Atlantic Capital Management

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Friday, 31 January 2020 20:45

Coping with College Loans

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Paying them down and managing their financial impact.

 

Total student loan debt in America is now around $1.6 trillion. Since 2008, it has more than doubled. Federal Reserve data states that 44.7 million Americans are dealing with lingering education loans. The average indebted college graduate leaves campus owing nearly $30,000, and the mean monthly student loan payment is about $400.1

Economically, the country is feeling the impact. The National Association of Realtors says that 25% of recent homebuyers have outstanding student loans, including 41% of first-time buyers. A 2018 study by the Center for Retirement Research at Boston College concludes that under-30 employees carrying education debt typically have just half as much saved in their workplace retirement plan accounts as other workers their age.2,3

If you carry sizable education debt, how can you plan to pay it off? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

*The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).

*You could use your tax refund to attack the debt.

*You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but it could also help you reduce it by freeing up more cash to apply to the loan.)

*You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and use the cash for paying down the debt. 

Now, in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance. 

Even just paying more than the minimum each month on your loan will help. Making payments every two weeks rather than every month can also have a positive impact. 

If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter point.4 

What if you have multiple outstanding college loans? If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.

Also, how about combining multiple federal student loan balances into one? That is another option. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates.5  

Maybe your boss could help you pay down the loan. Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 8% of employers offer this perk. A 2018 Employee Benefit Research Institute poll of 250 firms revealed that 13% planned to offer such assistance in the future.6

  

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

  

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - fool.com/the-ascent/research/student-loan-debt-statistics/ [9/23/19]

2 - nar.realtor/student-loan-debt [11/12/19]

3 - washingtonpost.com/business/2019/06/25/heres-what-trillion-student-loan-debt-is-doing-us-economy/ [6/25/19]

4 - nerdwallet.com/article/loans/student-loans/how-to-lower-student-loan-interest-rate [8/7/19]

5 - nerdwallet.com/blog/loans/student-loans/consolidate-student-loans-2/ [10/8/19]

6 - tinyurl.com/uzedpg2 [10/10/19]

Wednesday, 08 January 2020 15:18

Measuring the Value of a Financial Advisor

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One study asserts that these relationships can make a difference for investors.

What is a relationship with a financial advisor worth to an investor? A 2019 study by Vanguard, one of the world’s largest money managers, attempts to answer that question.  

Vanguard’s whitepaper concludes that when an investor works with an advisor and receives professional investment advice, they may see a net portfolio return about 3% higher over time.1

How did this study arrive at that conclusion? By comparing self-directed investor accounts to an advisor model, Vanguard found that the potential return relative to the average investor experience was higher for individuals who had financial advisors.1

Vanguard analyzed three key services that an advisor may provide: portfolio construction, wealth management, and behavioral coaching. It estimated that portfolio construction advice (e.g., asset allocation, asset location) could add up to 1.2% in additional return, while wealth management (e.g., rebalancing, drawdown strategies) may contribute over 1% in additional return.  

The biggest opportunity to add value was in behavioral coaching, which was estimated to be worth about 1.5% in additional return. Financial advisors can use their insight to guide clients away from poor decisions, such as panic selling or accepting excessive risk in a portfolio. Indeed, the greatest value of a financial advisor may be in helping individuals adhere to an agreed-upon financial and investment strategy.1

Of course, financial advisors can account for additional value not studied by Vanguard, such as helping clients implement wealth protection strategies, which protect against the financial consequences of loss of income, and coordinating with other financial professionals on tax management and estate planning.

You could argue that a financial advisor’s independence adds qualitative value. It should be noted that not all financial advisors are independent. Some are basically employees of brokerages, and they may be encouraged to promote and recommend certain investments of those brokerages to their clients.2 

Both types of financial advisors may receive their compensation in two ways: through transaction fees and through ongoing fees. Financial advisory firms are required to disclose how their professionals are compensated with the Securities and Exchange Commission (SEC).2         

After years of working with a financial advisor, the value of a relationship may be measured in both tangible and intangible ways. Many such investors are grateful they are not “going it alone.”

  

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf [2/19]

2 - cnbc.com/2019/10/23/guide-to-choosing-the-right-financial-professional-for-you.html [10/23/19]

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