Why Having a Financial Advisor Team is Important

Why Having a Financial Advisor Team is Important

With the advent of online trading platforms and information available for free on the Internet, many investors have decided to take a do-it-yourself approach to manage their money. Managing your portfolio is perfectly fine, especially those who are just starting, have little money, or have less complicated financial situations.

 

However, once investors begin accumulating wealth and add to their financial complexities by purchasing homes or running their businesses, it’s often a good idea to hire an advisor. There are several reasons people in these situations benefit from hiring an advisor to help them with their investment needs.

 

You don’t know what you don’t know

The world of finance is complex and ever-changing. If you have a full-time job that does not involve investments, it’s unlikely that you have the time, much less the inclination, to keep up with the continual adjustments in the space.

 

You may have a solid grasp of the fundamentals of stocks, bonds, and mutual funds. But do you know what the rules are on employer-sponsored retirement plans and Roth/IRAs and when you qualify for each? Do you understand the difference between HSAs and FSAs, and how to use them as an investment vehicle? Are you clear on whether you should pay down your mortgage, increase your savings, or do something else with your raise?

 

A financial advisor is required to keep up with changes in the marketplace. They understand how things like the CARES and SECURE Acts might affect your finances. They also know what they don’t know when it comes to finance, and will pull in other experts when necessary.

 

  • Help you determine your goals

Most investors understand that they need to save for retirement, given the lack of pensions and the uncertainty around Social Security. But what other goals do you have when it comes to money? Many people have goals that will impact their finances, but they might not know how sizeable it could be.

 

  • Provide a sounding board 

Just as business owners have an advisory board to help them get unstuck when facing issues and provide advice to help them grow, your advisor can provide commentary and guidance when it comes to your money.

 

There are many financial decisions for which there is no objectively correct answer. Whether to invest in a traditional IRA versus a Roth is one example. There are circumstances that better fit one than the other, but because they rely on assumptions about future taxes and earnings, there’s no right answer.

 

Similarly, people often need help thinking through the wisdom of buying into a retirement community or continuing care retirement community. Or even deciding whether to pay down the mortgage or invest some extra funds. Again, there are no objectively correct answers. Bouncing your questions off a third-party who’s knowledgeable about the issues can help you reach a satisfying decision for you and your family.

 

  • Help you stick to your plan

Emotions often get caught up in finances. When tech stocks prices go through the roof or housing finance options are attainable for everyone, it’s easy to be carried away by exuberance. No matter how irrational it might be. 

 

The financial press will cover these types of booms in breathless detail, adding to the perception that everybody’s doing it, and you’ll miss out if you don’t.

 

Similarly, during market volatility, watching your portfolio value decrease every time you look is painful. Many investors soothe the pain by selling out. It’s not a rational response, because it locks in the losses that would otherwise only be on paper. 

 

But at least when all the money is in cash, there are no fluctuations. Of course, leaving it too long exposes the capital to inflation, which eats away at spending power.

 

When other people are selling out, it seems like the smart thing to do to avoid being the last one left holding the bag. The stock market doesn’t work like that, but it’s persuasive messaging since the financial press will have been covering the bust in breathless detail.

 

Having someone who can talk you off the ledge and prevent you from doing long-term damage to your portfolio is priceless.

 

  • Work with your tax & estate planning needs

Once your finances start getting complex, so does your tax situation. Your accountant focuses on reducing this year’s taxes, but that may not be the right thing to do for the portfolio overall. You need someone who understands investments from a taxation point of view.

 

Similarly, as you increase wealth or develop a blended family, your estate planning needs increase too. In California, most people who have accumulated assets need a trust. 

 

If you have children from a previous marriage, you’ll need to protect their inheritance, no matter what happens with your current spouse. Most of these issues are too complicated for people to do it themselves, even though there are plenty of forms online of the unwary. 

 

While your advisor probably doesn’t do estate planning, they’re aware of the different kinds of asset ownership implications. They can often recommend an estate planning professional who will take care of you. 

 

No professional wants to recommend someone who isn’t competent, because it reflects poorly on them. A good advisor will only want to recommend the best estate planning attorney and tax professional too.

 

  • Understand your risk tolerance so you can sleep at night

What do the words “aggressive” and “conservative” mean? It depends on the person. For someone very comfortable with investment risk, “conservative” might mean having 20% of the portfolio in cash and bonds. Others with a lower risk tolerance would consider that aggressive.

 

A financial advisor will tailor the risk of your portfolio to the point where you can sleep at night. A portfolio invested entirely in small company assets and international stocks, particularly emerging markets, has demonstrated high performance. But very few investors can stomach the roller coaster ride it takes to get there. 

 

For investors who are very afraid of risk or not very knowledgeable about the market, the advisor may coax them into taking on a little more risk or else the portfolio won’t grow. 

 

Still, a good advisor wants you to be comfortable and able to sleep at night. They’ll try to find the sweet spot where you are relatively comfortable and yet earn some return on your money.

 

  • Objective advice

Have you ever noticed that when your friends come to you for help, you can easily see the problem? You have no problem explaining the consequences and pros and cons of their decision. Yet when it comes to your own life, you don’t even know where to start when a problem arises.

 

Your financial advisor has that objective viewpoint that you need. They see the market as a whole, not just the parts of it that concern you. They can widen out and look at the bigger picture, which is hard for individual investors to do when faced with a decision.

 

Need some objective advice or want a second opinion on your investment portfolio? Feel free to give us a call at 619.255.9554 or email us.

 

Why You Need to Hire the Best Financial Advisor Today

Why You Need to Hire the Best Financial Advisor Today

With the advent of online trading platforms and information available for free on the Internet, many investors have decided to take a do-it-yourself approach to manage their money. Managing your portfolio is perfectly fine, especially those who are just starting, have little money, or have less complicated financial situations.

 

However, once investors begin accumulating wealth and add to their financial complexities by purchasing homes or running their businesses, it’s often a good idea to hire an advisor. There are several reasons people in these situations benefit from hiring an advisor to help them with their investment needs.

You don’t know what you don’t know

 

The world of finance is complex and ever-changing. If you have a full-time job that does not involve investments, it’s unlikely that you have the time, much less the inclination, to keep up with the continual adjustments in the space.

You may have a solid grasp of the fundamentals of stocks, bonds, and mutual funds. But do you know what the rules are on employer-sponsored retirement plans and Roth/IRAs and when you qualify for each? Do you understand the difference between HSAs and FSAs, and how to use them as an investment vehicle? Are you clear on whether you should pay down your mortgage, increase your savings, or do something else with your raise?

A financial advisor is required to keep up with changes in the marketplace. They understand how things like the CARES and SECURE Acts might affect your finances. They also know what they don’t know when it comes to finance, and will pull in other experts when necessary.

 

Goals and guidance: the best financial advisors do more

 

  • Help you determine your goals

Most investors understand that they need to save for retirement, given the lack of pensions and the uncertainty around Social Security. But what other goals do you have when it comes to money? Many people have goals that will impact their finances, but they might not realize how short-term goals can have big impacts on their future retirement plans.

 

  • Provide a sounding board 

Just as business owners have an advisory board to help them get unstuck when facing issues and provide advice to help them grow, your advisor can provide commentary and guidance when it comes to your money.

 

There are many financial decisions for which there is no objectively correct answer. Whether to invest in a traditional IRA versus a Roth is one example. There are circumstances that better fit one than the other, but because they rely on assumptions about future taxes and earnings, there’s no right answer.

 

Similarly, people often need help thinking through the wisdom of buying into a retirement community or continuing care retirement community. Or even deciding whether to pay down the mortgage or invest some extra funds. Again, there are no objectively correct answers. Bouncing your questions off a third-party who’s knowledgeable about the issues can help you reach a satisfying decision for you and your family.

The best financial advisors provide a steady hand

 

Emotions often get caught up in finances. When tech stocks prices go through the roof or housing finance options are attainable for everyone, it’s easy to be carried away by exuberance. No matter how irrational it might be. 

 

The financial press will cover these types of booms in breathless detail, adding to the perception that everybody’s doing it, and you’ll miss out if you don’t.

 

Similarly, during market volatility, watching your portfolio value decrease every time you look is painful. Many investors soothe the pain by selling out. It’s not a rational response, because it locks in the losses that would otherwise only be on paper. 

 

But at least when all the money is in cash, there are no fluctuations. Of course, leaving it too long exposes the capital to inflation, which eats away at spending power.

 

When other people are selling out, it seems like the smart thing to do to avoid being the last one left holding the bag. The stock market doesn’t work like that, but it’s persuasive messaging since the financial press will have been covering the bust in breathless detail.

 

Having someone who can talk you off the ledge and prevent you from doing long-term damage to your portfolio is priceless.

 

The best financial team

Once your finances start getting complex, so does your tax situation. Your accountant focuses on reducing this year’s taxes, but that may not be the right thing to do for the portfolio overall. You need someone who understands investments from a taxation point of view.

 

Similarly, as you increase wealth or develop a blended family, your estate planning needs increase too. In California, most people who have accumulated assets need a trust. 

 

If you have children from a previous marriage, you’ll need to protect their inheritance, no matter what happens with your current spouse. Most of these issues are too complicated for people to do it themselves, even though there are plenty of forms online of the unwary. 

 

While your advisor probably doesn’t do estate planning, they’re aware of the different kinds of asset ownership implications. They can often recommend an estate planning professional who will take care of you. 

 

No professional wants to recommend someone who isn’t competent, because it reflects poorly on them. A good advisor will only want to recommend the best estate planning attorney and tax professional too.

Here at Platt Wealth Management we’re working remotely, and we’re happy to answer questions or schedule a virtual meeting. Feel free to call us at 619.255.9554 or email us.

Sleep well at night with the best financial advisor

  • Understand your risk tolerance

What do the words “aggressive” and “conservative” mean? It depends on the person. For someone very comfortable with investment risk, “conservative” might mean having 20% of the portfolio in cash and bonds. Others with a lower risk tolerance would consider that aggressive.

 

A financial advisor will tailor the risk of your portfolio to the point where you can sleep at night. A portfolio invested entirely in small company assets and international stocks, particularly emerging markets, has demonstrated high performance. But very few investors can stomach the roller coaster ride it takes to get there. 

 

For investors who are very afraid of risk or not very knowledgeable about the market, the advisor may coax them into taking on a little more risk or else the portfolio won’t grow. 

 

Still, a good advisor wants you to be comfortable and able to sleep at night. They’ll try to find the sweet spot where you are relatively comfortable and yet earn some return on your money.

 

  • Objective advice

Have you ever noticed that when your friends come to you for help, you can easily see the problem? You have no problem explaining the consequences and pros and cons of their decision. Yet when it comes to your own life, you don’t even know where to start when a problem arises.

 

Your financial advisor has that objective viewpoint that you need. They see the market as a whole, not just the parts of it that concern you. They can widen out and look at the bigger picture, which is hard for individual investors to do when faced with a decision.

Need some objective advice or want a second opinion on your investment portfolio? Feel free to give us a call at 619.255.9554 or email us.

Investing for the Sandwich Generation

Investing for the Sandwich Generation

Our tendency to live longer means that many families are in the unenviable position of supporting elderly parents while preparing for their retirement and trying to send their kids to good colleges. 

It’s impossible to get everything you want without an infinite supply of funds. But there are some reliable guiding principles. July is Sandwich Generation Month, a month dedicated to all the families struggling with this issue.

 

Put on your own oxygen mask first

 

We’ve talked about this principle before, particularly around the idea of self-care. It’s equally important when you’re trying to juggle your financial needs with those of others.

 

Why do the flight attendants tell you to put your oxygen mask on first? Is it because they think your selfish, or they want you to be selfish? Is it because they think you don’t care about the others around you? Do they believe, without even knowing you, that you feel you’re more important than everyone else?

 

It sounds ridiculous when put like that, right? You know why you need to put yours first: because you can’t help other people when you can’t breathe yourself.

 

Your financial needs are no different. If you don’t secure your financial future, how can you help others with theirs? If you drain your resources to help your parents, you cannot help your kids. If you assist your kids, you may put yourself in the position of needing their help in the long run.

 

Hopefully, by looking at the situation this way, you can see that it’s not selfish for you to want to prioritize your financial health before you try to support others with theirs. It’s common sense, not arrogance or unwillingness to help others.

 

Get help when you need it

There are a lot of services available for the elderly that your parents can use. You may need to research them. If you can’t spare the time to make all their meals or take them shopping, you’ll probably be able to find a program that will help them. 

 

And even if you do have the time, make sure that you get a break. Caregiving is a wonderful gift that you give to others, and it is also emotionally and mentally draining. All caregivers need to be able to take breaks to recharge

 

It’s not selfish to recharge your batteries. When you let them run down, you have nothing left to give to anyone. Keeping them charged is the best way for you to provide the care that you want your family to have. There are organizations specifically for caregivers that help with the mental and physical resources you need.

 

Years ago, a friend (at the time in her sixties) whose mother had early-onset Alzheimer’s disease was the primary caregiver. Her brother agreed to pay her for the service she provided. 

But because she took her mom to an adult daycare a few days a week, he wouldn’t pay for caregiver relief to come in so that she and her husband could go on vacation. This stress went on for years until her mother died of related complications. A few months later, she realized that she was displaying symptoms of the disease and that she had inherited it. 

 

Imagine spending all those years unable to take a break and enjoy time with your spouse or children due to your caregiving duties. Then you spend more years unable to take a break and enjoy that time because of a disease that prevents you from doing so. 

 

It would help if you took the vacation time that you get at work because rest and breaks are crucial to maintaining productivity, and even more importantly, joy in your life. Also, make sure that you get breaks and rest when you’re caring for a loved one. Renew your energy by spending time with your spouse and children too.

Loans for school, but no loans for retirement

On the other side of the sandwich, many parents feel the need to provide for their kids’ education in the same way that their parents did. Or because they recognize how important education is.

 

You and your kids are in very different phases of life. Your own earnings years are either drawing to a close or decreasing. While your kids either haven’t started yet or just entered the workforce. They have the time to pay off loans that you don’t. Most of the time, when you die, your loans and debts stay live.

 

Which means that you need to make sure you’re saving enough for retirement. You probably are already aware that Social Security is on somewhat shaky financial ground. However, it’s highly unlikely that people who have already paid into the system for decades won’t get anything. Currently, the program is fully solvent until 2035, but after that, it will be able to pay out only 75% of promised benefits.

 

We’ve been here before, most recently in the 1980s, when one solution was to push back the age at which people could take normal retirement, from age 65 to age 67. There are other ways to fix Social Security, including paying the tax on all wages, not just the first $138,000. On the other hand, it’s probably not a wise course to decide that you will depend utterly on Social Security for your retirement either.

 

Few workers have pensions anymore, so your retirement savings will be the bulk of what you live on in old age. If your balance is low, you have less time for the money to compound and you need to beef it up significantly. If you’re in the middle of your prime earning years (your 40s and 50s), you need to sock away as much as you can.

 

That may leave less for your kids’ college educations, but they can take out loans. They can also look into work-study programs. Many families save by enrolling their kids in community college for the first two years, before transferring to a 4-year university. There are a lot of options when you’re not focused on specific institutions or specific degrees. 

 

Be honest with your kids that they’ll need to contribute to their college fund. They might choose to supplement what you can give them with earnings from summer work, or save up birthday and holiday gifts. Get them involved in the future. Not only is it good for your wallet, but it’s better for them too.

 

If you want to discuss how to balance out your sandwich situation, please give us a call at 619.255.9554 or email us for an appointment.

Financial Decision-Making Under Uncertainty

Financial Decision-Making Under Uncertainty

As we discussed earlier (in the post about being productive while working from home), we’re all under a cloud of uncertainty. It’s not clear when people will start going back to work in the office. Or even if that will happen, since many employees likely will be working remotely for some of the time. Not knowing what will happen next makes financial decision making difficult. 

So, how you can optimize your decisions even when the circumstances are unclear? Fortunately, we can implement some reliable strategies that work under any uncertainty, whether it’s COVID-19 or anything else that life throws your way. You can adapt them to both business and personal decisions.

Take a deep breath to help ease anxiety and read on.

 

Recognize the uncertainty to avoid trigger decision-making

 

Sometimes people want to forge ahead with the decision making so they can take action. Humans tend to feel better when they’re doing something. Which is why so many end up selling their stocks when the market drops, because at least they’re doing something to relieve the anxiety of seeing their paper worth drop.

(Remember that your actual portfolio doesn’t drop in value unless you sell and take the loss.)

By acknowledging that you don’t (and can’t) have all the facts, you’re not resisting the logical part of you that knows this. If you don’t accept the situation, the side of your brain that understands you don’t have all the facts will be fighting every decision you make!

“My lesson… is to start every meeting at my trading boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.” – Nassim Taleb, author of Fooled by Randomness, Antifragile and The Black Swan

 

Examine all the options before financial decision-making

 

You may already have some thoughts about which way you want to decide. But make sure that you’ve explored every possibility, no matter how remote. Sometimes just taking a contrarian viewpoint helps you understand the possible negative consequences of your preferred course of action. And the positives of taking a different route, so that you arrive at a better-informed decision.

 

The best way to make sure you’re looking at all the alternatives is to involve other people. Have you ever seen contests with jars filled with some candy or other treats, and there’s a prize for guessing how many are in the jar? Any individual guess is highly unlikely to be right, but the average usually ends up extremely close to the actual number when they’re all combined. 

 

Use the wisdom of crowds. Invite others to hash out the options with you. If it’s a business decision, get your colleagues involved. If it’s personal, friends, and family. If it’s a financial decision, talk to your financial advisor. When possible, include people that you know have differing viewpoints so that you can understand why they have a particular perspective, which could change your view of the matter.

 

Spread out the risk

As you know from investing, the more risk, the more opportunity from return. If you can take more chances, you’ll increase the likelihood that you’re right. Give yourself a higher probability of one of your choices being the right one.

You can see this in the NFL. Research showed that over 14 years, the teams that ended up with two “lesser” draft picks performed better than those who had one high pick. They gave themselves more opportunities to do well with two players, rather than relying on just the one to carry them through.

Talk to your financial advisor about how your portfolio is designed for risk. Your advisor should be able to explain the financial decision-making behind your investment allocations and selected funds in your portfolio. 

Know you’ll be wrong and stay involved

 

 

We’re all human, which, by definition, means imperfection. Therefore, make your life less stressful from the get-go by understanding that you’re not going to be right all the time. It doesn’t happen. Sure, you can make better estimates and better guesses about the future as you go along.

Absent a crystal ball, you have no way of knowing whether you’re going to be right or not. If you expect that you’ll be wrong, it’s much easier to deal with when it happens.

When you play it safe because you’re afraid of being wrong, you miss out on opportunities. Make room for error in your process, even as you do your best to reduce systematic ones.

Venture capitalists know that three-fourths of the companies that they invest in will fail. So they often get involved with the management of the companies they buy. They help coach the founders and staff through the obstacles that arise. This involvement helps them mitigate the failure and learn what mistakes not to make in the future, even as they understand some of their portfolio won’t make it to the next round of funding.

 

 

Decide to learn for better financial decision-making

 

There are a couple of ways that you can use learning to make better decisions. 

One is to reflect on the decisions you’ve previously made. Include the ones that came out poorly, and the ones that came out well. 

Sometimes the result isn’t tied to the decision. You can make the right decision that doesn’t turn out well for various reasons, including luck. Or you make a decision that had a high probability of succeeding, but end up on the low end of the probability. Even good decisions aren’t guaranteed to come out well 100% of the time.

Review your decision-making process separate from the result. Did you make the best decision you could under the circumstances? If not, why not? What did you learn from the experience?

The second way to make better decisions is to run small tests or experiments before launching a full-scale version. 

For example, rather than ramping up your entire production line for an untested product, run some online experiments to determine if your customers would be interested in such a product. And, importantly: what they would be willing to pay for it. If they’re willing to pay, but the price point is too low to be profitable, you can scrap the idea. Or tweak it into something that people would buy that would still be profitable to you. With modern technology, it’s easy to do this kind of testing.

Or maybe you have a hobby that you’re considering monetizing. Instead of going full-bore on creating an entire line, make some prototypes and shop them around to make sure there’s interest in your items first.

Ideally, of course, you use both techniques. Tests and experiments begin to help you make a decision, and then reflection afterward to pick up on any lessons you need to learn for next time.

If you want to dive deeper into this topic, we highly recommend Annie Duke’s “Thinking in Bets.” This book allows you a peek into the thought process of one of the world’s most renowned poker players.

 

Would you like Platt WM to help you crowdsource a decision? We’re happy to help our clients think through their business and financial options. Give us a call at 619.255.9554 or email us.

 

10 Things Your Children Need to Know About Money

10 Things Your Children Need to Know About Money

Money is essential to living in the US, so everyone needs to know the basics about finance. Not many schools teach the subject. You might have to be the one to teach your children money fundamentals, no matter their age. If they’re old enough to earn an allowance, they’re old enough to learn how to deal with it.

We’ve arranged the concepts below from simple to more complicated. Kids today are often well-versed in TikTok and Snapchat but not money. As the parent, you’ll know where they are in terms of financial sophistication. How you talk to your kids can also differ depending on how old they are. The idea of a spending plan for a six-year-old shouldn’t be discussed at the same level as with your teenager.

Your children should have a good understanding of most of these before they get to college (with the possible exception of retirement savings). Don’t worry if you missed that deadline, because it’s never too late!

If you can, start early so your kids don’t get tempted by the credit offers that wash over college campuses. Or they don’t end up taking out $300,000 worth of loans to obtain a credential that would only generate around $40,000 per year in salary (true story).

 

Spend Less Than You Earn

 

Even young children can learn this at a very basic level. Suppose they’ve earned $5 in allowance money. Talk to them about setting some aside for later, maybe buying a gift for a sibling, and taking the rest to spend.

This can be scaled up as necessary for older children. They might want to spend money to hang out with their friends.

Plant the seed of spending less than you earn as early on as you possibly can, and water it regularly! Make sure the concept of saving is built in. Right away your kids understand that a portion of all earnings should be stashed away for later.

Wants vs. Needs

 

This is huge for helping children learn to live a financially comfortable life. Yes, your child needs a set of pencils for school. But they don’t need the super-expensive set.

Yes, they need clothes to wear. But they don’t need designer outfits.

Yes, your young child wants a lollipop, but they don’t need it.

Help them make a list of what they need and what they want. You might be surprised at what goes in each category! Talk to them in an age-appropriate manner about making sure that their needs are covered before they spend on their wants.

For example, you might expect your older children to purchase some school supplies or cover their own cellphone bill (or whatever), using their allowance or part-time job money. Be clear that they pay for these requirements first. Before they spend their money on other items like entertainment.

Money as a Tool Not an End Goal

You don’t want to raise a Scrooge McDuck who enjoys their money by diving into a pile of gold coins! Help them understand that the point of life is not to amass as much money as possible, but to lead a fulfilling life using money as a tool.

With younger children, keep it simple. Do they like it when other kids don’t let them use their toys, but keep the toys all to themselves? Those kids are greedy, and no one wants to play with them.

Children who see money as a tool and not an end in and of itself are less likely to be greedy and more likely to use it responsibly.

 

Are you on track for retirement?

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Charity

 

As a follow-up to avoiding greed, kids can be taught the value of helping others. Sometimes that’s a financial donation, but it often isn’t. A great lesson for this is to “adopt” a family at the holidays. Choose a family whose children are similar in age to your own, and have them help pick out the items needed.

In addition to money, children can learn to donate their time. Make it fun! If they love the water, join in on a beach cleanup during the summer. There are plenty of organizations out there so you’ll find one that works for your family.

Whether your family plans to donate money or time, talk to the kids about how they can determine if the charity is legitimate. How do you know that the money goes where you want it to go? When choosing the volunteer activity, they can also do (age-appropriate) due diligence.

 

Set Financial Goals

 

It’s highly likely that your kids, no matter what age, want something! They may not have the money for it. Teach them how to solve this puzzle.

For young children, pick a goal that won’t take too long for them to achieve. For older children, if it’s a more expensive item, you might contribute some amount and then have your child save up for the rest.

Sometimes, kids find through this type of exercise that the original goal isn’t quite worth saving all that money. That’s OK, and it’s a valuable lesson as well.

Debt and Compounding Interest

 

You might save this lesson for your older children. However, they definitely need to know it before they go off to college. They must understand that when they don’t pay off all the debt on a credit card, it grows higher than the amount they originally took out.

 

You can probably find illustrations of this online. Most credit card companies now show on the statement how long it takes to pay off a certain amount of debt when only the minimum payment is made.

Credit scores are also important for kids to understand. How too much debt makes it harder for them to buy cars and houses, and even rent apartments or get a job. Having a good credit score means using debt responsibly (e.g., paying off the credit card in full at the end of the month) and not having too much of it.

Debt vs. Credit Cards

Kids today aren’t necessarily familiar with checking accounts, so the difference between debit and credit may not be immediately obvious to them. Explain how the debit card draws from their account. And has no impact on their debt or credit score.

By contrast, paying on a credit card leaves the money in their account alone. But if they don’t pay the credit card off at the end of the month, they’ll owe more than the purchase price.

They also need to understand that this type of purchase could affect their credit score as well, if they’re not responsible about paying off the balance every month.

 

Taxes

Here’s another subject that’s probably better for older children. Not only income taxes on the money that they earn, but also sales tax on what they buy. They’ll need to learn that the price of the item on the rack isn’t what they’re going to pay at the cash register.

A big misconception kids (and adults!) have about income taxes is that the tax bracket rate applies to all their income. Introduce the concept of marginal taxes, where the bracket rate applies only to the amount above a certain floor according to the tax code. Let them know what income taxes are used for: roads, fire departments, public health, and the like.

If your child is earning money, whether it’s from YouTube videos or a part-time job, they should learn how to do their own taxes. My dad made me learn how to do mine back when there was no software. It’s a great life-skill for your kids to have, and they understand why the money they see in their account isn’t the $15/hour that was promised!

 

Emergency Fund

Before your child goes off to college, make sure they understand the importance of having savings they can draw on in case of emergency. One to two months worth of basic needs costs put aside is a great start.

 

Retirement Savings

One key concept to get across is the importance of saving for it ahead of time. Hopefully you already planted that seed with the idea of spending less than you earn, and the discussion of how compound interest works. This time, it’s working for them, not against them.

Another is why tax-deferred accounts are so attractive. Most kids should probably be opening Roth accounts if they’re eligible to make retirement contributions, but at this stage you probably don’t need to get into the nuts and bolts of traditional v. Roth.

They’ll need to learn about stocks and mutual funds. That a share of stock means they’re owning a share of the company they’re buying. Stocks are best for long-term investments, which is also important for them to know.

 

They’ll need to learn about stocks and mutual funds. That a share of stock means they’re owning a share of the company they’re buying. Stocks are best for long-term investments, which is also important for them to know.

Would you like to invite your adult children to your next planning session so they understand your plans and goals? Give us a call at 619.255.9554 or email us.

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

529 Savings Accounts and College: What You Need to Know

529 Savings Accounts and College: What You Need to Know

With National College Savings Day (which is 5/29, coincidence, we think not) right around the corner, we wanted to talk about one of the most popular education savings vehicles available to you: a 529 plan. 

A 529 plan has been used by parents and students alike to help save for the massive cost of education today. Depending on if a college is private, public, in-state, or out-of-state, students could pay upwards of $50,000 per year for an education! With that number in mind, finding another savings option may not sound like such a bad idea.

Let’s get down to it— what is a 529 plan and how does it work? How can you best use them in your financial plan? The answers may surprise you.

What exactly is a 529 plan?

A 529 plan is a tax-advantaged savings vehicle designed to help save for the cost of education. Though initially limited for a college education only, 529 plans have since expanded to include K-12 education through to graduate programs.

There are two types of 529 plans: education savings plans and prepaid tuition plans.

The most popular 529 plan is an education savings plan. An education savings plan allows you to contribute after-tax dollars into an investment account to save for the beneficiary’s future. The monetary gains grow tax-free and the distributions remain tax-free as long as they go toward qualified educational expenses such as tuition, fees, room and board, and books. 

These savings can also be used toward elementary and secondary schools. However, you may have to consider riskier investment opportunities if you wish to use the funds in that way. This is because you will have less time to save for elementary education versus college education.

While not the most popular, prepaid tuition plans can be an excellent option for some people. Prepaid tuition plans are only offered by certain states and can allow the account holder to pay for all or a portion of tuition and fees in advance in order to lock in a current rate. 

There are also more restrictions with prepaid tuition plans including:

  • A limited number of universities accept them.
  • Prepaid tuition plans cannot go towards room, board, and/or books.
  • These plans are not guaranteed by the federal government.
  • You cannot use these plans for elementary or secondary schools.

A major benefit of 529 plans is that anyone can open an account— no matter your income. While they are most commonly set up by parents or grandparents to help fund the education expenses of someone in their family, that is certainly not the only available route to take.

529 plans are executed on a state by state basis, so it is important to know the different rules for your specific area. This can be tricky for family members who live in a different state, but you are not limited to using a plan from your home state. For example, you can live in California and contribute to a 529 plan in Ohio.

Now that you know the basics of both education savings plans and prepaid tuition, it’s time to learn about the tax advantages that await you.

Tax advantages of 529 plans

In general, 529 plans were created to be tax-efficient. As long as the withdrawals are made for a qualifying educational expense (room, board, books, ect.), it will not be taxed. If you have to withdraw the money for any other reason, you will have to pay ordinary income tax and be subject to a 10% penalty. 

As we said above, even though each state operates its own 529 plan, you aren’t restricted to opening a 529 plan in your home state. However, by opening an account in a different state you may possibly forego some credits or deductions. For example, California’s plan Scholar Share doesn’t offer state exemptions or credits. 

There aren’t typically any annual contribution limits on 529 plans like there are with a 401(k) or IRA, but that goes on a state by state basis. However, there is usually a lifetime limit, which for California is $475,000. 

The bottom line is that the longer your money is invested, the more time you have for the funds to grow and the tax benefits to be greater.

How to best use a 529 plan

Of course, the primary purpose of a 529 plan is to save for future educational expenses. While this is the most effective way to use your money, it can be used in other ways.

The SECURE Act allows for $10,000 from 529 plans to be used to pay toward student loan repayment of the beneficiary and the beneficiary’s siblings. This is a lifetime limit with no tax consequences. 

There’s also a chance that your child may not attend school after you’ve invested in a 529 plan. In this case, you can transfer the plan to another beneficiary if you have multiple children, transfer the fund to another family member, or use the funds for your own education. 

This may not come as a surprise, but the earlier you get started with your savings, the better the outcome will be. We’ve said this in all areas of the financial process, but with the cost of education rising every year, it’s vital to put money away as early as possible.

Choose smart investing with Platt Wealth

Saving for education expenses can be one of the largest savings ventures a family can face. With the cost of education continuing to rise, the emphasis on saving, and saving early, can put you and your family in a good position to remain financially stable throughout the whole process. 

Every state has its own 529 plan and whether you choose an educational saving or prepaid tuition plan, it’s important to think about what is most important to you in a plan and how you can set your family up for a bright future. 

Our advisors at Platt Wealth Management are here to help you use your money in a way that not only enhances your life but the lives of others around you. Take control of your future education and give us a call at (619) 255-9554 or email us here for a review of your finances, on the house.

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