Paying for College Part 1

Make one of the most important steps in life a little easier on yourself

Saving for college. Those three words inspire fear in the hearts of parents across the nation. Endless debt. Birds flying the nest. Kids living on their own for the first time since….well, ever!

Choosing the Right College

Saving for college doesn’t have to be a nightmare. There are options for families who want to put money away specifically for their child’s education so they don’t have to graduate facing mountains of student loans. No matter your financial situation, hopeful families must calculate how much money they will need when their child reaches college age. Families will have to consider how many kids they want to send to college, what type of profession the student wants to pursue, and what type of colleges meet those needs.

Your cost of college depends on the type of college you choose. Here are a couple quick tips on choosing the right college:

1. Discuss what type of study your child wants to pursue. Ensure that the schools your apply to provide those types of programs, and are strong in those programs.
2. You can save a lot of money by going to a community college or public two-year college, then transition to a four year college or university. Classes are a bit easier, and most transfer most if not all of their credits to four-year universities. 
3. If your child is showing desire to pursue a profession that requires graduate school, make sure you factor in those costs and requirements into your preparation.  

Paying for College

Some families may choose to pay for their child’s entire college education, while some students take on the entire amount of the loan. More commonly, a combination of parental payment, student payment, student loans, as well as scholarship all contribute to making college happen for Americans across the country.   

In this article, I will talk about saving investment instruments, as well as factors to consider in your college planning and loan repayment. 

Saving Instruments 

529 Savings Plan

(According to SavingforCollege.com)


A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.

Which states offer 529 plans?

Nearly every state now has at least one 529 plan available. It's up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest, research state 529 plans and even compare between plans.

Tax Benefits

As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. See the top 7 benefits of 529 plans.

Some states (but not all) offer tax incentives to investors as well. Research your state's tax treatment.

NOTE:

Hawaii does not allow you to take a state tax deduction on your contributions to the plan. 

Types of 529 plans

529 plans are usually categorized as either prepaid or savings plans.

Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select. You can see how each 529 plan's investment options are performing by reviewing our quarterly 529 plan performance rankings. [updated date 05/2015]

Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges.

Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the Private College 529 Plan is the only institution-sponsored 529 plan thus far).

Enrolling in a 529 plan

There are two ways to invest in a 529 plan.

1. Directly with the 529 Plan manager. See a list of 529 plans.
2. Through a financial advisor. Find an advisor in our Pro Directory.

NEXT TIME......

Pay Down Your Student Debt!

Back to Basics : Why Do I Need Life Insurance Pt. 1

Have you ever heard your parents talk about life insurance before? Have you ever wondered what life insurance is, or why you need it?

Before I started college, I had no real idea what insurance was. I knew that people in retail stores tried to sell you warranties to protect your high priced items from being damaged. But life insurance is very different and unique in its own way.

In this first post, I am going to speak on the following:

• What is insurance
• Why do we need Insurance

Next Time I Will Cover:

• Term Life Insurance

Life Insurance is very important for those with dependents with bills to pay

What is Life Insurance?

 According to Fidelity, a life insurance policy is a contract with an insurance company. In exchange for premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insurer's death.

There are many types of life insurance, but the first two I want to cover are the most common; Term Life Insurance and Whole Life Insurance.

 Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free

Comparing Types of Life Insurance

	Term Life Insurance	Universal Life Insurance	Whole Life Insurance
Needs it helps meet	Income replacement in a lump sum	Wealth transfer, income protection and some designs focus on tax-deferred wealth accumulation	Wealth transfer preservation and tax-deferred wealth accumulation
Protection period	Designed for a specific period (usually a number of years)	Flexible; generally, for a lifetime	For a lifetime
Cost differences	Typically less expensive than permanent	Generally more expensive than term	Generally more expensive than term
Premiums	Typically fixed	Flexible	Typically fixed
Proceeds paid to beneficiaries	Yes, generally income tax-free	Yes, generally income tax-free	Yes, generally income tax-free
Investment options	No	No2	No
May help build equity	No	Yes	Yes
Available through Fidelity	Yes, Fidelity Term Life Insurance3	Yes, Universal Life Insurance, primarily focused on death benefit protection	Not currently offered

Why Do We Need Life Insurance?

 Imagine a world where you have a spouse, two kids, with a house and car to pay for. One second you're living life, next second BAM. Your spouse passes away from a car accident. Now what?

Not only are you emotionally distressed, but now your family now has half as much money to pay for the same mortgage, car, and living expenses. Not to mention the funeral expenses and other personal liabilities that the deceased person might have had. Without sufficient savings, your family may be forced to sell their car, or move out of their home. Their entire lifestyle could change.

Now lets go back to the same situation, but lets pretend that this family was protected under a life insurance plan. By working with an agent, the family calculated how much money they would need to pay for the necessary expenses in the case of a death of a breadwinner. The insurance company was able to get the family the funds they needed within a week after the death. While the death benefit couldn’t pay for all of their expenses, the family was able to pay off their house and funeral expenses. The spouse was able to keep the house, and the family was able to keep the rest of its life intact.

Whole Life Insurance serves a six key purposes, according to Forbes and Northwestern Mutual

Here is the link if you want to check out their site

Protect you and your family from the worst so you can live your best

1.       Access to Cash (Whole Life Only)

Whole Life policies accumulated cash over time. The cash value is accessible through policy loans or withdrawals for business opportunities, education funding, retirement income, emergencies, or to pay policy premiums.  

Translation: Whole Life policies build money at a guaranteed rate set by the insurance company. This money builds over time, at a very, very slow rate. You are not going to be impressed by the returns, but the key here is that it is guaranteed by the insurance company.

2.       Asset Protection (Term and Whole Life)

Life insurance can offer a financial fall-back when needed and offset the impact of estate taxes upon your death. The death benefit also can provide surviving family members with funds they need to live comfortably and help achieve their goals.

Translation: When you die, your family is left to pay the bills. Funerals cost anywhere from $3,000 - $20,000. Transfer of assets (think cash) often takes time to process. If your family is unprepared, your savings can be wiped out from an unexpected passing. Or you might not have any money to pay for the costs. Life insurance makes sure your family remains financially stable during a time where they are emotionally unstable, and unable to make good decisions.

3.       Consistent Safe Accumulation (Whole Life Only)

Permanent life insurance cash values are guaranteed, meaning you will always have access to the assets you accumulate.

Translation: Whole Life Insurance is a low risk product for people who want safe, guaranteed money. If you have a low risk tolerance, whole life may be an option for you to accumulated assets. Again, the growth is very slow.

4.       Flexibility with Less Restriction (Whole Life Only)

You can access your accumulated cash value without restrictions that exist on other assets. For example, there are no penalties or required minimum distributions, unlike other tax-favored investments such as IRAs and 401(k) plans.

Translation: Whole Life Insurance has more flexibility that other retirement accounts. There are few other retirement accounts that offer the same tax advantages at the level of flexibility.

5.       Long Term Financial Security for You and Yours Family (Whole Life Only)

Once you have built cash value over decades, you have multiple options for accessing those funds. You can cash in the policy, convert it to an annuity for guaranteed lifetime income, keep a portion of the death benefit and access some of the cash value, or continue the policy to protect your family and leave a legacy.

Translation: Whole Life is just like wine; It gets better with age. The rate of return on the cash value portion increases each year. If you want to transfer wealth with a tax advantage and leave something for your family, you might want to consider Whole Life.

6.       Protected Insurability (Whole Life Only)

As long as premiums are paid, permanent life insurance provides coverage throughout your life, even if health or personal situations change. And buying a policy at a young age locks in insurability.

Translation: Whole life lives up to its name. It is truly meant to be a permanent insurance policy with its protection and cash Value.

This list in in no way complete, but simply the benefits that I would like to point out.

What is Term Life Insurance?

                Term life insurance of the most affordable coverage. We will talk more about Term Insurance next time…..

Just In Case of Emergency

Problem: How much should I save in case of an emergency?

                Emergencies, just like life, are unpredictable.  When someone loses a job, has an accident, or comes across a surprise car repair, their cash flow can be devastated; if you are not prepared.

I hope you have a wad of $100’s saved somewhere!

We can never fully avoid emergency situations, but we can protect ourselves from them to a certain extend by saving in an emergency fund. Don’t know what an emergency fund is? Read on, brave reader. Already know what an emergency fund is? Read on anyway, because you can never be too careful.

What is an emergency fund?

An emergency fund is a separate savings or checking account used to offset the cost of an unforeseen situation. The main distinction between an emergency fund and a normal savings account is that you do not count the emergency fund to your nest egg or long term savings. Why? The only time you will tap into your emergency account is in a time of financial crisis. You will not tap into it unless you absolutely need to, otherwise it just sits there and acts as a shield.

Emergency funds are essential for on the job injuries

How Much Should I Save?

In the Financial Planning world, the rule of thumb is the have 3-6 months of expenses saved up as an emergency fund. While this will vary based upon your type of lifestyle and job stability. This may seem like a lot of money to save up and not touch, and it is. But that is what it takes to protect you and your family. Missing a couple months of rent could have you living on the street if you do not have the savings to cover the cost of living after you get injured or leave your job. Here at the steps I would take:

1.       Figure out how much you spend per month

2.       Project it out to 3-6 months.

3.       Save 5% of your bi-weekly pay and put it away

Where Should I Save It?

Emergency savings should be placed in a stable account where you can access the money quickly and easily in times of crisis. I would recommend an interest earning bank account, either a money market or interest bearing savings account that can be accessed without penalties

You should NOT save your emergency fund in a stock or investment portfolio. These types of instruments might actually put you at greater risk because they might lose value when you need the funds the most. These assets are not as liquid compared to a savings account, which could delay you getting the funds you need.  

When do I Spend the $$?

                The purpose of an emergency fund is to pay for expenses related to an unexpected hardship. Once you realize how many dollars you need saved up to cover 3-6 months’ worth of expense, you will know how much you have to maintain in order to continue to protect yourself. If an emergency does come up and you end up tapping into your fund, great! Just make sure you immediately begin to restore your funds as soon as possible.