June, 2020 | Live a Life By Design

The Millennial Perspective: The Cost of Learning

Posted on June 26, 2020May 13, 2021 by Ashley Stieb

I’m sure we have all heard of student loans the mountains of debt that come with them. Every generation has or has had student loan debt. Millennials, surprisingly, don’t have the highest average amount of student loan debt though. However, I think that we may have the hardest time balancing the debt with other aspects of being an adult. When people in Gen X, the generation with the highest average amount of student loan debt, were accumulating that debt, many Millennials were still learning to read and the cost of goods across the nation were a lot cheaper than they are now. Housing was cheaper making it easier for the generation before us to invest in a home following graduation. Food and gas were a lot cheaper too. Tuition, on the other hand, was starting to rise.¹

According to Business Insider, the cost of tuition has increased 260% between 1980 and 2014. In dollars, this equates to $9,438 for four years including room and board to $23,872. Along side this, inflation has seen an increase of around 120%. Now let’s look at the cost of minimum wage. In 1980 minimum wage was $3.10 and increased every couple of years until it stopped increasing in 2009 when it reached $7.25. While this is a significant increase in terms of percentage, it has not kept up with the cost of consumer goods and it certainly hasn’t kept up with the cost of tuition. This has caused the Millennial generation to fall behind on getting a real start on life.

Like any type of loan, student loans come with an interest rate and different types of loans have different types of rates. Federal student loans issued by the Department of Education range from 3% to 6% interest while private student loans issued through banks, such as Discover or Wells Fargo, start at 8% and go up from there. The process of getting federal student loans can be difficult for some and this struggle can be caused by a number of things. For some, their parents or guardians may make too much money to allow them to qualify for any financial aid until they are 24 years old, married, or have a child. Others may have done poorly in their courses causing them to lose their eligibility. In these cases, the options to pay for school are left up to scholarships, cash, private loans. The repayment options for these different types of loans differ greatly as well. With federal loans, you can often be placed on an income-based repayment system allowing for your monthly payments of the total sum of your loans to match your income. On the other hand, private student loans do not have this option unless they are consolidated. A new private loan is issued per semester and typically has a $50 monthly payment that starts after graduation, meaning that you could be looking at a $400 a month payment after graduation. Regardless of the type of loan or the amount of the monthly payment, it can be difficult to get these loans paid off in a reasonable time frame and get a start on building a life because of the lack of increase in income for new graduates.

¹ Business Insider: How College Tuition has Skyrocketed Since 1980

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Financial Literacy: The Key to Successful Kids

Posted on June 22, 2020June 22, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

One of the wisest statements made about planning for the future can be found in an ancient Chinese proverb: “The best time to plant a tree is 20 years ago. The second-best time is now.” This is a philosophy that is applicable to your finances.

Our schools are bombarded with challenges in teaching students the important lessons to equip them for life – algebra, science, English, literature, etc. I firmly believe this list of important lesson should include financial literacy. Starting to understand and apply financial concepts at an early age will empower the children to initiate better habits that will ultimately give our communities and country a better financial future.

Financial literacy is a term we use for the subject of financial planning concepts and the act of securing one’s future in a comfortable and confident manner. By initiating such subjects as savings, investing, budgeting, taxes, credit, and other vital areas of life at ages as early as 10, you are setting your child up for success in their future. Too often children are in college or after before they realize what they don’t know. This is on us! As parents, not only should we be responsible for the physical, cognitive and emotional well being of our children but we should include their financial understanding as well.

An area to start a child’s understanding of financial matters is teaching them the value of planning for tomorrow. If a child desires a certain toy or game, ask them how they would pay for the game. Does your child have responsibilities around the house that teaches them that all family members must share in the household duties? If so, perhaps you could negotiate an allowance or “hourly rate” for completing their chores. However, to continue the lesson of financial responsibility, you will save one-half or more of their earnings each week in a savings account. I have often learned with my own children that items purchased with their earnings are cared for much better than those items given them.

Teaching children about the use of banks and proper credit are good starting positions for them understanding these institutions. When I was a very young boy, my parents took me to meet their banker. I was in awe at the marble floors, high ceilings and when he showed me the vault – WOW! I knew at that moment that I wanted to be involved in the finance in some form. But the words of John Gillson, my parent’s banker, still ring clearly in my mind to this day – “Take care of your credit and it will take care of you.” What Mr. Gillson actually meant was that one should only use credit when absolutely necessary and, in the manner, needed to bridge the short-term cash flow needs of the person.

It is critical that our children understand the importance of finance in their lives. The best future you could help them achieve begins with a basic understanding of the impact finance has on their lives and how to appropriately utilize financial concepts to help them live life to its fullest. For additional resources about teaching children about financial concepts, view our Compass Capital Management Videos. Until next time, I’ll see you on the golf course!

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How Long to Keep Tax Records?

Posted on June 12, 2020June 11, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

If you are like most individuals, you have a drawer in your home or a box in the garage that contains all of your tax returns and supporting information from 1987. It is the sacred box of “all things to defend myself from the IRS”. Today, I am providing you some guidance that will help you clean out that drawer or box as well as relieve your mind from future inquires of taxing agencies.

There is no other word that strikes fear in the hearts of citizens worse than “Internal Revenue Service”. You go to mailbox and open it with a smile hoping that Ed McMahon has sent you the winning ticket to a sweepstakes only to find an ominous envelope from the IRS. Before opening the envelope, your mind races through a myriad of circumstances and outcomes. Survival instincts fire in your brain that you should seek a lawyer or CPA, transfer assets to other relatives or some other ridiculous plan to counter the attack by this federal agency.

Would you believe that most correspondence from the IRS is clerical in nature? The complicated system of revenue collection in the United States does not process without mistakes. A few years ago, one of our new clients came to the office, looking white as a sheet, and holding a rather large, white envelope. Her introduction omitted pleasantries and she immediately initiated her case of fearing the IRS and now “I will lose my house!” After speaking with her for a few minutes, providing a nice cold drink of water, and opening the envelope to read its contents, we disclosed some good news to her. She didn’t owe the government any money, she was actually receiving a refund. She looked at me with her eyes as big as silver dollars and exclaimed, “What?” Her previous tax returns, prepared by someone else, had omitted one of her estimated tax payments and she was receiving a refund of almost $21,000.

The moral of this story is that many citizens do not understand the role, authority and power of the IRS. This agency is one of the most powerful of our government. However, in my 33-year career of interacting with the IRS, I have experienced very few instances where I was treated unfairly or unprofessionally.

Maintaining proper and complete records of your financial transactions reported on your tax returns is critical to good outcomes. The statute of limitations for most individual income tax returns is three years from the date you filed your return or two years from the date you paid the tax owed. This means that any of your individual income tax return forms can be destroyed or scanned to electronic storage. You should keep all records to document income, expenses, gains and losses from the three years’ of returns so that you may properly defend your tax returns should you be selected for audit. Wow! That sounds like a sinister word – audit.

Certain documents should be retained indefinitely such as property deeds, birth certificates, gift tax transactions, stock certificates, bonds, and marriage licenses. Most of these documents can be reclaimed but the process is rather time consuming.

The key to a pleasant and happy life is to understand the role government plays in our lives. Too often myths and speculation rule our minds when the actual facts are much less menacing. If you receive a notice from any taxing agency, contact your CPA or tax preparer to determine the appropriate response. As citizens, you have appeals rights, amendment capabilities and other actions you can take to mitigate or eliminate your tax matter.

If you have a question about filing your individual income tax returns, click this link for information that may be helpful. Until next week, stay safe and well.

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Why Saving For The Future Matters?

Posted on June 5, 2020June 4, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Forty-one percent of Americans believe they would be able to cover a $1,000 emergency with savings, according to a survey conducted by BankRate in January, 2020. The chickens certainly came home to roost with the COVID-19 pandemic! The more disturbing findings of the survey were that 37% of the respondents would use their credit card to resolve the emergency. The lack of savings in the United States has reached critical stages for most families. To prepare your family for inevitable times of critical cash flow emergencies, I am providing you a proven strategy that will provide you with the confidence to weather emergencies in the future.

Some of the most common “emergencies” to strike families are automobile mechanical damages, large appliance failures, emergency medical care and loss of employment. Just one of these instances could spell disaster for your family without adequate savings to mitigate the disruption. During the pandemic, too many people have felt the anxious feeling of unemployment and wondering how their family will survive. Luckily, for many, the state and federal unemployment programs have been far richer in benefits than otherwise could have been. With the temporary additional federal unemployment benefit of $600, some individuals have “earned” more cash flow while being unemployed than experienced from their actual job.

First, review your expenditures currently experienced by your family and choose one item of lesser importance to you from the list. This is the item that will no longer be purchased and the funds previously spent for this item will be automatically drafted each month from your checking account to your savings account. What this process does is take away the resistance of human nature to change by asking your financial institution to do the hard work for you. How this is accomplished is by visiting (or calling) your bank and asking them to perform an ACH (automated clearing house) transaction for you in a specific amount on the same date each month. Once you have adjusted your mindset to the alleviation of this item, choose the next least desired item on your list and continue this process until your family’s budget reflects only those expenditures that truly provide your family enjoyment. The ultimate goal of the process of saving for your future is to maintain 90 to 120 days of living expenses in a liquid account in case (and they always do) an emergency strikes your family.

Second, if you are capable, consider seeking a part-time job or side gig. During the summer months you may have an opportunity to work in the evenings or weekends performing odd jobs or lawn work to increase your cash savings. This seasonal employment activity is an excellent method of increasing your cash reserves but may also tempt you to increase your lifestyle. This is where discipline must be exerted. Let’s say you earned an additional $200 in a week on your evening job. If you deposit these funds in your bank account, ask your bank to transfer them to your savings account instead of leaving them in your checking account. By performing this transfer your account will appear as though you have the same amount as always but your savings account will be increasing for your family’s safety. Any incremental increase in income, such as a bonus from your employer, should be treated in a similar manner.

Lastly, you may have accumulated assets which you no longer use such as additional lawn equipment, stored furniture, etc. Why not sell these items and place the proceeds in your family’s emergency fund? You may be surprised what someone will pay for a used piece of equipment!

The key to providing confidence and security for your family is the consistent monitoring of expenditures coupled with a mindset toward saving. Your bank most likely has an app for your phone that you can access with a couple of clicks. The challenge is to forgo looking at the increasing savings account everyday thinking it is available to you for a family vacation or new TV. No, this money is for the next emergency to strike your family. You will be glad you were disciplined and can face the next catastrophe with greater security.