Financial Tips For New Parents - #4 Start a College Fund

As a financial planner, I’ve done a lot of research on 529 plans before our son was born. A month after his birth, I set up a 529 plan for him and started making automatic monthly contributions into the account. I knew that the earlier I get into the habit of saving for college, the faster it will grow, and I don’t even miss it because it’s been a part of our budget for so long. Over the years, I’ve also come across several common misconceptions about 529 plans that make families hesitate on starting a college savings fund. Below is a summary of why I think the benefits of a 529 plan outweigh the potential benefits of alternative college savings vehicles.

Tax Advantages – Investments in a 529 plan grow tax deferred and potentially tax free if the funds are used for qualified higher education expenses. For example, let’s say you contribute $1,000 each year into the 529 plan over 18 years ($18,000 total invested), and when your child goes to college you have $30,000 in the account. The $12,000 of growth in the account is not taxable if you use the funds towards higher education. The earlier you start contributions, the more tax-free growth potential.

An alternative to 529 plans with similar tax advantages is the Roth IRA. Money invested in a Roth IRA grows tax free if withdrawn after 59 ½. So this strategy only works if you started having children in your 40s. If you have your first child at age 35, by the time they go to college you are only 53 and can’t take advantage of the tax benefit your Roth IRA. Furthermore, each person can contribute a maximum of $5,500 a year before age 50 ($6,500 after age 50) into a Roth IRA, and if your income is above a certain limit per IRS guidelines, you cannot contribute to a Roth IRA at all. For these reasons, I like the 529 plan better as a college savings vehicle. It separates the college savings fund from your retirement fund and makes it easier to plan for the future.

Flexibility – Each state offers 529 plans but most will allow non-residents to open an account as well. For example, you don’t have to live in Utah to open a Utah 529 plan. By having this flexibility, you can shop around and compare the various plans that are available to determine which one fits your needs. Furthermore, once you decide on the 529 plan, you can decide how to invest the money by choosing from the plan’s investment options (similar to a 401k plan).

One of the most common reasons I hear from parents for not setting up a 529 plan is the possibility that their child will not attend college. While that may be a real possibility for some families (for example, the child has special needs), it’s highly unlikely in most of my clients’ cases. Most people think they can only use 529 plans toward 4-year college educations, but in reality it’s much more accessible! There are over 6,000 eligible schools, including trade schools, community colleges, and even international and online schools. Here is a link to get the full list of schools available:

Control of Assets – The owner of the 529 plan is the adult, and the child is the beneficiary. As the owner, you can change the beneficiary to another family member if the child no longer needs money for higher education. In addition, the beneficiaries have no control over the assets so they can’t use the funds as they wish once they become adults. This is also why 529 plan assets are considered assets of the parent rather than the child for financial aid purposes (which is much more beneficial for the family). For these reasons, I highly favor 529 plans over UTMAs (custodial accounts), which are considered assets of the child for financial aid. Furthermore, they gain complete control over the account once they become 18 or 21 depending on the state, and may choose to not use the funds for higher education as you had intended.

Simplicity – Finally, I like 529 plans because they are simple to understand. Each account is for a specific child’s higher education, so it’s easy to see how much you’ve saved for this purpose. By using vehicles other than 529 plans, such as Roth IRAs or whole life insurance (which is so complicated that it deserves its own blog post), there may be other factors that you need to take into account in order to use the funds properly without triggering any unfavorable consequences.

Financial Tips for New Parents - #3 Review Medical Insurance Coverage

With so much going on in the months leading up to the arrival of your baby, the last thing on your mind is probably health insurance. However, this is actually a very important financial decision that should be considered even prior to the pregnancy.

If you have specific doctors that you'd prefer to see during your pregnancy, or a birth plan that you'd like to follow (for example, home birth vs. birthing center vs. hospital), you may want to review the insurance plans available through your or your spouse's employers to make sure that the plan you choose will cover the medical decisions that you make. Generally, you can only change your insurance coverage once a year, so take the time to do your homework. If your employer offers multiple plans, see if they have an online comparison tool that shows you how much your out of pocket costs will be in various scenarios. Make sure you understand the costs you're responsible for, such as premiums, deductibles, co-insurance and co-pays. If both spouses work, does it make sense for you to be covered separately or together under one plan? When the baby arrives, which plan should he or she be added as a dependent under? Read a summary description of what services the plans cover. Look up the doctors that you want to see and confirm that they are in the plan's network. 

A few months prior to your due date, contact your insurance company or HR department and ask what documents you need to provide in order to add your child as a dependent. It's best to have these documents prepared in advance as you only have a certain number of days after the baby is born to submit them. From my own experience, and I think most parents will attest to this, you'll be so preoccupied with your newborn and adjusting to your new schedule that it's best to prepare as much as you can beforehand. 

During the first year of your child's life, it will feel like you're constantly going to the doctor's office because there are so many well visits to schedule. An important lesson I learned is that we need to understand how many well visits the insurance plan covers. My son's pediatrician had a different vaccination schedule from most other offices, so they used up all the well visits that our insurance covered before my son's first birthday. I didn't know it at the time, but they continued to bill for well visits and when the insurance company came back and said we've already met the limit for the year, we ended up having to pay out of pocket for the remaining visits. 

It may seem obvious, but it's crucial that you do your research and understand the medical insurance coverage for you and your child before you need to use it. 


Financial Tips for New Parents - #2 Join Social Networks

Being a part of a mom's / parents' social network may not seem like a financial decision at first, but there are actually a lot of potential financial benefits to it. Moms love to share their experience or advice with other moms and are a great resource for anything from recommendations for pediatricians, babysitters, plumbers, contractors, to huge sales / free events that are going on in the area. 

You can join moms groups on Facebook or look for other email groups for families in the neighborhood. When my sister lived in Brooklyn, she was part of a family neighborhood network with thousands of families. She got an excellent realtor that someone in the network referred, and benefited from free bags of clothing that other parents were giving away. It's like Craigslist but more reliable because the families are actually your neighbors. Some church communities have a clothes swap system in place for young children. Members donate their kids' clothing after they outgrow them, and the clothes are then separated by size and put into bags. The bags of clothes rotate around to families that have kids in that age range. With this type of "sharing" system, you may not need to buy more than a couple of outfits each season for your children the first few years! 

It's also a great way to give back to the community after you've had a few years of experience as parents yourselves. And who knows, you may meet some lifelong friends or good play dates for your kids while you're at it. 

Financial Tips for New Parents - #1 Check Out Local Libraries

A few years ago, it seemed like everyone I knew started having babies. I took the opportunity to ask my close friends and family members for their best financial tips for new parents in the hopes that I could learn from their experience and share their collective wisdom with future clients. Since I became a mom myself late last year, I decided to review the list again and see which ones I found the most helpful. The result will be shared here in a series of posts this year that will hopefully be useful to you or someone you know (the tips are not listed in any particular order). 

My sister half-jokingly said that three groups of people use the library these days: students, retired folks, and moms. I found that to be so true. Upon several recommendations from moms to use the library as a resource, I went to my local library for the first time to get a library card right before the baby was born (the last time I used a library card was in 1999). Much has changed since then. I can actually log in online and request books and DVDs from any library in the county system and then pick them up at the local library when they're ready. It is so convenient, and FREE. 

There are a lot of baby and toddler friendly events going on at the library from story time to music time. It's a great way for your child to be in a learning environment at a young age without spending any money. You can also borrow children's books instead of buying them. If you see that he or she is really drawn to a particular book or two, then you can buy it knowing that they'll keep using it. In addition, I discovered that I can use the library to save money for the adults too! My husband and I don't read a lot, but we enjoy watching movies from time to time. Since we got rid of cable a few months ago (which saves over $1,000 a year), we would use Redbox to rent movies. However, after the baby, we quickly realized that we can't always predict which nights we'll have the time or energy to actually get through a movie. That's when I started using the library to rent movies - every movie I've searched for so far has been available and we have two weeks to watch them instead of only one night. They also have video games that we can borrow, which my husband is very happy about. I am completely sold on how awesome the library is.    

One Reason Not to Consolidate Your Student Loans


I recently worked with a young client who graduated law school with a significant amount of student loans. His school highly recommended that he consolidate his loans, which he did. However, after reviewing his financial situation, it seemed that NOT consolidating would have made more sense for him.

I was curious to see what information was available when I searched for articles that discussed the pros and cons of student loan consolidation. There were several helpful sites that I suggest recent graduates read and research prior to making a decision about consolidation. Below are a few links to get you started in the process.

When you consolidate student loans, you combine one or more federal student loans into a new loan with one payment per month rather than multiple payments to various lenders. Other than the convenience of having to make only one payment, most of the benefits of consolidation are for borrowers who have difficulty making the standard monthly payments. For example, consolidated loans have more flexible repayment options that may lower the monthly payment and even allow borrowers who qualify to take advantage of Public Service Loan Forgiveness.

However, in these articles there was no mention of the one reason that consolidation was not beneficial for my client. And that is if you plan on paying off your loans early, it may be better not to consolidate multiple loans with different interest rates. When loans are consolidated, you end up with a weighted average of the various interest rates as the new interest rate (unfortunately student loans cannot be refinanced at a lower rate). With separate loans you can target the one with the highest interest, then the next highest interest, and so on. This is a strategy much like what one would use to pay off credit card debt. By targeting the higher interest rate loans, rather than one consolidated loan with an average interest rate, you can pay off the loans slightly faster and pay less interest over the repayment period. Of course, not everyone is in a position to make more than the minimum payments on their student loans. However, if you are able to make extra payments with your income and cash flow, it may make sense over the long-term especially if you are paying interest rates in the 7-8% range.

5 Year-End Portfolio Moves to Lower Your Taxes for 2013

Between preparing for family gatherings and gift shopping for the holidays, if you can find the time to sit down and review your portfolio, you may be able to make changes that have a significant impact on your taxes for 2013 and beyond. Below are five areas that you should consider depending on your long-term goals and tax situation.

Maximize 401(k) / 403(b) contributions. If you have not maxed out your retirement plan contributions for 2013, you may be able to increase your contribution percentage for the last couple of pay periods of the year. If you are receiving a year-end bonus or have extra cash in the bank, you can tell your HR department to deduct a larger amount of your paychecks to maximize your 2013 contribution ($17,500 if you’re under age 50, $23,000 if you’re age 50 and older). Not only will this lower your taxable income for the year, but you are saving more for your retirement and taking advantage of tax deferred growth in the account.

Keep an eye out for year-end capital gains distributions. Stocks have had a great run in the past few years, which means mutual funds may be selling positions that have gains, thereby causing significant year-end capital gains distributions to their shareholders. If you are planning to rebalance your portfolio or make investment changes before year-end, make sure you pay attention to the mutual funds’ distribution estimates (you can usually find this information on the mutual fund company’s website). For example, if you are planning to buy Fund A, and it is planning to make a significant distribution this year, then it may make sense to buy it after the Record Date so you don’t end up with the distribution as taxable income in 2013.

Look for potential tax-loss sale candidates. If you have realized capital gains in 2013, or if the mutual funds in your portfolio are making sizeable distributions, you can look for securities in your taxable accounts that have losses. By realizing the losses in your portfolio, those losses can be used to offset the realized gains to ultimately reduce your net capital gains, and therefore, your taxable income. If the security you sold for a loss is one that you would like to hold for the long-term, you can always buy it back after 30 days (otherwise you violate the wash sale rule and you won’t be able to use the loss).

Consider making gifts of appreciated securities. Whether it’s a gift to charity or a family member, giving appreciated securities is a great way to lower your taxes while achieving a personal goal. If you write a check for $5,000 to a charity, you get a tax deduction for the amount of the check. However, if you give $5,000 worth of stock with a cost basis of $2,000, you not only get a tax deduction for $5,000 on your tax return (if you itemize deductions), you also avoid the tax on $3,000 of capital gain if you were to sell the stock. Similarly, if you have an adult family member who is in a low tax bracket (see the next bullet point), you can gift the appreciated security to him or her, and have them sell it without paying any taxes.  

Create capital gains if you're in a low tax bracket. While this strategy does not have a direct impact on your 2013 taxes, your actions now can provide you with tax benefits in future years. Whether you are temporarily or permanently in the two lowest tax brackets, take advantage of the zero capital gains tax. If you have investments with unrealized gains in your portfolio, you can create just enough gains and still remain below the 25% tax bracket, and all capital gains created will not be taxable. After realizing the gain, you can always buy the security back. This strategy is particularly useful for those who are temporarily in a low tax bracket because you are in a sense resetting the cost basis at a higher level without paying any taxes. In the future, when you are in a higher tax bracket and you decide to sell the security, you will pay less in taxes than if you had not reset the cost basis.

Not every one of the above five areas may be applicable to your tax situation in 2013, but it’s important to review these items at the end of each year since your tax situation may change from year to year and tax laws also change every few years. 

It's Time for Medicare Enrollment

As we head into the fall season and prepare for the year-end holidays ahead, many of you may also be preparing to review your Medicare coverage. October 15 – December 7 is Medicare Open Enrollment for anyone who is currently receiving Medicare benefits. Any changes made to your Medicare health plan and prescription drug coverage and will take effect starting January 1, 2014. Here are four simple steps with resources to help you through this annual process.

  • Review your current plan and any updates for next year. Medicare health plans and prescription drug plans can change costs and coverage each year. It is important to review the materials your plan sends you each year, like the “Evidence of Coverage” (EOC) and “Annual Notice of Change” (ANOC). Make sure your plan will still meet your needs for the following year. If you’re satisfied with your current plan, you don’t need to do anything.

  • Do your research and have your Medicare & You handbook handy. If you have any questions related to Medicare coverage, the handbook is a great place to start. It also includes other resources such as where to get personalized help.

Note: The Affordable Care Act and the Health Insurance Marketplace have no impact on Medicare. This new law and the marketplace created by it were designed for people who don’t have health insurance. If you have health coverage through Medicare, the Marketplace will not have any effect on your Medicare coverage.

  • Beware of fraudulent activity and identity theft. The Centers for Medicare & Medicaid Services encourages you to always guard your personal information and provides the warning below:
The Medicare open enrollment period is a time when there is a higher risk of fraudulent activity. Medicare will never call you at home, except if you’ve already reported a problem. Medicare will never ask for your Social Security number, because they already have it. And Medicare will never ask for your bank information, unless you called Medicare, requesting to pay your premiums automatically. Likewise, never share your personal information with someone who knocks on your door, or contacts you uninvited to sell you a health plan. That’s not allowed under Medicare rules. It’s also against the law for someone who knows you have Medicare to sell you a Marketplace health insurance policy, because you don’t need one. Be ready to say “no” if this happens to you. Finally, if you suspect fraud, you can call your local police, your state’s Attorney General, or the Federal Trade Commission if you suspect identity theft. If it has anything to do with Medicare, you can call 1-800-MEDICARE anytime to report it.

  • Shop around. If you are not satisfied with your current plan or just want to review your other options, you can compare plan choices with Medicare’s Plan Finder. You can enter the drugs you take to find out how you can lower your costs, review the plan’s ratings to compare plan quality, and join a plan online if you find one that meets your needs. To help you use the Medicare’s Plan Finder, there are tutorial videos available on the Medicare website. Happy shopping!

How Much Life Insurance Do You Need?

In my experience working with clients, I often find that most families do not have a plan for their life insurance needs. Because they are not sure how much insurance they need, each time they meet with a broker or agent, they buy an additional policy without a clear big picture of how much they are spending on life insurance or if their dependents have adequate protection.

When I meet with clients to go over their life insurance coverage, I first try to determine if they have a need for life insurance. Ask yourself, is there someone who is dependent on my income, such as a spouse, children, elderly parents? If the answer is no, then you don't need life insurance (there may be a few exceptions such as estate planning strategies for those with sizeable estates).


Once you've decided that you need life insurance, you have to figure out how much to buy, which is not always an easy task. Basically, what you're trying to determine is how much your dependents need to maintain their current lifestyle if something unexpected should happen to you. The simplest way to estimate the amount of life insurance coverage is to take your annual income net of taxes and multiply it by the number of years you expect to work before retiring. For example, if your after-tax annual income is $50,000 and you plan to work another 20 years, then a $1 million policy should be sufficient to "replace" the income you would have earned to support them.

It’s important to also consider life insurance for the spouse who has little to no earned income but stay at home to take care of the children. If something unexpected happens to him or her, the working spouse will have to hire a nanny or pay for daycare in order to continue working. The amount of coverage will depend on how many years you will need a nanny or daycare and what the cost is in your area.

Another way to estimate the amount life insurance you need is to compare your surviving spouse’s “needs” (liabilities and expenses) with his or her “resources” (assets and income). Whereas the simpler calculation described above attempts to replace your income, this calculation determines what your spouse and dependents will need to cover their expenses during their lifetime. This is a bit more complicated as you have to make several assumptions about your spouse’s future income and expenses. The “needs” side of the equation is, if something happened to you, what debts would your spouse have to pay off and what are his or her future expenses, including items such as college expenses and costs during retirement. The “resources” side of the equation will be the total amount of your spouse’s future income plus current assets that are available. The difference is the total shortfall which needs to be covered by the life insurance payout. Of course this is simplifying the calculation by not taking into account inflation or investment returns. For a useful calculator that can help you estimate your life insurance needs, here is a good resource.

Your life insurance needs can change over time as you go through different stages in life. Knowing how much insurance you need can potentially save you a lot of money on premiums. Unfortunately, I've seen many situations where brokers and agents offer life insurance to clients who have no dependents or who are retired and would have to pay extremely high premiums for coverage. Integrating life insurance into your overall financial plan can help ensure that your spouse and dependents will be taken care of when they need the insurance. But at the same time, you won’t be overpaying for something you don’t need and can use the money saved from premiums during your own lifetime or eventually pass it down to your heirs. 

Take Advantage of Lower Income Years by Doing Roth Conversions

After I started pursuing a career in financial planning and learned about Roth conversions, I realized that I had missed a great opportunity to save money on taxes. When my income was temporarily low during those tax years when I wasn’t working full-time, I should have converted part of my IRA into a Roth IRA since I was in a lower tax bracket.

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Should I Pay Cash or Finance My Car Purchase?

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One question that I often get from clients is whether they should buy a new car with cash or finance it. When I’m faced with this decision, I like to look at the two alternatives from the perspective of their “cost” to me. Basically, when you take out a loan to purchase the car, you incur a cost in the form of interest. However, when you use all cash to purchase the car, there is also a cost - you forgo the opportunity to do something else with the money.

In today’s low interest environment, many car dealerships are offering financing at rates lower than 2%. For example, if you are offered an interest rate of 2% on your $25,000 car purchase – the “cost” of financing is the 2%. But by financing, you gain an opportunity to use the money as you wish during the life of the loan. If that opportunity is greater than the cost of 2% interest, then it makes more sense to finance the purchase; if the cost is greater than the opportunity, then it makes more sense to just pay with cash.

Let’s look at a few different scenarios.

  • If your cash is sitting at the bank and you don’t anticipate using it for the next few years, your 2% cost is definitely greater than your opportunity of earning 0.10% at the bank. In this scenario, it’s probably better to just pay cash.
  • However, even if your cash is at the bank not earning much, there may be situations where you consider taking out the loan anyway. For example, if your future income and/or expenses are uncertain over the next few years. I was in a similar situation when my husband and I purchased our first car. Even though there was a cost to financing, it was “worth it” in our minds to pay the interest because we can keep the cash on hand in case we need to dip into savings in the face of lower income.
  • If instead, your cash is invested in the stock and bond markets, you have an opportunity to grow the $25,000 by greater than 2% per year over the life of the loan. In this case, you can also consider financing the car purchase and letting your money stay invested.

No matter what situation you’re in when it comes to purchasing a car, make sure that you can afford to part with the cash upfront or the monthly payments if you take out a loan, and factor in a margin of safety just in case unanticipated events happen over the next few years.

Want Your Tax Refund Earlier? File a Form W-4

If you’re paying too much in taxes from your paychecks, and getting a refund in April or May of the following year, why not consider having the IRS withhold less from your paychecks? (Especially now that you’ve seen the payroll tax take a bite out of your paychecks in 2013)

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How to Not Set a Budget


Most people cringe when they hear the word ‘budget’. It sounds tedious and restricting. Who wants to live by a bunch of rules that dictate how much they can spend on food, clothing or entertainment each month? That’s why I don't generally recommend family members or clients to follow a strict monthly budget. It may work for some, but most people I’ve talked to find it too rigid or tiring to implement.

Instead, what I recommend is tracking monthly cash flow, which is something I have been doing since I graduated from college. Now that it’s the beginning of a new year, it’s a great time to start if you’ve never tried it before. There are three benefits to tracking your income and expenses:  1) it gives you a better understanding of your overall financial picture (ex. how much are you saving), 2) it helps you set goals for the future and achieve them (ex. can you pay off your loans faster), and 3) it shows you where you can make changes in the future if necessary (ex. where can you cut back to pay for your children’s tuition). I’ve worked with several clients who tracked their expenses for the first time and told me that the exercise was eye-opening because they had no idea how much they were spending in certain areas.

So how does one get started? If you use credit cards for most of your purchases, you can look into setting up a free account at which automatically pulls all of your financial transactions and categorizes them for you each month. I personally love using Excel because I like having my own expense categories and I can format the spreadsheet exactly the way I want. If you go the Excel route, I recommend keeping a receipt for every purchase so you can record them at the end of the day or end of the week. You can also upload the Excel document to Google Drive so you can share it with your spouse and access it anywhere with internet.

If you decide to start tracking your cash flow in 2013, here are a few tips that will hopefully make the process as painless as possible.

  • Consider the first few months as a fact gathering exercise - just track what you’re spending by category and don’t feel pressured to change your spending habits.
  • After 3 or 4 months, compare the monthly results and make observations. If you’re married, it’s a good idea to sit down and go over it together with your spouse.
  • If you notice high spending patterns in a few categories, you may want to monitor it more closely over the next few months. You don’t necessarily have to set a ‘cap’ on how much you can spend in those categories each month, just the fact that you are aware of your spending should help you keep it in check.
  • Allow for some flexibility – if you are making a large one-time purchase in a particular category, try to cut back in another category that month or reduce your spending the following month to make up for it.  
  • Set a savings goal that you want to reach by the end of the year, but gradually build up to it so it doesn't feel so overwhelming that you give up before even trying. For example, if you are currently saving $100 per month, try to increase that by $25 each consecutive month. By December, you should be saving on average $400 per month!
  • Make it fun and reward yourself – Set aside a percentage of your savings goal for your vacation fund, a shopping trip or a new TV!

So don't delay - get started this year on a good financial habit that will pay off dividends in the years to come!

529 Plan Under the Christmas Tree

It’s easy to buy Christmas gifts for babies and young kids in the family – who wouldn’t want to pick out adorable outfits and fun toys for them to play with? But before you go all out every year and shower your nephews, nieces and grandchildren with presents, consider the possibility of splitting your gift budget between a small wrapped gift (so they still have something to open from you!) and a contribution to a 529 plan set up for them for college education.

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Time to Refinance .... Again?

Perhaps you’re also thinking if it makes sense to refinance your mortgage in today’s environment. After all, it’s hard to pass up the opportunity to lock in a 30-year fixed mortgage rate of 3.25-3.50% or a 15-year mortgage at less than 3.00%! Having recently gone through and am still going through a frustrating refinance, I thought I’d share a few thoughts on the topic that may help you in your process.

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Saving for Retirement: The 1% Challenge for 2013

No matter how close (or far) we are from retirement, I think it's wise to periodically think of ways that we can increase our retirement contributions, even if it's by 1%. After all, the earlier you save for retirement, the sooner you can retire, especially since the future of our Social Security doesn't look too secure. At the suggestion of a fellow financial planner, I'm posing a "1% challenge" for all of us - to think about our spending habits and see if we can save an additional 1% of our salary and put that towards our retirement next year.  Read More