses are really just individuals who are self-employed.  For example, independent contractors and sole proprietors are typically set up as pass through businesses.  Which means that if you and a friend do the same exact job, but you are an employee of a big firm and your friend is an independent contractor, your friend will pay taxes on 20% less income than you.  This likely to accelerate the growing trend of workers becoming independent contractors rather than full-time employees– there’s now a clear tax benefit to doing so.

 

  • But, there’s a catch. Pass through businesses that engage in a “service-based” business have some restrictions on how much you can make to qualify for the 20% deduction.  If your pass through business income is more than $157,500 for individuals (or $315,000 for married couples), your ability to deduct 20% of your taxable income starts to phase out.

 

  • What counts as a “service-based business”? Most occupations that involve selling a service to another person, including accounting, health, law, financial services, and consulting.  Oddly enough, two services were specifically excluded from the income phaseouts:  engineers and architects.  If you work in either of these fields, your income can grow as much as you’d like without losing the ability to deduct 20%.
Standard Deductions and Personal Exemptions

The income-component to the tax code change is relatively straightforward:  most people will have a reduction in their overall tax rate, except for the specific groups I outlined about.  However, this only tells part of the story.

Note: It’s a little bit more complicated to tell if these changes will be a net benefit or net loss for you, as they tend to offset each other.  I’m going to lay out the changes and give you the tools you need to get an idea whether this will have a net positive or net negative impact on you, but it’s always a good idea to talk to a CPA about your unique circumstances.

  • Once you calculate how much you have in taxable income, you are allowed to either deduct a variety of expenditures from your taxable income (we’ll get to that in a minute), or take what’s called a Standard Deduction. The standard deduction directly reduces your taxable income.  Under the old law, individuals could claim a $6,350 standard deduction, and married couples could claim a $12,700 standard deduction.  Under the new law, the standard deductions have nearly doubled.  Now, individuals can reduce $12,000 and couples can reduce $24,000 in taxable income under the new standard deduction.

Clearly, this is a net benefit, right?   Sort of.

  • Under the old tax code, you also had the ability to claim a personal exemption of $4,050 for yourself ($8,100 for a married couple), and another $4,050 exemption for each child that you have. These exemptions, like the standard deduction, reduce your taxable income.  Under the new tax law, these exemptions have been eliminated

It’s critical to note that the amount of the personal exemption being removed ($4,050) is less than the increase in the standard deduction (a $5,650 increase for individuals and a $11,300 increase for couples).  So, for people without children, this is a net win.  But, particularly for large families who claimed the $4,050 exemption for each child, your taxable income is going up considerably.  However…

  • There are two changes to the Child Tax Credit under the new law that likely will more than make up for the loss of the exemptions for families with children:
    • The amount of the tax credit has doubled, from $1,000 to $2,000 per child, per year. Note that, unlike the discussion around exemptions and deductions (that referred to taxable income), the $2,000 tax credit is literally a $2,000 reduction in the taxes that you owe. Which makes it a considerably better benefit than a $4,050 reduction in taxable income.  One other note:  if your final tax calculation comes out that you don’t owe any money in taxes, $1,400 of the $2,000 credit is refundable to you.
    • There are income restrictions for who is eligible for the Child Tax Credit, but these have been greatly expanded under the new law to make the credits more accessible to more families. Now, individuals who make less than $200,000 per year or married couples who make less than $400,000 per year can claim this credit.

As an example, let’s look at a household that consists of a husband, wife, and three children.  Both the husband and wife make $175,000 each.

Even though they have a greater taxable income under the old tax code, they save over $18,000 in taxes, both because of the decrease in marginal tax rate and the substantial Child Tax Credit.

To summarize:  your standard deduction has gotten better, your ability to claim exemptions has been removed/gotten worse (particularly for large families), and the expansion of the Child Tax Credit has gotten significantly better for families with children under certain income thresholds.

LOTS of Changes in Itemized Deductions

As I mentioned above, everyone can claim the standard deduction.  But, if you can list a set of qualified expenses that exceed the amount of the standard deduction, you are still allowed to use the itemized deduction process.  It wasn’t common to itemize deductions before, and now that the standard deduction has been doubled, it will be even less common now (since you need to have nearly double the amount of expenditures in order to be better off itemizing).  But, if you do itemize, here’s what you need to know about the changes to the types of expenses that qualify for itemization:

  • Charitable Contributions- There were a lot of rumors that we would be losing the ability to deduct charitable contributions under this law. That fear proved to be unfounded:  the amount you can itemize for charitable contributions has actually increased (from 50% to 60%).  But, of course, fewer people will take advantage of this now that the threshold to exceed the standard deduction has nearly doubled.

 

  • Mortgage Interest– There are two big changes here:
    • You are still able to deduct the amount of interest paid on a mortgage, but the amount of interest that qualifies has been reduced. Before, you could deduct interest paid on the first $1,000,000 of mortgage principal; this has now been reduced to $750,000.  But, it’s critical to note that all mortgages in existence before December 15, 2017 have been grandfathered in and are not subject to the new rules.
    • Interest paid on Home Equity Loans or Home Equity Lines of Credit is no longer deductible.

 

  • State and Local Taxes– this one has gotten a lot of press coverage. Before, you were able to deduct the amount you pay in state taxes and local taxes on your federal tax return.  There was a lot of talk about removing this provision entirely, but in the end, the final tax law merely put restrictions on this ability rather than eliminating it altogether.  You are now able to deduct a maximum of $10,000 in state and local taxes, rather than unlimited amount.  This particularly hurts high-income individuals in states and cities with high tax rates.

 

  • Your ability to deduct medical expenses has temporarily expanded, even though this was another item that Congress nearly eliminated. If you have medical expenses that exceed 7.5% of your income, you can deduct these expenses in 2017 and 2018, which is down from a 10% of income threshold.  But, in 2019, the ability to deduct medical expenses goes back to 10% of income.  One other note:  this is, I believe, the only change that applies to your 2017 income taxes (that are due April 15, 2018).

 

  • The IRS had a long list of Miscellaneous Expenses that could be deducted if they exceed 2% of your taxable income. Most commonly, the ability to deduct expenses relating to tax preparation fell under this category.  The ability to make these deductions has now been eliminated.

 

  • You are no longer allowed to deduct moving expenses. (With one exception:  you are still allowed to deduct moving expenses if you’re in the military and you are required to move for a military job).

 

  • Finally, alimony payments are no longer treated as a taxable transfer. Under the old rules, the person who pays alimony to an ex-spouse was allowed to deduct the alimony amount, and the person who received the alimony payment needed to count it as taxable income.  This is no longer the case, but similar to the grandfathering under the mortgage interest deduction, the new rules only apply to new or modified alimony agreements in 2018 and beyond.
Other Big Changes

There are a few other big changes to the tax code that don’t relate to the tax rates or various deductions available:

  • The Individual Mandate that requires you to pay taxes if you don’t have health insurance under the Affordable Care Act (“Obamacare”) hasn’t technically been repealed…. But the taxable penalty for not having health insurance is $0, starting in 2019. This doesn’t mean that you shouldn’t have health insurance (you should), but it does mean that you won’t be taxed if you don’t have health coverage.  But again, note that this provision starts in 2019.  If you don’t have health insurance in 2017 or 2018, you’ll still need to pay the tax.

 

  • There are several changes to the use of 529 Accounts. Historically, these accounts have been one of the most tax-advantaged accounts to save for college- contributions are tax free at the federal level and can be tax free at the state level as well, and withdrawals are tax free if used for qualified higher education expenses.  Under the new code, they now can also be used to fund K-12 education expenses- they’re not just for college savings anymore. Under the new rules, you’re allowed to withdraw $10,000, per child, per year, for qualifying K-12 education expenses (including private school tuition).  There was a provision in the bill that would have extended these accounts to be able to be used for homeschooling education expenses, but this was removed from the final version of the law.  529’s can now be used for college expenses and K-12 expenses, but not homeschooling.

 

  • There are two other huge changes that are much less likely to affect younger people, so I’m going to gloss over them. But you should be aware that they exist:
    • The Alternative Minimum Tax (AMT) is still around, but it’s now much harder to actually qualify to pay the AMT. The AMT is a method of making sure that very rich people can’t use too many loopholes to avoid paying taxes. Essentially, under the AMT, you need to calculate the amount of taxes you owe twice– once under the standard tax rules, and once under the AMT rules.  If you owe more in AMT taxes, you need to pay the AMT.  This is still in existence, but it’s going to be much harder for people to actually need to pay the AMT.  If you have a very high income, this is something to keep on your radar, but most people don’t need to worry about this at this time.
    • The Estate Tax, like the AMT, is still around, but almost nobody will qualify for it anymore. The estate tax is a vehicle used to tax the amount of wealth someone has after they die, before the wealth is inherited by the next generation.  The estate tax still exists, but your estate needs to be double the size it used to be in order to be subject to the estate tax.  Until you have $11.2 million dollars saved up (or $22.4 million for couples), you don’t need to worry about it!
Conclusion

When they began the tax reform process in early 2017, Republican leaders in Congress claimed that they wanted to make it so easy to file your taxes that most Americans would be able to file taxes on a postcard.  As you can probably tell from the summary above, they fell… just a little short of that goal.

That being said, the fact remains that for most taxpayers, the filing process will be somewhat expedited, primarily by doubling the standard deduction.  For many people, you’ll just need to calculate your taxable income, take your standard deduction (and, potentially, your Child Tax Credit), and you’ll be good to go.

What do you think?  How will the new tax law affect the amount of taxes you pay?  And if you want some ideas on how to use the change in the tax code to save some money on your taxes, click here to download my twelve #taxhacks based on the new law.

The Conversation About Money You Need to Have With Your Spouse

The Conversation About Money You Need to Have With Your Spouse

Nobody likes to talk about money.

In many ways, finances are the last big “taboo” in our society.  There’s even some research to back it up – a study from University College London surveyed 15,000 men and women in Great Britain a few years ago and found that people are seven times more likely to tell a stranger details about their sex life than they are to tell a stranger their salary.

One of the central missions of my work is to help millennials get more comfortable talking about money.

Because it’s absolutely critical that we do so, particularly as we enter serious relationships.  As a generation, we are moving in with partners and getting married at a later age than our parents and grandparents did.  Which means that couples have more established habits around money when they start to combine finances.  And that, ultimately, can lead to friction in a relationship.

There’s been some research done on this subject, too.  And it isn’t good news.  Money issues are the number one cause of stress in relationships and can be a leading indicator of divorce.

As uncomfortable as it might be to have a serious, in-depth conversation around money with a boyfriend/girlfriend/fiancé/spouse, we need to learn how to have these discussions.  And more importantly, we need to learn how to have these discussions in a way that doesn’t cause us to fight.

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

What a Money Conversation Should Cover

Talking about money with a partner should be an open dialogue.  To make it easy for you, I’ve prepared a list of fifty-four questions about money that I think every couple should discuss.

Before we talk about what it should cover, though, we need to talk about what this money conversation shouldn’t include.  Primarily, judgment.

This needs to be a judgment-free conversation.  Your objective is to understand your partner’s habits and values as they relate to money, not to criticize them.  Once everything is out on the table, only then can you begin to craft financial strategies that will work for your family.

I truly believe that this is the only way to reduce or prevent conflict around your finances.  Have a serious, no-judgment dialogue about your history with money, and use the perspectives you get from the conversation to shape your family’s financial vision.

Here’s what you need to cover, as I outline in this free checklist:

Your Money Histories

Who you are as a person is often a direct reflection of how you were raised.  The way you handle your finances today is the result of your history with money to date.  Therefore, you need to know your spouse’s money history in order to understand and appreciate how they interact with money.

Before you start making big financial decisions with your partner, it’s critical to understand “where they’ve been” when it comes to money, and vice versa.  Doing so will help give you perspective on how they make decisions that might be different from those that you would make on your own.  Which, in turn, can reduce fighting about money.

Your Money Habits

If the discussion about your money history is about where you’ve been in the past when it comes to finances, the discussion around money habits reflects where you each are today.

Even if you’ve been together for years and have fully integrated your finances, this is still an important discussion to have.  At the absolute worst, this discussion will help you better organize your finances.  At best, you’ll learn some critical details about the current state of your finances.

Your Money Goals

We’ve covered where you were in the past, and where you are today when it comes to your finances.  Now, we need to talk about where you’re going.

What is it that you want to accomplish financially in your life?  What does your dream life look like as a family?  We often just go through the motions of our day-to-day life without thinking too much about these things in detail.  I think that this is a mistake.

Use my free question list to have a real discussion about what it is that you each want out of your life.  Once you’re able to articulate these things in detail, you’re that much more likely to actually make them happen.

Your Investing Philosophy

The discussion about your money goals can be a really fun exercise for couples.  But once you’ve talked through some of these goals, you need a roadmap to get you there.  And that typically will involve some sort of investing decisions.

How comfortable are you making investing decisions?  How much risk are you willing to take?  It’s critical to have a discussion about these topics with your partner up front, to reduce conflict about these items later.  Even if you don’t know that much about investing, you still need to be comfortable with the amount of risk you’re taking.

The Important Stuff

I’ve saved this set of questions for the end, even though these are the most important things you’ll discuss.  The last piece you need to address in your money conversation has to do with the role money should play in your lives.

My favorite question to ask whenever I meet with a new client is simply, “Why is money important to you?”  And when I ask this question, I refuse to accept a one word answer like “freedom”, or “security”.  Why does freedom matter to you?  Why does money make you feel secure?  You need to go deep – really deep – into these questions to fully understand the role that money will play in your family.

This isn’t just fluff.  I’m giving you some of my best stuff in this free download.  I’ve had multiple clients literally burst into tears when they go through some of these questions. Not out of sadness, but out of the realization that it’s within their power to use their money to live their dream life.

I truly believe that you can live your dream life too.  But, this only happens when you’re intentional about aligning your finances with that vision.  This list of questions to discuss with your partner is a critical step to help you get there.

Money Conversations are Important for All Couples

I know what some of you are thinking: this conversation isn’t one that you need to have.

Maybe you’re just at the point where you’re thinking about moving in with your boyfriend or girlfriend, and feel uncomfortable bringing money up so early in a relationship.  Or, maybe you’ve been married a few years and think you know all of the important stuff about your spouse’s finances.

Here’s the thing:  it’s never too early to start talking about your future if you’re in a committed relationship.  Money will play a pivotal role in the success of your partnership.  It’s an uncomfortable subject to discuss, but using the questions in this guide will make it easier.

And if you’re already married, you’re absolutely right that you know a lot about your partner’s financial situation already.  Of course you do.

But 99% of the couples I’ve met with have a very superficial knowledge about their partner’s finances.  They know the key numbers and financial data points, but not the why behind the decisions they make with their money.  And it’s this why that’s so important to understand if you want to avoid fighting about money later on.

You might know your partner’s answers to some of the fifty-four questions in this guide.  But I guarantee that if you go through the rest of them, you’re going to find some big surprises.

It’s Awkward, But Critical

Money might be awkward to talk about, but when you’re in a committed relationship, you must talk about it.  The good news is that money can be a powerful tool in your toolbox that you need to use to live your dream life – if you have proactive conversations about it with your spouse.  Use this guide to help facilitate a conversation with your spouse about money.

Where to Keep Your Savings When Interest Rates are Low

Saving might be a virtue, but it’s not one that the market tends to reward.

Even as interest rates in the economy as a whole have risen over the past few years, savings account interest rates generally haven’t followed suit.  Banks are quick to raise rates on things that make them money (such as interest rates on loans), but haven’t been nearly as quick to raise savings account rates.

Simply put, savings accounts are terrible right now.

Ask your parents or grandparents where they keep some of their spare cash, and they might tell you that rather than keep money in savings, they put money into Certificates of Deposit (CDs) or into a Money Market Account.  The only problem?  Those rates aren’t very good right now, either.

So, is all hope of earning some decent return on your savings lost? What’s the best place to keep your savings?  And how much do you really need to keep in your savings accounts?

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

You Need to Keep Some Money in Cash

Please don’t misinterpret “Savings accounts are terrible” to mean “You shouldn’t keep any money in savings”.  You should.

You need to keep enough money in savings to cover three to six months of living expenses, just in case you lose your job, your car breaks down, or you have unexpected health expenses.  There’s no getting around it, you need to have cash that you could access at a moment’s notice.

If both you and your spouse have good paying jobs or your fixed monthly expenses (like your rent or student loan payments) are relatively low, three months of spending is usually sufficient.  If your household only has one source of income, or your fixed expenses are relatively high, you should shoot to have six months of spending in a savings account.

Don’t Let That Number Scare You

Three to six months of living expenses is a big number.  If you don’t have that much money in savings today, it can seem like an impossible target to reach.

Rather than focusing on the end target, start by working toward something smaller. Instead, calculate your average spending for one month, and focus on saving that much.  Once you have that amount in the bank, try to double it.  And so on, until you reach your target savings about.

Start small, and focus on saving a month’s worth of expenses at a time.

Once You Have Your Emergency Fund Established, Keep it There

Once you’ve saved three to six months of living expenses, which we call your “emergency fund”, don’t keep adding to it.  Leave your emergency fund alone until you need to actually withdraw funds in a pinch.  (Of course, once the emergency is over, you’ll want to focus on building up this savings back up to three to six months of living expenses.)

But, you still should check in on this account from time to time.  Once or twice a year, you should review your budget to make sure that your spending hasn’t drastically changed.  If you’re spending more than you used to, you may need to add some money to your emergency fund, and vice versa.

In fact, most people will need to add to their emergency fund periodically over time.  Why?

Because savings accounts are terrible.

Simply put, the stuff we buy tends to get more expensive faster than banks raise interest rates on savings accounts. Long term inflation (the rate that prices rise) is around 3% per year in the US.  If the money in your savings account only earns 0.2% interest per year, you’re essentially losing money by keeping money in a savings account.

Which is why it’s so important to review your spending and add to your emergency fund as needed so you could still cover three to six months worth of expenses if you had to.

Beyond Emergencies

We’ve talked about why I don’t like savings accounts, but also why you need to use them anyway for your emergency fund.  We’ll talk through ways to make the most of savings accounts in a bit.

But what about the rest of your money?  Once you have your emergency fund, where should you be putting your savings?

It Depends on When You’re Going to Spend Your Savings

When deciding what to do with your non-emergency savings, the first question you need to answer is, “What’s it for?”  Are you saving money for a down payment on a house in a year or two, or for something more long term?

Unfortunately, finding a place for your money that will earn a higher rate of return than savings accounts will involve taking risk.  And as a general rule, the sooner you actually need the money, the less risk you should take with it.

For example, I usually recommend that most people in their 20s and 30s invest almost all of their retirement savings in the stock market using low cost mutual funds. These are relatively high-risk investments, but they also produce much higher average expected returns every year. If your retirement account were to drop in value by 20%, you might certainly be upset… but since you aren’t going to retire for several more decades, it wouldn’t be catastrophic since you have plenty of time to earn the money back.

However, if you were planning on using your savings to buy a house a year from today, and your savings were to drop in value by 20%, this would be a much bigger deal for you since you’d have much less time to earn the money back.  While long term growth rates in the stock market tend to be good, they can and do fluctuate up and down in the short term.

All of this is a long way of saying:  when deciding what to do with money you’ve saved beyond your emergency fund, the primary thing to consider is when you’re going to spend the money.  The longer you want to keep the money saved, the more risk you can afford to take.

Some Rules of Thumb

Now that we’ve discussed how to think about risk with the money you have saved, consider the following options for your short and longer-term savings.  There are pros and cons to each of these strategies that you should consider before making a decision- if you have any questions about these strategies, shoot me an email.

Short Term Savings (You Expect to Spend the Money in 0 – 2 Years)

For short term savings, you should take as little risk as possible to minimize your risk of loss in the account.  If you’re still up to take some risk, you might consider investing 20% of your short-term savings into stock mutual funds, and the other 80% into bond mutual funds.  This portfolio mix will still fluctuate with the market, but it should offer you a decent expected long run return.

Better yet, you might consider only investing in bond mutual funds and skipping the stock component altogether.  Bond funds still go up and down in value like stocks, but tend to be less volatile in most environments.  A money market mutual fund could also work well, but will offer a lower expected return (in exchange for less volatility).

If you’re looking for places to put your money that don’t pose a substantial threat to drop in value, you could consider a short term individual savings bond or a CD that matures by the time you need to withdraw the money. While rates on these vehicles tend to be relatively low, they are still a safe place to put your savings.  And particularly for 2 year CDs, rates tend to be much better than you’ll get on a savings account.  But, beware:  using either of these investment option, you’re tying your money up for the full term of the bond or CD.  If you buy a 2 year CD, you shouldn’t plan on taking the money out of the CD until the full two years are up.

Finally, particularly if you are looking to use your money in the next few months, you may be stuck keeping your savings in cash.  We’ll talk about ways to improve your returns on these types of funds shortly.

Medium and Long-Term Savings Goals

While any of the short-term strategies I described above could be used for longer term savings goals, I recommend investing your longer-term money into stock and bond mutual funds.  A longer-term CD or individual bond could work for you, but you’ll likely be better off putting your money into the market.

Since stock mutual funds offer more risk and more reward than bond funds, the longer you are looking to invest for, the higher the percentage of your investments should be in stock funds.

For example, if you are looking to buy a house in five years, you might consider investing 50% of your money for this goal into stock mutual funds, and 50% of your money into bond funds.  If you’re looking to invest for your newborn child’s college education, you might invest 80% of your savings into stock mutual funds, and 20% into bond funds.  And if you’re saving for your retirement that’s 35 years away, you might invest 100% of your retirement savings into stocks.

One final note about this, though.  As you get closer and closer to realizing these longer-term goals, you want to make sure that you gradually shift your investments into more conservative positions, all else being equal.  If you want to buy a house five years from now and you decide to invest your savings 50/50 in stocks and bonds, as you get closer to the point in time when you want to buy a house, you should shift your account away from the stock funds and into more bond funds or CDs.

This is All Well and Good, but Where Do I Keep My Cash?

You know the options for where to put your savings beyond your emergency fund, but that still leaves us with the same fundamental problem we had at the beginning.

If savings accounts are terrible, is there another option for where we can keep our emergency fund and maybe even our savings for our short-term savings goals?

The answer is, “sort of”.

Ditch the Traditional Savings Account and Open a High Yield Savings Account

Like just about everything else in our lives, the internet has drastically altered the landscape of personal finance options.  A few decades ago, you would have needed to work with a stockbroker to invest in a stock or mutual fund.  Now, you can open up an account at TD Ameritrade and place a trade on your own with just a few clicks of a button.

The same thing has happened with savings accounts.  A few years ago, you had no other option than to keep your savings with the local branch of a national bank, or maybe a more regional bank or credit union.

No longer.

Over the past decade, several banks have opened high yield savings accounts.  These aren’t banks that you could go to visit in person; instead, they operate 100% online as a way to keep their costs low.  This, in turn, allows them to pay significantly higher interest rates than the traditional savings banks.

Three of my favorite high yield savings accounts are

As of this writing, all three of these banks paid the same interest rate and they have been regularly raising their rates over the past few years.  They also have no monthly fees associated with them, and are FDIC insured.

Best yet, the interest rate on these accounts is literally over 4,000% higher than the interest rate paid on a Bank of America savings account at the time of this writing.

Most savings accounts just aren’t good in today’s interest rate environment.  And even with high yield savings accounts, I still don’t recommend keeping your medium- and long-term savings in one of these accounts.

But, if you’re looking to get a higher return on your emergency fund and even your short-term goal savings, a high yield savings account is the first place I’d start.

What To Do If You Have a Worse Credit Score Than Your Spouse

When most couples talk about money, the topic of credit scores usually isn’t one that gets them fired up.  It’s much more fun to focus on a goal like buying a new home than it is to dwell on your credit score.

But, building your credit is one of the most critical steps to take in your 20s, since your credit score impacts most of the other parts of your financial picture.  The interest rates on your future mortgages and car loans directly depend on your credit score.  And, credit takes time to build, so even if you don’t need to take out a mortgage soon, the time to focus on this is now.

It’s very common to see a husband and wife have very different credit scores.  What steps should the person with the lower score take?

[This article is part of an ongoing series about the way managing your money changes when you get married in the coming months.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

Differing Credit Scores Can Be a Huge Challenge for Couples

There are a lot of decisions couples need to make about how they handle their finances together when they get married.  Typically, these decisions involve deciding whether (and how) to combine financial accounts, how to manage monthly cash flows, and how to save and invest.

Credit scores aren’t one of the topics that tend to come up right away.  Unless you’re in the process of buying a home, they just aren’t a topic that tends to be on the top of people’s minds.

But, this doesn’t mean that it isn’t an important topic for couples.  On the contrary, being in a marriage where one partner has a significantly higher credit score than the other can be a huge source of stress on your relationship.  And, it can complicate the process of taking out a mortgage, since you will need to use both of your credit scores when applying for the house.

It’s important, therefore, to be aware of your partner’s credit score and to get out in front of any areas for improvement before you actually need to use the credit score.

How Do You Fix It?

The good news is that this is a fixable problem.  The bad news is that it can take a good amount of time to improve your credit scores significantly.  Which is why it’s critical to start as soon as possible.
This isn’t an exhaustive list, but if you’re looking to improve your credit score, start with these strategies:

Download your Credit Reports Every Year

Knowing is half the battle.  Use a free service like Credit Karma to pull your credit reports once a year.  And, make sure to look at reports from all three credit bureaus- Equifax, Experian, and Transunion.  It isn’t common, but sometimes there can be erroneous items on one report that aren’t listed on any of the others.  You can also get your credit reports through the website of each of these credit bureaus.

Dispute Errors As Soon As Possible

We’ll touch on this in a bit, but it’s so important that I wanted to call it out right away.  You’d think that the three credit bureaus are infallible, but unfortunately, they are far from it.  I’ve caught three different errors on clients’ credit reports in the past couple months alone.  If you see something that you know is a mistake on your report, use the link on the relevant credit bureau’s website to file a dispute immediately.  These things can take some time, but it is possible to remove factually incorrect information from your reports.  And, as I said, this is unfortunately a more common problem than you’d expect.

Recognize that Making Changes to Your Available Credit Usually Involves Taking a Step Backward Before You Take a Step Forward

This is crucially important.  If you open a new credit card and use it the right way (more on that in a bit), over time your credit score will likely go up.  But, whenever you request new credit, this creates what’s called a “hard check” on your credit that causes your credit score to drop for the time being.

Again, in the long run, this will be outweighed by you using your new credit wisely, but be aware that if you’re planning to take out a loan sometime this year, now isn’t the time to be opening new credit cards.

And as an FYI, “hard checks” typically remain on your credit report for two years.

Have Enough Credit Available…

This one is particularly important for those people fresh out of undergrad or a grad school program.

Double check how much available credit you have on each of your credit cards.  Typically, most people new to the working world have credit limits in the $300-$500 range.  Frankly put, that’s not enough to build a great credit score.  Request a credit increase to give yourself more of a foundation to build your credit history.

…But Don’t Use (Much of) It

One of the primary drivers of your credit score is how much you use the credit you have available.  A good rule of thumb is to always use 30% or less of the total amount of credit you have available on each credit card.

In other words, if you have one credit card with a $10,000 credit limit, never let the balance on that card get higher than $3,000.  And of course, pay off the balance every month.  Speaking of which…

Set Reminders

It’s hard to keep track of your finances when you’re busy.  So, make it easy on yourself!  Set reminders to pay your bills every month.

One of the easiest ways to mess up your credit score is to accidentally miss a payment.  Set calendar reminders to yourself to make sure you don’t forget!

Check Your Reports for Any Overdue Bills (And Either Pay or Dispute Them Right Away)

When you do your annual review of your credit report, pay close attention to any bills (medical bills are common examples) that have accidently or allegedly gone unpaid.

If you have a bill listed as in collection that has gone unpaid, first do some research to make sure the bill is actually yours, and if it is, that it actually wasn’t paid.  John Oliver did a great report on erroneous credit reporting not too long ago that is worth taking the time to watch.

If you have a reason to contest the charge, do so as soon as possible.  If you realize that you just forgot to pay the bill, take care of it ASAP.

Don’t “Shop Around” for Loans and Credit Cards….

Or, at the very least, be careful not to get firm quotes from more than one lender at a time.

As mentioned above, every time a lender does a credit check on you regarding issuing you a credit card or loan, this creates a “hard check” on your credit that hurts your score.  If you go to five different credit card companies requesting a credit card, that’s five “hard checks” that will appear on your credit report, even if you only open one card.

By all means, do your homework and shop around, but only begin the application process once you’ve made a decision.

Beware Retail Credit Cards

I’ll confess- I’ve goofed on this one myself.

Stores generally offer pretty good perks to entice you to open up a store credit card.  But, having retail credit cards directly impacts your credit score, and not in a good way.

Lenders view retail credit cards as a negative indicator, so it’s almost always a best practice to say no to the discounts that the retail stores offer you in order to save money on your mortgage down the road.

Give it Time

In most areas of financial planning, we can usually implement a pretty quick fix.  Whether it’s acting on a need to save more for retirement or to refinance a loan, usually the recommendations I provide to my clients can be acted on quickly and you can see immediate results.

Unfortunately, improving your credit score just doesn’t work that way.

Don’t get me wrong, there are things you can and should do today to improve your credit score.

But, it’s not a quick fix- it might be two years before you see substantial improvement.  Trust the process and give it time, and your score will improve if you manage your credit the right way.

 

How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

Congratulations to everyone graduating this semester! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being done with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation about a one time, quick start session!

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve written about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six-month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the workforce, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

What Millennials Need to Learn from the ESPN Layoffs

Well, this is a bummer.

The big news this week is that ESPN, once considered the fastest growing and most stable news organization in sports, is laying off numerous reporters and on-air personalities.

Layoffs are a cruel reality of the world we live in.  Unfortunately, reports of companies cutting jobs pop up in the news far more frequently than they should.  And there’s something about how public ESPN’s move was that makes it hit home all the more.

But there are a few important lessons in this story for all of us, particularly for millennials who are relatively new to the workforce.

There’s No Such Thing As 100% Job Security

No matter how quickly your company is growing, no matter how good your last performance review was- in today’s day and age, job security flat out isn’t something that we can count on.

Sure, there are a limited number of exceptions.  Tenure can help if you work in higher education.  Unions can, too.  But for the most part, it’s a mistake to treat a job as completely stable.

Some best practices to help deal with this unfortunate reality:

  • Talk to that recruiter who just hit you up on LinkedIn. Even if you aren’t looking for a new job right now, it never hurts to have the conversation and build a relationship with someone who has the capability to make hiring decisions. If you’re ever out of a job on short notice, you’ll be happy to have these connections!
  • Update your resume. If you’re anything like me, your resume hasn’t been updated since your last job interview.  A best practice is to update your resume – and LinkedIn bio – once a year.  That way, it’s ready to go whenever you need it.
  • Network, Network, Network. There’s many ways to do this one, but you absolutely have to be networking in your industry.  Attend a conference that caters to professionals with your particular area of expertise.  Use a site like Meetup or Eventbrite to find local networking events in your city.  Building relationships is the name of the game.
  • Mind your finances. Of course, there are huge financial concerns with the risk of job loss too.  Which brings us to our next major point…
You Absolutely Must Have an Emergency Fund (In Cash)

As a financial planner, I help people meet a wide variety of financial goals.  From retirement, to paying down student loans, to buying a home– there are a ton of different ways to allocate your money to improve your financial future.

But none of those things happen until you have an emergency fund.

You read that right.  Of course, you need to meet you minimum financial obligations.  Pay the minimum on your student loans each month, don’t miss credit card payments, contribute to your 401(k) until the match point.  You know the drill.  But, before you start looking to invest any “extra” money, you need to work to build an emergency fund.

The golden rule is to (eventually) build up to the point where you could support yourself for six months, without holding a job, just from your emergency fund.  But I wouldn’t focus on that right away- that’s a pretty intimidating goal for most people to reach.

Instead, calculate your average spending for one month, and focus on accumulating that much money in your emergency fund.  Once you have that much, focus on doubling it.  And so on, until you get to six months.

In other words, being so far away from reaching your emergency fund savings goal isn’t an excuse to not try to reach it in the first place.  Start small, and focus on saving a month’s worth of expenses at a time.

And one more thing- I don’t care how low savings rates are, you need to keep your emergency fund in cash.  If you invest your emergency fund and you were to immediately lose your job just as the stock market crashes, it won’t do you much good.  Set a goal for your emergency fund, and keep it in cash.  Preferably, in a separate savings account from the rest of your savings, so you won’t be tempted to spend it.

What’s More Secure: A “Side Hustle”, or a Full Time Desk Job?

If you were to ask 100 people whether it’s safer to have a full time job with an employer, or to work for yourself, I’m guessing that over 95% would say that it’s safer to have a full time desk job.

That may well be true.  It takes a lot of work to build your own revenue streams from the ground up.

But if you start your own business as a “side hustle”, and slowly grow it over time to the point where it could become a full time endeavor for you, I’m not so sure that this type of model is less secure than working for a “real” company.

Let’s put it like this.  Pretend that you have experience designing websites and writing code.  Would it be more secure for you to A) work for a company that does web design and be paid a salary, or B) to work as a freelancer part time and (over time) build up to 50 web design clients, enough that you could quit your full time job?

In Scenario B, if a client were to “fire” you, you would lose a total of 1/50 of your income, or 2%.  In Scenario A, if your employer were to lay you off, you’d lose 100% of your income.

The point of this isn’t to try to convince you to quit your full time salaried jobs.  Rather, I’d encourage you to revisit the way you think about your income and job security.  Finding a side hustle that you are passionate about and can sell to other people is a great way to diversify your income streams.  Just as you wouldn’t invest all of your money into one stock, it’s a best practice to diversify your income sources as well.

Hopefully, This is Never Relevant to You

Obviously, I hope you’re never in a situation where you’ve been laid off for a job.  But just in case, following the steps I outlined above will leave you more prepared to handle this situation.

The Why, When, and How of Combining Your Finances With Your Spouse

“Now that we’re getting married, how should my partner and I manage our money together?”

It’s one of the most common questions I get from my engaged and newlywed clients. It can be hard enough for us to manage our own money. Adding a second person to the mix makes things all the more complicated.

First and foremost, there’s the challenge of how to manage your money together with your spouse. Which accounts to use, how to monitor your finances together- there are a lot of questions here. Enough that I created a guide to walk you through my methodology for combining accounts.

But before we get into the how of managing your money together with your spouse, we need to take a step back.

Start with Why

Whenever I discuss combining money with your spouse, the very first question I typically ask is- why do you want to combine your accounts together?

Is it a matter of convenience? It’s certainly easier for you to keep track of your family finances if everything is in one place. Or is a philosophical matter? You’re one family, after all, and many people want to manage their finances as such.

Do you and your partner want financial autonomy in your day to day lives? Or, do you view your financial future as being completely intertwined with each other. Or maybe somewhere in between?

There’s no right or wrong answer here. But the approach you should take is largely dictated by your answers to these questions.

One Important Note

Pacesetter Planning provides financial advice, not legal advice. Before you decide to completely integrate your financial accounts with your spouse, it is recommended that you consider speaking with an attorney. If you decide not to completely combine accounts, you can certainly still use my framework for managing money together.

If you do decide to keep your accounts separate, you should add your spouse as a beneficiary to your accounts as soon as possible. This way, if something were to happen to you, your spouse will inherit the assets without legal complications.

That being said, my personal philosophy is that if you’re getting married, you should be “all in”. So, I don’t have a problem if couples want to completely integrate their accounts- as long as they want to for the right reasons, as discussed above.

The Next Question- When Should You Combine Finances

You shouldn’t actually combine your financial accounts with your partner until you’re married. Period.

Couples in our generation operate differently than our parents and grandparents. These days, it seems like the norm is to take big steps, like moving in together, before you are engaged. I know and I get it- I lived with my wife for over a year before we got married.

But just because some societal norms are changing, doesn’t mean that everything should change. Particularly when it comes to legal issues.

You might view yourself as “basically married” to your boyfriend or girlfriend, and there’s absolutely nothing wrong with that. But, you bank won’t view you as married until you’re actually legally married. Nor with the courts, if you were to break up. These situations become much more complicated if you have shared financial assets that you’re trying to split between two non-married people.

There’s nothing wrong whatsoever with jointly managing your finances with your boyfriend or girlfriend if you are living together. In fact, I usually encourage it. My guide on managing your finances with your partner will show you how. But managing your finances together doesn’t mean you have to actually combine your accounts. One more time for good measure: don’t do that until you actually get married.

Hopefully, it just means you’ll have separate accounts for a few more months or years. But in the worst case scenario, it can save you a ton of trouble by waiting.

How Do We Go About Merging our Finances?

You’ve talked about why you want to combine finances with your spouse. You are, in fact, spouses, so it’s an appropriate time to merge your money. Now, how do you do it?

I have a three-tiered framework for how to combine finances with your spouse. You’ll get a step by step walkthrough of this in my free guide. In this guide, you’ll learn how to:

1. Identify your shared financial goals with your spouse, and why these are so critical to keep in mind when you set up your joint financial accounts

2. Inventory each of your current financial accounts, and create an account map that shows you exactly where your money is today and how it’s being used.

3. Choose which accounts to use and Confirm you have enough accounts in line with your goals.

There are a lot of steps to combine your money the correct way, and it’s critical that you take the time to make sure that nothing falls through the cracks. Download my free guide on combining your finances today, and you and your spouse will have a roadmap to make sure you’re set up for success.

What Do I Do With My 401(k) When I Leave My Job?

The average millennial changes jobs four times before they reach the age of 32.  Generally speaking, this is a great thing from a financial perspective- salary tends to go up whenever you change jobs.

There are a few situations that can arise when we hop from job to job, though.  For example, what should you do with your 401(k) once you leave a job behind?  Too often, this step gets lost in the shuffle, and it can be easy to lose track of these accounts if you aren’t careful.  So, what should you do with your employer-sponsored retirement account once you leave?

Four Options

There are typically four options that you can pursue.  There’s no universal right or wrong answer here (although one option is significantly worse than the others). But, the most important thing is to develop a system to keep track of these accounts as you move from job to job.  I have a dedicated framework that can help with this- and I’m sharing it for free on my webinar on March 7.  The bottom line- whatever you do, make sure you are able to keep track of where all of your retirement accounts are!

With that being said, let’s discuss the four options in detail.

The Two Not-So-Good Options

Your first option is to cash out your 401(k).  As in, when you leave your current job, you technically can withdraw all of the money from your 401(k) to spend it today.

That being said, this is generally a terrible idea.  Retirement accounts should be kept until you’re ready to, you know, retire.  And, you’ll pay a hefty tax penalty by cashing out of your 401(k) early.  Just because it’s technically one of your four options, doesn’t mean you should actually do it.

Your second option is to leave it with your old employer.  There are some employers that force you to move it to an IRA if it’s a small account, but in most cases you can leave your old 401(k) with your old job.

That being said, there are a few reasons I typically don’t recommend this approach:

  • This is probably the easiest way to lose track of your account. If you leave all of your 401(k)s at old jobs, it can become difficult to monitor all of them.  And, of course, you really should be keeping an eye on your investments over time and adjusting them as you get closer to retirement.  As you have more and more 401(k)s, it can be harder to keep tabs on all of your different investments if they are scattered across account with your old employers.
  • Typically, employers charge fees on 401(k)s for people who are no longer employed with their company. Why pay that fee, that you aren’t getting any service for, if you don’t have to?

If your old 401(k) has great, low cost investments, it might not be a bad idea to keep your account there, but that generally is the only time I recommend this.

The Two Better Options

Two options down, two to go.  And luckily, these options are typically better.

Your third option is to consolidate your old 401(k) into your new one, if your new employer will let you.  The idea here is simple- why have two accounts to keep track of when you could combine them all into one account?  Moving your old 401(k) balance into your new job’s 401(k) is a great way to streamline your accounts.

This doubly goes if the fund options in your new 401(k) are good ones.  If you have good investment options that have low fees associated with them in your new 401(k), combining the two accounts is a no brainer.  You’ll be limited to the funds available in your company’s plan, but if they’re good, that might not matter too much.

Unfortunately, many 401(k)s use high fee accounts that can really eat into your retirement returns over time, and you aren’t getting anything in return for the fee you’re paying.  Which leads us to option four:

You can move your 401(k) into an IRA.  To do this, you’ll need to open up a brand-new IRA for yourself (unless you have one already, of course), and then request your former employer to transfer the balance to your new IRA.  You’ll then need to select the investments you’ll want to use in your IRA, and monitor their performance over time.

A few notes here:

  • When you request your old employer to move the funds to your IRA, make sure they know that you’re moving it to an IRA. Moving a 401(k) to an IRA is not taxable, but if they think you are just withdrawing your 401(k) to your bank account, you’ll need to pay a penalty to the IRS.  So, make sure they address the transfer to your IRA.
  • Make sure the account is a Traditional or Rollover IRA, not a Roth IRA. Transferring a 401(k) to a Roth IRA will cause you to be taxed on the entire balance of the account.  This can be beneficial for some people, but you definitely want to consult with a financial planner before you do this.  The key point- make sure that you don’t open up a Roth IRA by mistake!
  • One of the benefits of moving a 401(k) to an IRA is that you have full freedom over the investments in the account. You aren’t limited to a few funds in your 401(k), you can choose anything.  But, taking this approach means that you’ll need to screen your investments and rebalance your accounts over time.  I’d be happy to chat about this if you have any questions about how to do this.
How to Decide between Consolidating and Transferring to an IRA?

So, let’s take it for granted that you’re trying to decide between the last two options- combining your 401(k)s, or moving your old 401(k) to an IRA.  How should you go about making this decision?  A few key things to consider:

What are you Paying in Fees?- there are some great 401(k)s out there, but unfortunately, many of them aren’t so great.  Many 401(k) accounts only have a few funds to invest in, and they tend to have high fees associated with them.

Use a site like www.personalfund.com to evaluate how much you are paying for fees in your 401(k). If your new 401(k) has a lot of low fee options, it might make sense to combine.  If you have a lot of high fee options, it probably makes sense to go with the IRA.

Do you Need Help? Do you feel ok self-managing your investments, or do you want the help of a professional?  Most financial planners don’t provide direct investment advice on 401(k)s (although I do!), so if you want some help with your investments, usually you’ll need to move it to an IRA.  But keep in mind, that will come with an extra cost.

On the other hand, if you feel confident managing your investments yourself, you could pick either route.  It’s just a matter of which funds you’d like to invest in.  Speaking of which…

What Funds are Available?  As I’ve alluded to multiple times, 401(k)s typically provide some convenient funds to invest in, but they tend to be limited and higher in cost.  If you want a more extensive investment option, including stocks and index funds, you should probably move to an IRA.

There’s No Universally Right Answer

Ultimately, when you review the items listed above, you might find that you probably can’t go wrong between options 3 and 4.  It all comes down to personal preference, and how much you care about investment options and fees.  Ultimately, do your homework, and you should be able to sleep soundly with your decision.

And if you have further questions about retirement preparation, sign up for my webinar on March 7th to discuss these strategies in more detail!

 

How to Allocate Your Money Effectively

[Click here to register for my webinar, “How To Organize Your Finances and Create a Roadmap Toward Financial Freedom”!]

Ever since I founded Pacesetter Planning, I’ve worked with my clients on a wide range of financial topics.  I’ve gotten a variety of questions from clients and potential clients, and while everyone’s situation is a little different, generally they fall into the following categories:

  • How do I manage my finances with my husband/wife/fiance/significant other?
  • How much do I need to buy a house?
  • How much should I be saving for retirement?
  • How do I select investments?
  • Should I put extra money toward my student loans or should I direct that money elsewhere?

As you may have noticed, I’ve addressed a good number of these topics at a high level on this blog already (and will continue to do so).  But, you may have picked up on something else.

All of these Questions are Interconnected

It’s hard to make financial decisions in a vacuum.  Often times, the hard part isn’t answering these individual questions, but finding the right answer to them all at the same time.  It often isn’t practical to increase your saving for retirement and buy a house and pay extra on your student loans all at once.  These decisions need to be made together, and there’s usually not a clear right or wrong answer.

That, of course, is where I come in.  I help my clients develop plans to manage their finances, prioritize their goals, and help them allocate their money accordingly.  We set targets and track progress against these goals, updating as needed.

You Need a Framework to Make these Decisions

While everyone’s circumstances are a little bit different, I use a strict framework and process to help clients make these decisions.

And I’d like to share it with all of you.

On Tuesday, March 7 at 8 PM EST, I’ll be hosting a free webinar called “How to Organize Your Finances and Create A Roadmap Toward Financial Freedom”. You can register for the webinar here.

On this webinar, we’ll discuss:

  • How I recommend clients structure their accounts to keep track of their finances
  • How to implement a system to manage your income month to month to pay yourself first
  • How much money you’ll need to retire, and what it will take to get there
  • How to balance your everyday spending with your short and long term financial goals
We Face Greater Financial Challenges than our Parents and Grandparents.  Plan Accordingly.

Sometimes I get pushback when I say this, but I truly believe that millennials face much greater challenges than previous generations.  Think about it for a minute.

Most of our grandparents worked 40 years at the same job, retired and received a pension from their company to fund their retirement.  They have Social Security.  When they were our age and looking to buy a home, housing prices were about twice the average annual salary.

Many of our parents may have had multiple jobs over the course of their careers, but most of them only had one job at a time.  Some of them may still have a pension, but all will (barring some sort of catastrophe) receive Social Security.  And again, the average home price when they were in their twenties was around twice the average annual salary.

Now?  The average millennial changes jobs four times before turning 32. More than 1/3 of millennials have a side job.  The average price for a home has jumped to about 3.5x the average annual salary. Most of us have some type of student loans.

Pensions? Social Security?   ¯\_(ツ)_/¯

We have some big challenges ahead of us.  The good news is that these challenges can be beaten.  But, you need a method and a plan to get you there.  I’ve got it for you.

I Want to Teach You Everything I Know

I didn’t get into financial planning to only work with rich clients.  My goal is to help make all of my clients wealthy someday.  The more people I can help, the better.

Sign up for my upcoming webinar, and let me know if you have any questions you think I should address.  I look forward to sharing my methodology with you all.