College Financial Aid Planning—Deadlines coming up!

College aid forms can seem about as friendly as a 1040, and maybe even more upsetting emotionally. Plus, there are two of them most of us have to fill out—the FAFSA and the CSS Profile. If you’ve been reading this blog you know I advocate submitting the FAFSA on the earliest possible date, or as close to January 1st as you can. But here’s a shocker for most people: if your kid is applying for admission to any school early decision or early action, the school may require you to submit the CSS Profile by November 1st of senior year. For a list of schools that require the Profile in addition to the FAFSA, you can look at the second page of the Profile info from last year.

Be sure you check out not only the application deadlines but the financial aid deadlines. For example, last year Stanford’s early action deadline was November 1st, but their deadline to submit financial aid for early action was November 15th.  However, at the University of Chicago this year, the deadline for early action admission and for financial aid for early action applicants is November 1st.  But whoa, the Profile is only available beginning October. 1st. You’ve got some fun times ahead!

If these financial aid application deadlines are a surprise, well, it points out how important it is to start college financial planning early. Time after time I hear people say, “Well, I don’t have to start yet, my kid is only a freshman in high school”. Wrong! You need to start the intensive part at least that early, but you should ideally take “early action” when your child is a toddler.  The earlier you start, the more likely you are to accumulate savings, and the more flexibility you will have to adjust to changing circumstances. The earlier you start “late stage” planning (at least by first year of high school) the more strategies you can employ to lower your out of pocket costs.

Okay, your student is a senior. What can you do now? You still have about one month to make changes if necessary—contribute to a Roth or IRA or fund an HSA for example. Spend this weekend assembling your 2010 taxes, doing an initial run through of your 2011 taxes. Contact your accountant if necessary, but you can often get an adequate picture if you can match your current figures to last year’s. The Profile will need to be revised after you have 2011 taxes completed, but schools use this first look to tentatively budget their financial aid and give you an early estimate of what you might be awarded. If you have to estimate, estimate on the honest low side (the side that makes you look poorer). And don’t depend 100% to the penny on what the estimate says—it’s not a final offer.

Now would also be a good time to write any letters documenting special financial circumstances—job loss, divorce, illness. In some situations, schools will require documented evidence from a third party. For example, if a non-custodial parent cannot or will not fill out the required document, some schools will require backup information from a disinterested third party.

My best advice is to see a financial planner for help. (What were you expecting?) An early look at your specifics can save you thousands of dollars either by increasing your eligibility or lowering your out of pocket costs. A plan in place can also help you avoid investment and retirement mistakes—college costs can have a domino effect on all family finances. Let’s get going!

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Saving money: only as frugal as you need to be

Many of the financial fitness gurus have banged the drum ad nauseum—don’t buy lattes, don’t eat out, buy your clothes second hand, clip coupons. Then there’s the other side of the fence—start your own business, make money by investing in (fill in the blanks), etc. Who’s right?

Well, I say only pinch as many pennies as you need to (unless of course you enjoy it). Do you have an emergency fund equal to at least 3 months income? I like six months to a year better, maybe two if you’re really close to retirement, but you’ll have to assess how secure your job is and what other sources of support you can access—like living with a parent, a partner with secure employment, a good side business. Are you saving at least 10% of your income (if you’re younger than 40) or 20% if you didn’t save much before 40? Are you nearing retirement with savings of 20 times your current income? Then don’t bother—buy anything you crave at the grocery store, indulge in that dinner out without an Entertainment book coupon, park at Starbucks. If your financial picture is already in good shape, you’re probably not the type to go wild anyway.

But let’s take it down a step. If you’re carrying a balance on your credit card(s), aren’t saving, don’t have an adequate retirement fund for your age, it’s time to become a frugalista. And I mean that whether you’re making $50K or $500K. Unfortunately, any financial planner can tell you hair-raising tales that prove income has no relationship to savings. But even being frugal has a hierarchy: tackle the big wins first.

Re-evaluate your big bills first—get some new insurance quotes, see if you really need the super premium cell phone service, and (gasp) calculate whether you really can afford your house or if a sale or refinance makes sense. The afternoon spent doing this can easily pay you back $100 or more per month, and that buys a lot of lattes. People who spend all Sunday afternoon clipping and sorting coupons to save $5 often never take a look at their car insurance or their cable plan. Dumb.

Then what? Calculate how much time you spend to make sure the money saving is worth it. Now, I’m my mother’s daughter so I do clip coupons and probably always will because it’s a fun form of shopping for me, from the comfort of my bed on Sunday mornings. But I only clip coupons for stuff I buy anyway, or might be interested in trying. Since there are rarely coupons for fresh fruit or grass fed beef, I don’t make much on this. However, I can usually find enough coupons to pay for the cost of the Sunday paper, making it worthwhile to me. Also, when I use coupons I generally try to get the value back in cash (just ask) and put that cash in the change jar in the kitchen. I like to see it add up and it turns out to be fun (for me) mad money. Even though I’m awed by people who do it, super couponing is not my style—too much effort for too little per-hour return. But if I were really, really broke or simply enjoyed the gaming aspects of it, I’d do it.

Still short on the silver? Then it’s worth evaluating what IS important to you and what’s not. Brown bagging it is almost always worthwhile not only for cost, but also for taste, identifiable ingredients and weight control. But if you can use lunch to network or accomplish something, then grabbing something to go, or eating in the most plush restaurant will be a worthwhile investment of money. Office coffeemaker or Caribou? Again, is it a satisfying luxury or a reflex. I vote for pleasure, but only if it really is a pleasure. Otherwise, save the dough.

Our strong “Protestant ethic” considers frugality a virtue and an end in itself rather than a means to a goal. Not me, I say enjoy life. I can’t enjoy myself if I’m not paying the bills, and opening up banking statements with a hefty balance is more worthwhile to me than a brand new car. I clip coupons but I like to stop at Starbucks. So, I say adjust not only your spending but also your savings to your needs. Decide if you’re getting a good return on any investment involving money, time, or effort.

 

Diversification—eggs in many baskets

Put all your eggs in one basket, and watch that basket, a quote variously attributed to Mark Twain and Andrew Carnegie, is really bad advice. While Andrew Carnegie knew what he was doing financially, Mark Twain most certainly did not. So listen to me, not him (I know better than to invest in crazy printing press inventions the way Twain did).

Pinning all your hopes on the success of one thing–one investment, one college admission, one friend—is quite simply playing roulette and you’re probably going to lose. Here’s my rationale for diversification:

• If one basket goes kaput you don’t lose everything

• You can control your choices, but you can’t control external factors. Worry only about what you can control

• Sentiment on various investments can vary greatly. Some part of the time you’ll be in-sync, sometimes not. You have a better chance of success if things are not correlated or all the same.

Quantity is not the same as diversification. If you own Dell, Hewlett-Packard, and Apple, you’re not diversified. If your child applies to Harvard, Yale and Stanford, you’re not diversified. If all your friends are from Civil War re-enacting, you’re going to be pretty lonely in the wintertime. You have to make your investment in things with true differences. In financial terms, this is why I recommend index mutual funds and/or ETFs. Put 90% of your money into funds and you can own Dell, H-P, and Apple as one basket (nicely diversified within that basket but not necessarily one I recommend), but also a fund of small value companies, international bonds, REITs, or just about any other type of investment that might be suitable for you. You develop a suitable mix based on your goals, the amount of money you have to invest, and your tolerance for stomach churning. That’s one of the things a financial advisor can help you sort through.

On the other hand, you probably don’t need 65 different investments. Research has shown that more than about 10-12 core holdings begin to lose the value of diversification. You’re spread out among so many things that you have no chance of “beating the market”—you ARE the market. Plus, keeping up with what’s going on just becomes ridiculously time consuming. 10 or 12 mutual funds you can monitor, 25 individual stocks become your full time job, with no evidence that you’ll actually do better and probably do a lot worse than an index. Ask any big-time money manager. Ask Bernie Madoff.

You know all this already? Are you doing it? Are you in love with a stock? Holding it because it will “come back some day”? You inherited it from your dad who worked for the company forever? Um, were you formerly employed at Enron? Reserve your love for your friends, family, art, music, hobbies. Investments are just money—get professional advice and make rational decisions.