A much needed update for families

The Free Application for Federal Student Aid (FAFSA) Simplification Act of 2021 was passed by Congress for many reasons. For starters, the calculation was originally defined over four decades ago in 1972 and is in some need of updating. According to the National College Attainment Network (NCAN), only 61% of seniors applied for aid in 2017 and 54% in 2021.

Some consider COVID to be the main culprit for this sudden drop, but the complexity of the form is the other main issue. Currently, students are required to answer 100+ questions depending on their family's income level. As of now the new FAFSA form changes are set to be released in December 2023 and students and parents alike need to be aware of the specific aspects that will apply in the 2024-2025 academic year that may impact aid eligibility depending on their family situation.

What’s changing and why it matters

1. EFC (Expected Family Contribution) replaced with Student Aid Index (SAI)

Short answer: Fairer access to funds for lower-income households.

One of the more obvious changes was renaming the EFC to the SAI. The goal was to not only reduce the confusion around the actual costs of college and what families are responsible for paying but also ensure access to Federal Student Aid programs including Direct Student Loans, Parent PLUS Loans, Work-Study programs, and even Pell Grants for low-income households. This number can be negative with maximum Pell Grants awards giving a student up to -$1,500 in money back. Time will tell but the largest impact will fall on middle to upper income families who will no longer be able to divide the number of college students in the household that are currently in college. For example, a family that could pay $40k/year could split the aid evenly between the number of students in college at the time. They no longer have this luxury and will see a reduction in aid.

2. Custodial parent status changes

Short answer: For non-married couples, the parent who ultimately claims the child as their dependent on their tax return will submit the FAFSA.

Currently, the FAFSA only collects income and asset data from the parent a student lives with. In cases of divorced, separated, or non-married couples who reside together starting in 2024-2025 school year, the SAI calculation factors in the parent who provides the greatest financial support. In cases of divorce and separation starting in 2023 the SAI calculation will only require the parent who provides the majority of “support” to fill out the FAFSA. One household might pay the child support but the other pays for the mortgage, groceries, and sports clubs. The implications of this decision can be significant.

3. Formula changes

Short answer: Students can qualify for more awards.

As with the SAI calculation, the number of students a family has in school is no longer a factor for Pell Grant eligibility. By completing the FAFSA, you are considered for the maximum amount of Pell grants first (based on number of people in your household) and your AGI (Adjusted Gross Income) compared to the FPL (Federal Poverty Line). If not eligible, your maximum Pell Grant amount will be subtracted by the SAI. Finally, you will still be considered for a minimum Pell Grant if no award is given. These other factors in the formula for aid are listed in no order but should be noted for your situation.

The student income protection allowance threshold was raised from $6,800 to $9,400.

• Businesses and farms that employ 100 or more employees will be considered an asset going forward

• Capital Gains from the sale of investments will be considered income on the FAFSA

• Child support received is now reported with assets NOT income

4. Student income from outside sources

Short answer: A student’s financial aid won’t be penalized for withdrawing 529 funds early.

Currently students must report gifts or distributions from a 529 owned by a non-parent (e.g. grandparents or other family members) or non-custodial parent if the student's parents are divorced. Due to the FAFSA’s prior income year rules, a student who needed access to those funds before Jan. 1 of their sophomore year of college would be penalized in the formula for the withdrawal. Now they are completely removed from the aid formula calculation.

5. New student allowances for the cost of attendance

Short answer: FAFSA will cover more day to day student expenses.

Although these are smaller changes, college students alike must not overlook these valuable new allowances that the FAFSA will allow students to claim for ancillary items. Not only is there a small allowance for personal expenses if a student works part-time but a personal computer purchase with no enrollment status requirement. You can even have an allowance for transportation between home, work, and school. More details can be found here.

Proactive financial aid resources to guide your family

For a current or future college student, utilize the free Student Aid Estimator.

If these changes make need-based options harder to attain, look for colleges that offer merit scholarships. This does not mean forgoing the FAFSA completely but intentionally seeking out Merit scholarships at specific institutions. This process, known as Early Action, is detailed in this article with a list of colleges that offer Merit Aid. We recommend starting this process early as many colleges recruit students as early as late spring of your child's junior year!

Finally, contact financial aid offices to see if they will be awarding institutional dollars based on the current formula not connected to the EFC/SAI numbers.

We can help with education planning

The FAFSA is changing for better or for worse and will affect how parents and students think about college for years to come. If it would be helpful to consult a team of credentialed advisors with expertise in college planning, schedule a call here.

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If you are a recent grad, you have likely fantasized about making career moves, moving to a new city, or maybe even getting your own pots and pans. Instead, you might be moving in with your parents. According to Forbes, 50% of Millennials and Gen Z plan to move back in with their parents after graduating college. Whatever steered you to decide to move back in with your parents, hopefully this post gives you some confidence about your decision.

Some of you may choose to live at home, but many of you have no other option. Do you find yourself hesitating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact saving money on rent can have on your future?

This is an excellent opportunity to start saving like a millionaire.

For illustrative purposes, let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for various reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

LET THE SAVINGS BEGIN

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent, wifi, utilities, and parking.

WHERE SHOULD SHE PUT THIS EXTRA CASH?

Sophia is comforted by these additional savings in her bank account today. She remembers her economics teacher explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sophia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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Starting From Square One (Or $20 in my bank account)

Picture this: You’ve just graduated college and received your first '“big-kid” job. You have about $20 in your name. Although it is a new concept, with a new job comes new responsibility, and you decide you should probably be more mindful about your spending (and saving) habits. But how do you start?

I had the unique privilege of beginning my career at Human Investing shortly after I graduated. As you can imagine, working at a financial advisory firm meant that before I started contributing to the company’s 401(k) plan, I was given a beginner’s course in investing.

AN ENDLESS MAZE OF DECISIONS

Like many people who join corporate America, I opted into its retirement plan because it was a free benefit I received. I knew saving for retirement was important, and the investment options available to me would benefit my long-term financial plan.

When I received my first paycheck, I learned the importance of contributing to my 401(k), but in a way that was compatible with my cash flow.

A common rule of thumb is to contribute 10-15% of your gross salary to your retirement account if you can (this includes the employer contribution/match). After learning this, I was eager to invest 15% into my 401(k). However, I did not consider other key factors that made up a healthy and holistic financial plan, like funding an emergency savings account or considering other short-term goals (ex: continuing education or buying a home). Although I was so eager to contribute as much as I could to my retirement plan, I ended up contributing much less than expected after assessing my current financial situation.

Unpacking where to start

I share this story because, like most people new to the financial scene, I wanted to manage my money well, and I figured investing all of my excess income would equate to successful money management. What I didn’t do was take a step back and assess my entire financial landscape. Thankfully, Human Investing was there to provide some guidance. That’s why we made this visual. We call it “The Pyramid to Financial Wellness.” Use the visual as a map; start at the foundation and then work your way up. Before continuing, please know that we all have unique financial situations, and not every block may apply to your situation.

LEVEL 1: Build a Foundation

Build a Budget to understand your monthly cash flow: If you’re looking to invest dollars from your paycheck, you need to know how much bandwidth you have at the end of each month. If you don’t currently have any excess dollars, try to get creative. Look at your current spending habits and see if you need to minimize spending in a certain area. Don’t be afraid to rely on savings apps for help. We generally recommend Mint or Digit.

Pay off High-Interest Debt: Focus on higher interest, non-deductible loans first, such as credit card loans. Consider refinancing your loans or reconsolidating your debt to make payments more manageable.

Contribute to your Company-Sponsored Retirement Account: If applicable, contribute enough to receive the employer match. For example, if your employer matches up to 6% of your contribution, try to meet the 6% savings rate.

Build an emergency fund: If something unpredictable happens, make sure you’re prepared. Click here to learn how to build an emergency savings fund.

Level 2: Plant Long-term Seeds

Open a Retirement Account for future savings: Based on your age and tax bracket, start contributing to either an IRA or a Roth IRA. Click here to see if a Roth IRA account is the right account for you.

Continue paying down student loans: If student loan payments are on your horizon, don’t delay! Try to pay off what you can now. Consider refinancing your loans in order to make regular payments more manageable.

Save for a Home: If this is a goal of yours, start saving. Depending on your timeline, try to save in either a High Yield Savings Account (Short-term goal) or a Roth IRA (Longer-term goal).

Level 3: Hone your Monthly Budget

Open up a 529 account for a child or grandchild: If you are hoping or planning to fund your child’s college education, utilizing a 529 account can protect your purchasing power. The same rules that apply when flying apply here too. Put your mask on before taking care of others.

Pay down your mortgage: Target additional mortgage payments if you are able. Consider refinancing your mortgage to possibly find greater savings with lower interest rates.

Save for Short-term and Mid-term goals: Short-term goals include immediate expenses, paying down debt, having an emergency savings fund, etc. Mid-term goals are big purchases that you plan to make before you retire. This includes saving for a house or a car. Avoid borrowing and start planning to save. If you’ve exhausted other savings vehicles (like your 401K and Roth IRA), consider opening a brokerage account.

If you have any questions about how investing can fit into your financial plan, contact us! We are here for you and are excited to cheer you on as you learn to manage your money well.

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Summertime in full swing often means summer jobs for many young people, especially high school and college-age students. Earned income can provide a terrific opportunity for young people to save, think about their future, and begin practicing financial independence.

High school and college students motivated to save and invest can utilize Roth IRA accounts to get the most out of their dollars. Compound interest in action is a pretty magical thing to behold, and the earlier you can earn compound interest working for you, the better! Compound interest, tax benefits, and learning lifelong financial lessons can make for an incredible summer job experience.

Here is why opening a Roth IRA account is an excellent option for those spending their summer working as a high school or college student. 

Tax-Free Benefits

We are big fans of Roth IRAs here at Human Investing. Because the money used to contribute is after-tax dollars, it grows tax free and is not taxed down the road when you take it out…..We love this!

The younger your child starts a Roth IRA account, the more time their tax-free dollar amount in the account has to grow.

Compound Interest Growth

Youth isn’t wasted on the young. In Beth Kobliner’s book Make Your Kid a Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23, she uses the following example:  

“Let's say [your teen] puts $1,000 of his summer earnings into a Roth IRA for each of the four years from age 15 to age 18. If he stops and never puts in another penny, but lets the money grow, by age 65 he'll have about $107,000, if the money earns 7% a year. 

But if your kid waits until age 25 and then puts away $1,000 for each of the four years until age 28 and stops, that account will only be worth a little over $50,000 by age 65.”

By taking advantage of a Roth IRA early on (in this example, ages 15-18), you can double your money compared to starting in your twenties. 

Roth IRA Specifics

In 2022, the maximum annual Roth IRA contribution is $6,000 a person for those under 50 years old who are single and making under $129,000 a year.

For those under 18 years old:

For children under the age of 18, they would need to open a Minor or Custodial Roth IRA account. 

Money put in this account must be earned, not gifted (this includes birthday and graduation gifts), and the adult who opens this account for the minor controls the assets until the minor reaches the age of majority (which is 18). 

Adults can also contribute. If your teen earns $3,000 at their summer job, you could either contribute the full amount they earned and let them spend their money, or you could contribute a percentage of your teen’s earnings (like 50%). 

It’s important to note that parents can contribute the money to a teen’s Roth IRA if their teen earned at least that amount. For example, if your teen made $2000, the most that could be contributed to the Roth IRA is $2000 total.

More info here: https://www.schwab.com/ira/custodial-ira 

For those over 18 years old:

For children 18 years or older, their Roth IRA account is now no different than the Roth IRA their parents might have. This account has the same requirements and restrictions as any other non-minor Roth IRA.

Building habits for the long-term

Here are a few ideas from parents on our team about approaching this opportunity with your child who has a summer job. 

As tempting as it is to spend those paychecks on something more tangible (a car, clothes, trips with friends), our children will need to understand the importance of financial independence, hard work, and investing for the future. Old habits die hard, so the earlier they learn these lessons, the better off they will be in the long run! 

You can incentivize your child’s savings by matching their Roth IRA contribution (up to their contribution limit). You can also lead by example. Share with your child why you save and what your financial “why” is. Share your hopes and dreams for their financial future and how their Roth IRA can be a means to this end. 

If you want to read more about Roth IRAs, check out our other blog post by fellow HI team member Nicole: Is a Roth IRA the Right Account for you?

Feel free to reach out to our Human Investing team if you would like more information about Roth IRA accounts. 

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Cash has its place in any financial plan. However, holding too much cash or cash-like investments like a CD or a Money Market account can be one of the most overlooked risks when it comes to long-term planning. 

Inflation Creates Permanent Loss  

Traditional wisdom says if you want to preserve your dollars, keep them as cash. Yes, this level of caution can help reduce short-term volatility or loss of capital. Unfortunately, unbeknownst to many investors, cash is not as risk-free as it seems. Holding too much cash long-term can come at a high price. 

 Inflation is defined by the Federal Reserve as "the increase in the prices of goods and services over time.”[1] For investors, inflation is a silent killer that, if unchecked, can permanently deteriorate their purchasing power. To stress this, see how quickly your money can be cut in half based on different inflation rates.   

View fullsize

Table 1

Source: Ycharts

Build a Diversified Plan  

Inflation requires investors to think long-term. Balancing temporary risks with combating inflation is an essential element of building a successful financial plan. 

Long-term investors who want to combat rising costs due to inflation should look to build a diversified investment strategy with an appropriate amount of stocks. While the stock market entails short-term volatility, it has never experienced a total and permanent loss. In fact, stocks have done just the opposite.  

Table 2

This graph is for illustrative purposes only. Past performance is no guarantee of future results. Data sources: Health care costs, CMS.gov; Portfolio returns, CFA Institute (SBBI®)

When Should I Hold Cash?

This is not to say someone ought to avoid holding cash altogether. Strategic cash cushions do have a significant place in a financial plan when considering both short-term and long-term financial decisions (see the barbell approach). There is no one size fits all plan. The amount someone should keep on hand should correspond with their living expenses, instability of income, stage of life, risk tolerance, etc. This amount is typically 3 to 12 months of living expenses. However, the permanent risk associated with holding too much should be evaluated, and if possible, mitigated. This starts with a deliberate and personalized plan concerning how much to hold and where to keep it. 

Decisions around cash are just as psychological as they are financial. For this reason, it can be helpful to enlist the help of a trusted partner like Human Investing who has your best interest in mind.   

Sources

[1] Federal Reserve (2016). What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?

[2] Inflation Data source from 1/1/1926-12/31/2021: Ycharts.

[3] U.S. Centers for Medicare & Medicaid Services. “Projected | CMS.”

[4] CFA Institute (2021). Stocks, Bonds, Bills, and Inflation (SSBI®) Data.

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On September 1st, my beautiful wife and I welcomed our new son into the world. His arrival has brought our family much joy during this season. Like all newborns, he has also brought sleepless nights, an abundance of comfort food, and disruption to our schedules and disciplines. As a result, I am here to tell you from personal experience the “dad bod” is real (find out if you have a dad bod here).

As I begin the journey to get back in shape, exercise and clean eating seem more difficult than ever before. Had I maintained my regimented sleep, diet, and exercise schedule throughout the entire pregnancy, returning to my baseline wouldn’t be as challenging. In physics, we call this inertia. In finance, we call this the compounding effect.  

Like most things in life, there is a compounding effect on our actions. 

• Consistency in showing up to work → proficiency at your job. 

• Consistency in showing up in the lives of loved ones → richer relationships. 

• Consistency with a sustainable diet and exercise plan → greater physical health. 

• Consistency in following a prudent investment strategy → increased net worth. 

Consistency is integral to the compounding effect

The inverse is also true. Disruption is a detriment to the compounding effect, a truth for our fitness as well as our investment accounts. To quote Charlie Munger, Warren Buffet's partner at Berkshire Hathaway —“The first rule of compounding is to never interrupt it unnecessarily”.

I would argue that someone’s consistency often has a greater impact than their effort and resources. Take the following example of two investors: 

• Investor A - saves $2K/year from age 26-65.  

• Investor B - saves $2K/year from age 19-26 and stops there.  

• Both achieve a 10% annual return.*  

At age 65, who ends up with more money?  

• Investor A: $883,185  

• Investor B: $941,054 

By saving and investing $2,000 at the beginning of each year from age 26 to 65 (39 total years), Investor A can expect to have a final balance of $883,185. Investor B only saves for 8 years but starts to save earlier in life than Investor A. Investor B benefits by taking advantage of 46 years of compounding growth, finishing with a balance of $941,054.

What Investor B lacks in consistency of contributions, they make up for in consistency of not interrupting the compounding effect on their investment account. I know you are probably curious, what would happen if Investor B did not stop contributing at age 26? Investor B’s account balance would be $1,902,309. Once again consistency wins out.

Start now and stick with it

• There are no shortcuts to saving for retirement and fighting the "dad bod". Starting can be difficult and sometimes painfully slow, however, the long-term results can be powerful. 

• The easiest advice to give is “never get off track.” However, like your sleep schedule with a newborn, there are some things you cannot control. It is important to know how to reassess and get back to work.  

• Building anything valuable and defensible takes time, effort, and energy. Build a plan today.  

If you want to compare notes on raising a newborn, see baby photos, or discuss the impact of consistency when building a prudent financial plan, please reach out. We are here for you.

*This is for illustrative and discussion purposes only. Investment results will vary.

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A credit score can be a helpful tool for your overall financial wellness. Unfortunately, rules and regulations surrounding credit scores can be complex and unclear. Read on to learn the importance of a good credit score, its components, and how to use a credit score to impact your financial health.

WHAT IS THE PURPOSE OF A CREDIT SCORE?

Put simply, a credit score is your financial report card. It allows lenders to assess your trustworthiness as a borrower. A good credit score not only grants you easier access to lower interest rates on loans, but it can also help you rent an apartment, finance a car, or pay down a mortgage. In short, your credit score helps you navigate the lending side of the financial world, and even gain greater financial success.

WHAT ARE THE COMPONENTS THAT MAKE UP A CREDIT SCORE?

Your payment history: Do you have a record of paying your bills, in full and on time? Doing so will boost your credit score. Paying bills on an inconsistent basis (or ignoring them completely) will lower your score. FYI, paying the minimum monthly payment is not paying your bills in full. Paying only the monthly minimum will negatively impact your credit score. Don’t be tricked by that sneaky number. Live within your means and pay your bills on time. Pro tip: Utilize due dates in your calendar, or use the reminders app on your phone, to remind you to pay your bills.

The amount you owe: Do you approach or reach your credit limit each month? The ratio of the amount you spend and the limit on your credit card is called credit utilization. It is best to keep this ratio high (i.e. 1:10 not 1:1). Leaving room between the amount you spend in any given month and the limit on your credit card will boost your credit score, while closely approaching your credit limit each month (or reaching it) will lower your credit score.

The length of your credit history: How long have you had a credit score? The longer the better! If you do not currently have a credit card, make sure you are responsible enough to own one before rushing to get one. Remember, it is better to be a responsible borrower for a shorter period of time than an irresponsible borrower for a longer period of time.

Your credit mix and new accounts: How many accounts do you have? Utilizing a variety of different borrowing options (i.e. a combination of a mortgage, an auto loan, and student loans) isn’t bad if necessary. In fact, it can actually be helpful! Try to keep open accounts to a minimum, even if you only use some accounts sparingly. Opening multiple accounts can cause lenders to be more suspicious, which in turn can lower your score. So, yes, you heard me. You might need to cancel that Hawaiian Airlines card, even if you save $150 every 2 years for your biannual Hawaii trip.

Aside from these factors, lenders may also look at your salary, occupation and job title, and employment history. These additional factors will not actually change your credit score, but they can be used in addition to your credit score to assess your trustworthiness.

WHAT IS A GOOD CREDIT SCORE?

By assessing each of these components, a three digit credit score is generated, ranging from 300-850. Any score over 700 is considered a good score.

SO, WHAT DOES IT LOOK LIKE TO BE A RESPONSIBLE CREDIT CARD HOLDER?

Sure, this information can be helpful, but how can it be applied to everyday life? Let’s look at an example.

Sophia is a recent college graduate.

She just received her first full-time job and is looking to build her credit score. She applies for a credit card that has a low credit limit and only uses it for her regular monthly payments: gas, Netflix, and her gym membership. She lives within her means, knowing she has other payments to consider, such as her student loans and auto loan.

Sophia gets used to living off of a budget.

Every month, Sophia remembers to pay her credit card bill, and pay it in full. As a young lender, it is important for her to stay on top of her monthly payments.

As Sophia ages, she solidifies her good spending habits.

She opens another credit card account that has a larger spending limit, and uses it conveniently for groceries, bills, and other expenses—still living within her means and paying her bills on time.

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All her daily money habits pay off.

Her credit score has deemed her a trust-worthy lender, and she is able to lock-in favorable rates for the mortgage of her first home!

“You need to make more money…”

My budget coach and I sat there silent in the face of what seemed like an impossible reality.

For me, and perhaps for some of you, the option to make more money was laughable.  At that life stage, I was in the midst of a financial tornado: our nation’s economy was hung-over from the market crash of 2008, my employer at the time lost a grant that substantially reduced my paycheck, and an unexpected illness and injury lead to weighty bills and rendered additional work next to impossible.

Each month I felt like I was scraping up pennies just to make ends meet – Maybe some of you feel the same today.

Unavoidable realities like a job loss, illness, injury, and accidents are financial burdens that most of us will face at some point in our life.  The support of a funded emergency savings account is a solid way to ease some of the financial blows that come our way.

I am happy to report that, though it took some time and sacrifice, I was able to meet my “impossible” goal to have a funded emergency-savings account, and I would like to share with you some of the helpful tips I learned along the way.

organize where your dollars are going

There is a link between paying attention and success, so consider paying close attention to where your dollars are going.  List all purchases, spending, and expenses for the month and ask: What, When, How Much and Why are dollars leaving my account?  What are the “surprise” expenses?  Take a moment to consider needs vs. wants.

Next, (you may have guessed it—and even groaned) consider making a budget. If you hate dealing with money or do not even know where to start, there is HOPE!  There are many creative ways to budget that do not take a lot of time or effort but help you to pay attention and stay on track.

• If you don’t have a budget consider: YNAB; Mint; Cash Envelope System (or digital); The  50/30/20 method, value-based budget, or unconventional alternatives such as a visa cash card loaded weekly/monthly with your budgeted amount.  I found success with the 50/30/20 method combined with the envelope system.

• If you do have a budget, look closely at the How Much and Why.  Consider setting a goal to check on your spending and expenses once a week and ask:  How am I doing?  What can I change to improve?

Open a Savings Account and Set Goals

This is not just wishful thinking – it is preparing to succeed.  Many financial institutions will allow you to open a savings account simply and easily online.

Here are a few recommended examples for high yield online savings:

• Capital One

• Ally Bank

For most households, an appropriate emergency-savings buffer is three-months of your living expenses.  Write it down.  Take a moment to imagine that amount and how you will feel when you meet your goal.

Set a goal: Ask your employer about directing a portion of your paycheck directly to your savings account.  An alternative is to set monthly, automatic transfers from your checking to your savings account.  It is generally best to have this occur the day after payday to give your funds a day to settle.

Setup auto-deposits: This also may help with large, annual bills.  Take your annual bill and divide it by twelve – this is how much you need to save every month to pay for this bill outright – Plus, you may actually save money when you pay in full!

Boost your savings when that “Free Money” comes your way

You just got your tax return.  You just got a stimulus check.  Your grandma just sent you a birthday card.  Your company gave you an unexpected bonus.

Your heart, your peers, and your social network cheer:  Treat yourself!

It is easy to think of unexpected cash as “free money.” Yet if your goal is to build up an emergency savings fund, “free money” is a great way to get a big boost.  To satisfy that itch to have a treat, consider making a deal with yourself:  I will set aside 20% (or $20, or whatever you feel you can stick to) into my savings account, and the rest I can use for a treat.

If you plan for your treats and stick to your plan, you gain a double reward.

hustle and Ask for deals

While it may not be a benefit to bundle in services you will not use, it is a wise idea to call your service providers to ask about unadvertised promotions.  Our household was able to keep our high-speed internet bill at $30/mo for nearly 5 years by calling once a year to ask about current promotions, specials, and loyalty rewards.  This annual phone call saved a total of $240 per year.

Tighten Your budget’s Belt

Unsubscribe: Do you know how much you really spend on your subscriptions? Look at your credit or debit card statements for a few months and see what you find.  Often, we sign up for a free month trial and forget to cancel, we don’t notice the $50 because it’s billed annually, or we don’t actually use what the subscription offers.  

Take what is free: Did you know that most libraries have free audio, video, and eBook apps?  Did you know that Harvard offers a whole range of classes for free?!  As you make good choices about reducing your subscriptions, consider taking advantage of the huge range of free courses, events, activities, and entertainment.

Dine-in: Eating out is to your budget what driving a semi-truck is to fuel efficiency: a drain.  Your budget will stretch further on fewer dollars when you eat at home.  Consider leveraging the percent principle noted above – Make a goal for eating at home so that eating out becomes a treat. Don’t know how to cook?  Learning can be easy! Or fancy!  Hate cooking and think you don’t have time?  Cooking can be simple!

Every little bit counts: One of the key-ways dollars sneak away from our wallet is thinking, “It’s only $10 a month” or “Three-dollars won’t go very far” – Perhaps it’s just the cost of your morning coffee. If the only thing you do is make your coffee at home, you stand to save approximately $800 a year or more.  And look closely:  that’s only one cup of coffee a day!

Make it fun: There are dozens of ways to save money and even have fun while you’re at it! Here are a few to get started:  Staycation!  Be a Winner! Grocery Wins!  Become a Hunter! Up-Cycle!  “Use it up, wear it out, make it do or do without…” – Calvin Coolidge

CELEBRATE THE LITTLE VICTORIES

I hope this has given you some practical steps and encouragement to begin an emergency savings account for when life, inevitably, happens.  In closing, I want to offer the most powerful tool you have: Hope.

“Success is failure turned inside out—the silver tint of the clouds of doubt.” - John Greenleaf Whittier

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The financial world can be a confusing place filled with jargon, technicalities, and little to no guarantees. Research suggests that those who are financially literate tend to have better financial outcomes. Financially literacy is typically measured by asking some core financial concept questions. Let’s walk through some financial literacy questions from the National Financial Capability Study, and explain the why behind the answer. Feel free to guess and score yourself at the end:

Question 1 - interest:

Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

A. Less than $102
B. Exactly $102
C. More than $102

Answer: C, more than $102.

Explanation: The key part here is “After 5 years”. We are told the interest rate is 2% per year. That means every year, 2% gets added to our principal balance. To break it down year by year:

The interest earned increases each year. This is due to compound interest: the original principal ($100) grows, and the interest you earned previously (in year 2, $2) both earn interest. At the end of 5 years, we have $110.41 which is C More than $102.

Why this matters: Interest affects you when you save money to grow it, or borrow money to pay it back later. Knowing how interest can work for or against you is critical for financial success.

Question 2 - inflation:

Imagine the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A. Less than today
B. Exactly the same
C. More than today

Answer: A, Less Than today.

Explanation: They key here is the inflation rate is higher than the savings rate. Inflation is growing at 2%, meaning the price of goods (rent, utilities, food, cars, etc.) is going up by 2% each year. The cost of $100 of goods today will be $102 in 1 year. Your interest on savings is growing at 1% a year. That means in 1 year you will have $101 to spend on goods. In 1 year, you will have $101 to buy $102 worth of goods. Your ability to buy is A less than today.

Why this matters: Even if you keep your money “safe” in the bank or under the mattress, inflation is going to make that money less and less valuable. Thus why investing is so important. Investing can be scary due to downturns in the market, but ultimately the odds are in your favor to grow your money over time. Unless you can save significant portions of your income, growing your savings faster than inflation is critical for being able to retire.

Question 3 - Risk Diversification:

Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A. True
B. False

Answer: B, False.

Explanation: To answer this question correctly, it is important to understand both risk and that a mutual fund owns a variety of companies. They keyword here is safer. Financial markets have two types of risk: market risk and company-specific risk (aka systematic risk and nonsystematic risk respectively).

Market risk refers to risk all companies face. Examples of market risk include a change to the US tax code, a global pandemic, or shifts in consumer tastes like a shift from fast food to organic freshly prepared food. You will always face market risk because every company is exposed to these risks. Company-specific risk refers to risks unique to one company. Examples of company-specific risk include sudden changes in management, a press release about product defects, mass recalls, or a superior/cheaper product released by a rival company. Because you own a variety of companies in a stock mutual fund, you diversify away (i.e. reduce your risk) if any single, specific company has a terrible event.

Why this matters: Don’t invest all your money in one company. Especially if you work for that company, and your compensation is based on the company doing well. By spreading out your investments, you reduce your risk of catastrophic returns, and smooth out the ride so you can sleep at night.

Question 4 - interest of the life of a loan:

A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the interest paid over the life of the loan will be less

A. True
B. False

Answer: A, True.

Explanation: Because of the shorter life of the mortgage loan, you pay less interest. Remember in question 1, interest compounds every year. When you borrow money, that compounding works against you. Therefore, the faster you are paying off debt, the less time for interest to compound and grow the total amount you have to payoff. The monthly payments are typically larger, but the overall interest paid is less.

To illustrate with numbers, let’s look at the difference between a 15 year & 30 year mortgage, assuming a 5% interest rate for both:

Why this matters: You can see from the example how much money is saved by opting for a 15 year mortgage. Can you afford that extra monthly payment? That’s worth investigating, but you’ll never explore your choices if you don’t know what they are. You can also usually get a lower interest rate for shorter term debts, which saves you even more money. Anytime you borrow any amount of money, the faster you can pay it off, the less you will pay total. Even if you don’t get a lower rate on the debt, if you pay off the principal sooner, that means there’s less interest compounding against you. When looking to borrow money, evaluate what term (length of time) works best for you and your budget. You want to minimize your cost of borrowing, but you also want to give yourself enough flexibility that you’re confident you will make all those payments on time, regardless of what life brings.

Question 5 - Bond prices and interest:

If interest rates rise, what will typically happen to bond prices?

A. They will fall
B. They will stay the same
C. They will rise

Answer: A, they will fall.

Explanation: This is the question most people get wrong. A bond is government or corporate debt. The government or company pays you coupons (interest payments) based on the issued interest rate. At the end of the bond’s life, it matures, and you get the principal back.

Imagine Disney issues bonds paying 5% interest, the current market rate. You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures. If interest rates rise next year (say to 8%), and Disney issues new bonds, they will issue them at the new interest rate. Your neighbor Laura decides to buy $1,000, and she gets an $80 coupon from Mickey Mouse every year. Because interest rates rose, the value of your bond paying $50/month goes down in value, less than $1,000, because the $1,000 could buy Laura’s bond paying $80/month. The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000.

Why this matters: Interest rates change over time. This causes bond prices to change. Bonds will still be less volatile than equities, but they do also fluctuate in value. Don’t panic when you see interest rates rise, and your bond prices going down in value. This is both normal and expected. Rising interest rates are also usually a healthy sign for the economy, and so your equities will generally be rising in value to help offset the loss in value of your bonds. The reverse is also true here. Falling interest rates tend to indicate a less healthy economy (think about when rates have dropped significantly & quickly; the 07-08 financial crisis and COVID-19) which means falling stock prices. Because they don’t tend to move together (uncorrelated), bonds and stocks are an excellent pair for smoothing out your investment returns.

How did you do?

If you got some questions wrong, I hope you understand the why behind the answers and how to utilize this knowledge to better your financial life. If you have questions about financial vocabulary or systems you’d like me to blog about, please email me at andrewg@humaninvesting.com. If want to talk to an advisor, please email us at hi@humaninvesting.com.

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This will probably take place in Animal Crossing this year

This goes out to all those who hold part of the $1.6 trillion in student loan debt in the United States. This debt has the power to ignite in us fear, uncertainty, anxiety, and hopelessness. If you’re like me, at any given moment you are subconsciously trying to scheme out some way to make it better – whether it be refinancing, making extra payments when possible, seeing if you’re eligible for forgiveness, or just praying for a miracle. Given the increased levels of anxiety world-wide during this pandemic, I’m hoping that this information will provide a little bit of relief to your worries, even for a short window of time, as it has done for me.

If you’re eligible for relief, consider waiting to refinance

If you have been thinking about taking advantage of the low interest rates and refinancing or consolidating your student loans, you may want to hold off according to Justin Kribs, MS, CFP; Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc.

Last month, the US Department of Education announced student loan relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Refinancing your federal loans now with a private loan lender will waive all the new benefits from this relief, including the temporary 0% interest rate on federally held loans and suspension of payments. These federal benefits are most likely something you don’t want to miss out on.

Here’s the student loan relief per the CARES Act

Loans Eligible for Relief Benefits

• Perkins Loans, Federal Family Education Loans, and Parent Plus Loans

Loans NOT Eligible for Relief Benefits

• Private loans (e.g. bank & credit union loans)

• Any loan not owned by the U.S. Department of Education

CARES Act - Benefits Offered to Borrowers
(In Effect 3/13/20 through 9/30/20)

1. Forebearance/suspension of payments
   Loan payments are suspended for federal loans and no interest will accrue during the six-month suspension
   Note: According to the CARES Act, the six-month window of suspended payments begins automatically, but it is recommended to confirm with your loan servicer to ensure they are suspending payments.

2. Interest rate elimination
   Interest rates are reduced to 0% on all FD and FFELP loans
   Note: It is important to note that FFELP loans that are owned by a bank, credit union or other lender are not eligible for the 0% interest rate.

3. Public service loan forgiveness
   Suspended payment months continue count towards the loan forgiveness programs. As long as you are working, you do not need to make payments to continue to qualify.

Next steps

1. Defer student loan payments
   If you’re eligible: Contact your lender and request or confirm a suspension of payments (this may have started automatically).

   If you’re non-eligible: Call your private lender ASAP to see what options they offer to suspend, reduce, or pause payments and/or waive late fees – These will not be offered if you do not reach out.  Keep in mind that each institution has its own guidelines for payments and late fees. Look here for a list of banks providing information and resources on Coronavirus relief

2. Make extra payments if you can
   If you have extra cashflow, now is a really good time to take advantage of the 6-month, 0% interest benefit period. During this 6-month period, all your payments will pay down principal (and any interest that accrued prior to March 13th), putting you further ahead in the long run. You can make extra payments on your lender’s site at any time.  
   Note: Be sure to select “Do Not Advance the Due Date,” otherwise your lender will apply your payment to future payments rather than counting them as additional payments. There is usually an option to make this selection on the “pay now” page.

What if I want to refinance after the relief ENDS?

Since the CARES Act 0% interest is a short-term benefit, you may still want to consider re-financing to leverage a lower, long-term rate.

Are you a good candidate to refinance?
A person with stable income and a higher income to debt ratio may be a good candidate for refinancing.  “A person with unpredictable income should probably steer away from refinancing,” says Justin Kribs, since private loans do not generally offer the same loan payment flexibility that is offered with federal loans.

What are your goals?
Shorter Loan-Term Length: For someone with excess cashflow to increase monthly payments and who is looking to pay off their loans as soon as possible, refinancing may offer a shorter term-length for your loan.

Lower Payments: For someone looking to free up some current cashflow by paying less on their loans each month, the reduced interest rate of a refinanced loan may offer a lower monthly payment.

This student loan calculator is a great resource to understand the impact of a refinance on your loan amortization (showing the payments split between principal & interest during your entire loan term length) and help determine if a lower interest rate will help you accomplish your goals.

How will you choose a private loan lender?
Client Experience: How are you being treated on the other end of the phone? Or on the other end of that email? Justin Kribs argues that this is one of the first things to look for when comparing lending companies.

Flexibility is Key: What types of assistance do they offer in times of hardship? Keep in mind that Private Loan Lenders do not offer the same assistance as Federal Loan Servicers (e.g. Income Based Plans, Forbearance, etc.). If this sort of flexibility is important to you, make sure to be clear when asking what benefits they will offer you.

Questions to ask: 

• How many different repayment options do they give you?

• Who does the servicing of the loan?

• What is the Co-signer release agreement?

Recommended Lenders who come with positive client reviews:

• First Republic Bank

• So-Fi

• Laurel Road

Sources

Justin Kribs, MS, CFP®, Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc. https://insmedloanservices.com/

 https://www.forbes.com/sites/advisor/2020/03/26/student-loan-forbearance-in-the-coronavirus-covid-19-stimulus-what-you-need-to-know/#3e9e92cc2039

https://studentaid.gov/announcements-events/coronavirus

https://www.forbes.com/sites/advisor/2020/03/12/list-of-banks-offering-relief-to-customers-affected-by-coronavirus/#7411c1d73ee3

https://www.marketwatch.com/story/2-trillion-coronavirus-stimulus-bill-gives-student-loan-borrowers-six-months-of-relief-2020-03-26

https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

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@blankerwahnsinn

Your team at Human Investing is here to serve you. Though our physical workplace has changed for the short-term, our company’s missions remain as strong as ever: to faithfully serve the financial pursuit of all people.  

We are entering a financially burdensome time. Many individuals and businesses are projected to suffer financially. The impact will look different for everyone.  

If you are seeking ways to change your spending habits, something you will certainly need is time.  Said differently, cash outflow is unlikely to change unless we take the time to research, contemplate, and change current routines. 

Here is a list of ten ways you can help cushion financial burdens that have either occurred already or are expected in the future:  

1. Check your credit card points.  

   When is the last time you used credit card points? If you are in a financial crunch, now might be a wise time to cash out your credit card points. Not all credit cards include cashback rewards, but examples of companies that offer cash back cards include Chase, CapitalOne, and Discover.  

   Regardless of the cashback options available to you now, take the time to review whether you utilize the benefits of your existing credit cards. While you are reviewing your credit cards, this site is a helpful tool to figure out which credit card fits best with your lifestyle and spending habits: Nerdwallet - Credit Card Comparison  

2. Eat the food you buy for quarantine.  

   This sounds obvious. But for some households, this will be challenging since we have purchased an allotment of random items. Was the store sold out of spaghetti?  Did you instinctively grab the only noodles left? If so, make it a fun activity for your family to express some creativity or try new recipes in the kitchen.  

3. Consider refinancing your mortgage.  

   Do you have a mortgage? Rates have come down considerably this year and refinancing your mortgage is worth a looking into. Refinancing your mortgage can lower your monthly mortgage payments, offering both short-term and long-term savings. If you are interested in learning more about refinancing your home, see our recent post by Will Kellar: “How to refinance your home.”

4. Save the money you would be spending.  

   We all have had to cancel upcoming plans. In many cases, that means extra savings. Put aside those dollars and use the money as needed. 

5. Create or monitor your emergency fund.

   We realize many people do not have an emergency reserve. Traditionally a family should have three-to-six months of expenses saved in an emergency fund (three months for dual-income families and six months for single-income families). We encourage individuals to create an emergency reserve regardless of the economic forecast, but it becomes especially important during turbulence.  If you do have an emergency fund and are experiencing financial hardship, now is an appropriate time to use it. 

6. Shop and spend mindfully.  

   Personally, I love the 24-hour rule. It’s a practice of self-restraint. If you feel the urge to purchase something (new shoes, a different laundry basket, extra-spicy BBQ sauce), wait 24 hours before you make the purchase. The time-lapse often mitigates a compulsive purchase.  

   Due to the economic uncertainty of tomorrow, we must be willing to make drastic changes to our spending habits. We are all compromising our normal routine in some way, shape, or form. With that said, it’s important to be cognizant of how these changes are impacting our cash outflows.

7. Consider selling unnecessary household items.  

   I predict that people will spend more time selling their unused or unwanted household items. Take some time to go through your storage or extra items. Craigslist, Facebook Market, Poshmark, and Nextdoor are all great resources for buying and selling things second-hand. One man’s trash is another one’s treasure. 

8. Create a budget.  

   A budget can provide financial awareness and reassurance. Now is a great time to revisit your budget or create one if you have yet to do that. Here is a budget template to get you started - Budget Template There are also online budgeting tools available such as mint.com, YNAB.com, or everydollar.com.

9. Unsubscribe.  

   Out of sight, out of mind. Take this time to unsubscribe to unnecessary social media accounts that tempt you to splurge or spend extra money. To minimize your current expenses, it may also be worthwhile to unsubscribe from unused memberships like online streaming services or gyms.

10. Create ‘no-spend days’.  

    Since many Americans are working from home, ‘no-spend days’ are a good family challenge. It’s important to vocalize the game to your family so everyone can participate and be mindful of not spending money.  

Please feel free to share with others and let our team know if you have other examples of financially savvy savings that we can add to this list. We are open to new ideas and challenges!   

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2020 has put a wrench in most plans. As a recent graduate, you were likely excited to make career moves, grow your friend circle, move somewhere new, and maybe even get your own pots, pans, and plants. Instead, you are living at home with your parents.

According to 2015 data from the Census Bureau, some 82 percent of American adults think that moving out of their parents’ house is a “somewhat,” “quite,” or “extremely” important component to enter adulthood. For those of you currently living at home with your parents, hopefully this post resonates with you.

Some of you may be choosing to live at home, but many of you have no other option. Do you find yourself vacillating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact that saving money on rent can have on your future? Maybe this is a great opportunity for you to start saving money like a millionaire.

For illustrative purposes let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for a variety of reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

Let the savings begin

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent/wifi/utilities/parking.

Please note: It’s understandable if you’re not able to save $13,200 while living at home. Whether living at home allows you to save $13,200 or $3,000, the benefit is huge for your future financial wellbeing.

Sophia is comforted by these additional savings in her bank account today. She remembers someone (like Uncle Mike or her economics teacher Ms. Anderson) explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Because Sophia is living with her parents, she saved $13,200 of extra cash that she can invest in the stock market.

here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sofia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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