I Hate Debt

Don’t we all??  I worry about placing myself in a situation where an unexpected event (car accident, illness, et cetera) could create a financial disaster.  As a result, I carefully monitor the level of both short- and long-term obligations I have. 

With interest rates at historic lows, I decided to take a closer look at refinancing my house.  I have refinanced two times already; should I do it again?  Some of you may be considering the same thing, so I thought I would talk a bit about how I made my decision.

It is important to understand what you are trying to accomplish.  In my regard, I want to pay off my house within 15 years, while keeping the monthly payment at a reasonable level.  Others may want to tap home equity so that they can pay down loans with higher interest rates or do some repairs to the home.  If this is the case with you, calculate in advance how much you need. 

The next step is to take a look at your credit report.  Some people have had some dings from the Great Recession.  Resolve any reporting issues in advance of applying for a loan.  It will save you a lot of aggravation later.

Now, let’s figure out if it is feasible to refinance.  I used the calculators that are available on the bankrate.com website.  Here is a link:  http://www.bankrate.com/calculators.aspx. They have a great mortgage amortization calculator that shows you total interest paid over the life of the loan.  You can also see the impact of extra amounts paid toward principal. 

Using this tool, I entered my current interest rate and loan terms.  I analyzed the impact of the extra payments I have been making toward principal each month.  Then, I entered a 15-year term but with a lower interest rate. 

I compared the total interest expense with my current rate vs. a lower estimated rate.  The difference in total interest paid for my current loan vs. the lower interest rate loan is about $5,000, as long as I continue to make extra payments toward principal.  Closing costs and refinancing fees add up, so I suspect that net difference between the two loans would be much lower. 

As long as I continue making extra payments toward principal, I will accomplish my goal of paying off the loan within 15 years.  The lower interest rate loan would also require a larger monthly payment.  I am not comfortable with that.  With my current loan, I can keep my lower payment amount, giving me some security in the event of a serious financial crunch. 

Lower interest rates can be very enticing.  In the long run, though, you could sacrifice financial peace-of-mind just to save a few dollars.  A careful analysis of your personal situation can help you make the right decision.  If all of this seems overwhelming, we are always here to help.  Your financial advisor is just a phone call away.

Cristy Freeman, AAMS
Senior Operations Associate

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Where Does The Time Go?

When I was a little kid, it seemed to take FOREVER for Christmas to get here.  The tree would be up for ages, the presents underneath teasing me.  When my parents were at work, I would shake the presents and try to determine the contents.  I confess I sometimes lifted the corner on some of the packages.  It’s a great way of learning whether or not you are getting that Barbie you wanted.  It worked well until my little sister tattled.  No one likes a snitch, Amanda.

In my adult life, time flies by.  It seems like only yesterday we were celebrating a new year; now Thanksgiving is almost here, and the holiday madness is about to begin.  Everything kicks into overdrive as we rush from holiday party to family event.  We spend hours in the kitchen, preparing dishes that will be engulfed in minutes and forgotten almost as quickly.  It seems that chaos reigns during the holiday season.

In the midst of all this activity, let’s not forget our financial lives.  If you plan to donate appreciated stock to charity or give it to relatives, take care of it now.  Do not wait until late December.  Go ahead, and cross it off your list.  The later you wait, the more difficult it becomes to process the transaction before December 31.

It is also important to take a look at your portfolio.  Do you have any gains that could be offset by losses?  Do you anticipate any big financial events next year (i.e. your child will be starting college; you plan to remodel your home; et cetera)?  A quick conversation with your financial advisor sets up for a smooth start to 2012.

Take a deep breath.  It will be okay.  The holidays will be over before you know it!  I hope you and your family have a happy, healthy, and peaceful holiday season.

Cristy Freeman, AAMS
Senior Operations Associate

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The Asset Allocation for College Funds

Asset allocation, the proportion of stocks, bonds and cash in a portfolio, is one of those topics that financial advisors think about constantly.  Because we have clients with such a variety of needs and changing financial scenarios, we are always working with someone to help them find the appropriate investment allocation for their personal situation.  For the typical investor however, it shouldn’t be so hard.  Once you’ve chosen the appropriate allocation, you should stick with it as long as your financial or life circumstances haven’t changed much.  This type of “set it and forget it” mentality is the mark of a disciplined investor.

But what about the asset allocation for a college fund?  For a newborn child you only have 18 years before you have to pay out a significant portion of the fund, which you will then deplete over 4 years.  If you start saving later, the time frame is even shorter.  This is very different from a retiree who will often have a longer time frame than 18 years.  Also, for a retiree, typically the intention is to spend around 4 to 5% of the retirement portfolio value every year, so that the retirement funds continue to grow over time.  This isn’t the case with a college fund.  It can be both long-term (18 years to grow) and short-term (all paid out over 4 years) at the same time.  It makes the asset allocation decision a conundrum.  Now throw in the fact that somehow children grow up faster than you can possibly imagine and each year the time until payout grows exponentially closer, requiring more frequent allocation tinkering.

If you are able to save when your children are babies, the allocation decision is fairly easy.  With an above-average risk tolerance you might choose 100% equities.  Once kids are in their teens though, you could switch to a more conservative allocation with a mix of stocks and bonds.  As they approach their final year of high school, you could move to all fixed income.  There is no easy solution here, and often it depends on the parents outside resources.  If the parent is entirely dependent upon the college funds to pay for college, the fund should be more conservative as they approach age 18.  The give up is potentially less money for college if the stock market is doing well during these years.

If you have multiple children with 529 plans for each, and outside resources in addition to this, you may choose to stay with a higher equity allocation.  If the stock market doesn’t perform well during the college years, the parent could choose to pay some expenses out of pocket and then roll any excess 529 funds to younger siblings.

Regardless of the allocation you choose, you are taking a risk.  If you’re too conservative you may not have enough money to pay for college.  Conversely, if you’re too aggressive, you stand the chance of losing money you’ve saved all along just at the time that you need to withdraw it.  My advice is to discuss the allocation with your financial advisor.  Your risk tolerance will be the main driver in this decision.  Other important factors will be outside resources for paying for college, as well as your family’s unique circumstances.

Harli L. Palme, CFA, CFP®

Financial Advisor

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An Unexpected Windfall

At the start of every new year people make resolutions to lose weight, alter bad habits, or save more money.  While I cannot help you with some of those issues, I can offer a little advice on saving money.

For 2011, the IRS has reduced the employee-paid portion of the Social Security tax from 6.2 to 4.2 percent.  While that may not seem like a large amount of money on a per-paycheck basis, it can add up to a nice sum for the year.  If you earn the maximum Social Security wage limit of $106,800, 2 percent represents $2,136.

Before you grow accustomed to having a few extra dollars in your paycheck, I recommend you implement a plan now.  Here are a few suggestions:

  • Deposit the funds into your emergency savings account.  Everyone needs an emergency savings account.  Opinions vary about the amount.  Some suggest 3 months’ worth of routine expenses.  Other say 6 to 9 months are needed.  
  • If your emergency savings account is well funded, apply the dollars to debt.  You could apply the extra money toward the smallest debt, if you want to experience the rush of the early payoff.  However, you will be financially better off if you to apply it to the account with the highest interest rate.  Reducing debt levels is always a great idea.
  • Fund a Roth IRA if you qualify.  If not, apply the savings to another retirement vehicle, such as your company’s 401(k) or a traditional IRA account.

I recommend that you use automatic bank drafts for any of the above options.  It is a simple way to transfer the funds from your account before you can spend them.  Parsec can assist you with setting up an automatic transfer into your brokerage accounts.

I hope you have a safe, healthy new year and wish you the best of luck in accomplishing your goals!

Cristy Freeman, AAMS
Senior Operations Associate

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George, I Can Lie About My Age!!

This year, I celebrate a milestone birthday. Let’s just say I am now officially too old to be George Clooney’s girlfriend.

As often happens with milestone birthdays, you reflect about how you imagined your life would be at this stage. Perhaps you had envisioned retiring at an early age. Maybe you wanted to start your own business. Or save tons of money, quit your job, and travel around the world for a couple of years. (Hey, you can dream.)

Then, life happened. You devoted yourself to a career. You bought a home. You got married and started a family. The years go by. You wake up one day and realize you’re that age.

When you first began your journey with Parsec, your goals were just rough ideas of where you thought you wanted to be in 10, 15, 20 years. Now that time has passed, are those goals still the same? Have you been affected by any of these events:

• Started a family
• Sent a child to college
• Lost your job
• Dealt with aging parents

We would also be remiss if we overlooked the extraordinary market volatility of the last two years.  All of the above events can significantly alter your financial plan.

Do you still have the same goals now that you did before these events occurred? Has your “deadline” for achieving those goals shifted? It is very easy in the day-to-day rush to not think about these things. However, it is important to evaluate your financial situation and goals periodically so you can stay on track.

Your financial advisor is here to help you. Together, he or she can review your financial plan and work to keep it in line with your changing life. Just call him or her anytime.

Cristy Freeman, AAMS
Senior Operations Associate

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