July ACap Recap – Your Financial Questions Answered
1. How much should I save for college?
Two of my clients recently wanted to know whether they are saving enough for their children’s college educations: one family has newborn twins while the other family has two young grade-school aged children. College costs are rising rapidly and at a much faster rate than the cost of living. Based on a 6 percent annual inflation rate per year (the historical average is between 4-8 percent), the parents of the twins would need to save approximately $17,000 a year for each child to safely cover college costs, while the parents of the grade-school aged children will have to save over $20,000 per child. Both of these families are planning to send their children to private universities; even though public schools are less expensive than private schools, their costs are rising just as fast, especially given the now regular state budget cuts. Given that most families do not have infinite funds, parents should allocate financial savings between retirement and college. That being said, my philosophy is to first ensure your own financial house is in order before saving for your children’s college; the stronger your foundation, the more readily you can financially assist your children in the future. And remember, students can borrow for college, but you can’t borrow for retirement.
2. Should I consolidate my student loans?
Student loan consolidation entails taking several loans, each with its own payment and terms, and consolidating them into one loan with a single payment. The end result is usually a lower monthly payment and easier management because you no longer have to keep track of several loans. There is no simple answer because it depends on the type of loans you have, how long you’ve had them for, their interest rates, and whether your loans are private, federal, or a combination of the two. Not all loans are eligible for consolidation: federal programs prohibit you from consolidating private loans, and private loans may have prepayment penalties. Lastly, keep in mind that by consolidating your loans, you are effectively restarting the clock on an entirely new loan. The payments will be lower, but you will be making more of them. Therefore, if you have several small loans that are close to maturity, you may be better off taking a different approach to loan consolidation.
3. Can I transfer my old 401k to my new employer?
401k plans, their investment options, and their portability are a constant source of confusion among the general public. You are entitled to all the money you put into your 401k plan. Employers may impose vesting schedules on money they contribute on your behalf, but whatever you put in is yours to keep even after you leave your job. If you leave your current employer and start a new job that also has a 401k plan, you may be able to transfer your old 401k into your new 401k plan if your current employer allows it (such restrictions are rare). You also have the option to transfer your 401k into an IRA (either a Roth IRA or a Rollover IRA). However, before you make a decision, first determine whether the new company’s 401k plan is a good one: does it have low cost investment options, are there many asset classes to choose from, and does it offer index funds? If the answers are no, then you would be better off transferring your money into an IRA where you can invest more broadly at very low cost.
4. Which countries use the euro?
The euro is a shared currency among 17 (and growing) European countries. It was first introduced in 1999 and adopted by 11 countries. The most recent addition was Estonia in 2011. Similar to the U.S. Federal Reserve Bank, the European Central Bank (ECB) controls monetary policy (i.e. setting of interest rates). However, unlike the U.S. IRS, each euro zone country manages its own fiscal policy (ability to tax). This disconnect between monetary and fiscal policies is one of several reasons why the euro zone is experiencing a prolonged recession. So while the U.S. Treasury is able to issue U.S. Treasury Securities and pay for them through Federal tax receipts from the IRS, the ECB does not have such a mechanism. Euro denominated bonds are issued by the member countries, and the riskiness of those bonds is based on the issuing country: for instance, German bonds are considered more safe than Greek, Italian, or Spanish bonds, even though they are all euro denominated bonds. Despite some shortcomings, there is tremendous political commitment to maintain the single currency. Lastly, it should be noted that just because a country is in the European Union (28 countries) does not mean it uses the euro. For example, the United Kingdom is in the European Union, but it still uses the pound sterling as its currency.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com