Student Loans: Bankrupting the American Dream

September 17, 2015

my children’s student loans are forgiven … if I die. You heard me right. If I take out a Parent Plus loan and I die, the student loans will be forgiven. Unfortunately, this isn’t an attractive financial planning strategy.

As freshmen move into college dorms across the country, many parents and students will be thinking about the crushing weight the associated debt will have on their futures. Both my children went to private universities, adding up to close to a staggering $500,000 in tuition and fees. That means I have to earn nearly twice that amount to afford to pay taxes before paying off their student loans. For most Americans, this is unsustainable. Worse, it is literally killing the American dream.

Student loan debt has risen to $1.2 trillion, outpacing credit card debt. Recent reports, studies and surveys show that young Americans are putting off buying homes, starting families and opening businesses because of crippling student loan debt. Parents are also sacrificing: putting off retirement and thereby adding to our nation’s unemployment woes.

While our economy is struggling to bounce back from the recession, and every presidential candidate is campaigning on jobs and the economy, it is the cost of higher education that should be at the top of the agenda. It is the elephant in the room that no one wants to face.
Parents should not ignore student loan debt as an economical way to give children the best inheritance possible and keep their own financial plans on track. The government has plenty of options to help. There is the American Opportunity Tax Credit, debt forgiveness for public service, scholarships grants, Coverdell accounts, 529 plans, Parent Plus loans, Stafford-subsidized loans and the D.C. tuition assistance grant. (You may need a graduate degree just to figure out the fine print.) But, at the end of the day, these programs are like pistol shots at a ballistic missile. Further, it has been argued that their existence has accelerated tuition increases.

Why is the solution more debt on the backs of American taxpayers? The IRS allows people to invest pre-tax in retirement accounts knowing that they will generate more revenue when they take it out. (While this may help offset the cost to society, the biggest beneficiary is Wall Street.) Why is education any different? If we were to allow education to be a pre-tax payment, since college graduates earn more on average than non-college graduates, it would be a win-win for the students and for our economy. On top of that, placing reasonable caps on tuition deductions may put downward pressure on tuition costs as universities compete to attract the best and the brightest.

Along with the simple steps parents can take to make student loan payments a manageable part of their financial plans, there are simple steps we should be taking as a country to address this crisis. Until we do, student loans will continue to bankrupt our wallets and the American dream.

Will Greece and China Affect My Portfolio and Why Do We Care?

August 17, 2015

If you’ve been watching the news lately you have seen China’s stock market fall by a third in less than a month, and Greece’s economy plunge towards default. So far, China has wiped out $3.5 trillion in wealth, more than the total value of India’s stock market, and the Greeks have voted to reject austerity measures that would save them from default and ultimately remove them from the European Union.

It is no surprise that people have been asking me how I think Greece and China will affect the market. My response is why do you care? While this usually triggers a nervous response, scary times do not always make your portfolio scarce.

Greece is one of the largest exporters of sea sponges. When was the last time you invested in sea sponges?

In China, the reality is the Chinese stock market has simply fallen back to levels last seen in March, but it’s still up by more than 75 percent in the last year (Economist Magazine, 7/11/15).

China is slowly transforming and adjusting to a capitalist economic structure, while the European Union is in its infancy. Compared to the magnitude and vitality of the more mature American economy, Greece and China might as well be in the dark ages.

As an investor you probably think I should be more concerned. But if you consider the history of U.S. monetary policy you realize that while imperfect, we have historical heft behind our economy.

The real problem is not the things we cannot, nor will never, control such as terror threats, typhoons, interest rates, political uncertainty, or the untimely booms and busts that are a reality of modern investing. The real conversation is how does one protect one’s cash flow during those scary times.

Gone are the days where $1 million in retirement, when interest rates were 10 percent, meant retiring on $100,000 of income, and when rates fell to 4 percent grandma had to cut $60,000 out of her lifestyle. No longer can you cut the budget by visiting the grandkids less.

Now let me rephrase the question. How much short-term return would you be willing to give up for the possibility of sleeping soundly at night, knowing that you are not only financially secure but also financially independent?

Security during the scary times means first determining the amount of money you need to support your lifestyle, with and without work. Second, calculate the gap. Then take five years of the gap out of the market and place it in a secure non-market based account to draw on worry-free. Then set up portfolios of risk, or market based vehicles, in five, 10, 15 and 20 year portfolios, putting the most volatile allocations furthest in the future where risk can be better managed, and where over time the temporary volatility of Greece and China become simply a pimple on an elephant’s back.

The question you should be asking is not how the price of sea sponges in Greece will affect your portfolio, or how today’s problems affect tomorrow’s bottom line, but rather, how can you structure your portfolio to help achieve long term security even through the bumps and busts.

John E. Girouard is the author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research, and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, Maryland.

Who Does Your Financial Advisor Work For?

July 16, 2015

Pop quiz: Who does your financial advisor work for? The easy litmus test is to take a look at the fine print on the bottom of his or her business card.

Is your financial advisor a fiduciary? Is he or she faithful to the client first, without conflict of duty?

Wall Street banks are protesting a new Labor Department proposal that would require their advisors to disclose something that most people have never understood. Unless investment advisors are truly independent, they owe their alliance first to the companies they work for.

That might seem obvious, but most consumers are oblivious to the difference between an advisor who owes his job to a company — the shareholders — and an independent advisor who owes his job (and his income) to his clients.

As an independent investment advisor, I know my job is to protect my clients from their worst financial instincts, to reach realistic goals and to sleep soundly at night. I’m not worried about the stock price of a large Wall Street firm, stock options or year-end profit bonuses.

I rarely agree with the “titans” of Wall Street, but here they have a point. The proposal is a bad fix for the wrong problem. It’s a sheep in wolf’s clothing. Implementing it may be a nightmare for the big banks, but, worse, I cannot see how it helps consumers. Consumers, it turns out, are confused about how money and investing really works.

If you feel like a consumer who is financially illiterate, give yourself a break. You are in the majority.

Not surprisingly, Wall Street is unhappy about the rule. It will make it harder for the big banks to rake in a hefty profit by selling their latest financially engineered products. It will mean stacks of paperwork for them as they defend their recommendations and try to keep from being held responsible if they fail.

Proponents of the proposal claim it will save investors money by limiting conflicts of interest. The goal is to keep advisors from recommending products that will earn them and their company the most profit at the expense of the investor.

For independents like myself, this proposed rule is one I’ve been living with and refining for decades. I’m happier getting paid for what I know — like plumbers and auto mechanics — than for what I can sell.

After watching Washington regulate the financial industry for nearly four decades, I can confidently predict that by the time Washington gets around to closing loopholes, the lawyers working for the big Wall Street firms will have already identified some new ones and engineered products to take advantage of them. Trying to regulate Wall Street is like trying to pick up a beanbag chair: squeeze one end and the other end gets bigger.

The real problem is not how to control Wall Street. The real problem is how to educate the public, and public officials, about how Wall Street really works, how financial products are designed, how much it costs to manage your money, and how to tell whether one investment is better than another.

There is a simple solution. When you hire a real estate broker or retain legal counsel you have to sign a simple disclosure. Why should Wall Street be any different?

The author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Helping Out Our College Grads

May 31, 2015

Touring my old neighborhood in Logan Circle with my daughter recently, looking for her first one-bedroom apartment without roommates, I was shocked to find that the average rent was north of $2,000.

What 20-something, much less a recent college graduate, can afford that rent by herself? I often hear people say that they don’t know how kids these days can afford to live, but this didn’t sound right.

I went home and crunched some numbers. When I lived in my daughter’s neighborhood 34 years ago, my rent was $875 with an inflation rate of three percent. That same rent would be $2,390 today. I did some more math. My starting salary was $18,000, which is the equivalent of $49,175 today.

It is any wonder that over the next couple of weeks college graduates all across the country will be accepting jobs, packing their bags and moving back in with their parents?

As parents we have raised our children, begged them to do their homework, sent them packing for college and cheered at their college graduations. After they graduate, it’s time for them move out, pay rent and start contributing to their 401(k), right?
It’s harder than ever for college graduates to find jobs, afford rent and pay off rising student-loan interest rates. Even more worrisome, only one in four Americans has emergency savings. We, their parents, are the primary source of help when our graduates have to deal with emergencies.

This got me thinking. Maybe, if we really want our children to be independent, we should welcome them back home rather than encourage them to move into an apartment they cannot afford without our financial support. Perhaps we are making the biggest parenting mistake of all by helping them with money, rather than with wisdom and experience.

This is the time to help our recent college grads get a head start on their financial future by saving for law school tuition, for a down payment on their first house or for the seed money to launch their own business.

But no matter what it is, make them pay. If they move back home, mandate that they save the monthly equivalent of rent in the community they want to live in, teach them to maintain a budget, encourage them to sign up for online money-management apps and show them how to grow their credit score.

After a couple months, they will have saved enough money for an emergency fund and to splurge on life experiences. You will have taught them to live within their income, while giving them the tools and understanding to save systematically. Perhaps most important, you have also given yourself the time to get to know your kids as adults, a friendship that you will treasure.

Walking around my old stomping grounds with my successful, financially independent daughter reminded me that parenting sometimes means being flexible. But when you get to watch them set themselves free, it is worth every penny.

A registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland, John E. Girouard is the author of “Take Back Your Money” and “The Ten Truths of Wealth Creation.”

Could Banking’s Past Become Its Future?

December 5, 2014

Whenever I pass the intersection of Wisconsin Avenue and M Street, I am reminded of my father, a banker in my hometown for 35 years. Anyone who visits Georgetown knows the beautiful, gold-domed building with a marble facade that, once upon a time, was home to a local institution, Farmers and Mechanics National Bank, later a branch of Riggs Bank, and today a branch of PNC, as evidenced by the sign bolted over the door.

If (and when) PNC is taken over by an even larger bank, this will make it easier for the next owner to unscrew the old sign and attach a new one. It’s an apt metaphor for what we’ve learned during the past five or so years: you can’t bank on financial institutions that are too-big-to-fail and too-big-to-care. At first look, it would appear the local banks my father worked for are now a relic of the past, where bankers understood both banking and their customers—and where you went to the same church, supported the same charities, shopped at the same local stores, and your kids were on the same sports team.

My father’s experience—before the revolving door mergers began in the 1990s—was that the core profit for his bank depended on the community’s trust.

During the 1960s, like many cities across the country, our community was devastated by riots. But what I remember the most was how my father walked down the street to all his local customers, whose businesses had been damaged, and offered them on-the-spot loans to rebuild. He likes to say that every loan was repaid and those customers remained loyal—until the bank was taken over by a bigger bank and my father was forced into retirement.

Today in developing economies micro financing is thriving not because the customers are tycoons but because they know their customers. I’m not condemning growth and change, but for far too many global public banks it has become a faceless game of risk-reward, where underwriting is simply a FICO score.

While the bank my father worked for is history, I see signs of hope for the type of banking he practiced. Looking in our own neighborhood, you can see local institutions that operate on principles like those of one of the District’s most notable bankers, Robert P. Pincus, vice chairman of EagleBank. His success is rooted in his passion for giving back to the community and his personal policy includes buying suits from a local tailor and dining at locally-owned restaurants, instead of chains.

Other community banks include Bank of Georgetown and Cardinal Bank, which provide services to small businesses including construction loans and contribute to local charities. They are known in the community, and they know us, too.

Today, buying produce from a local farm, meat from a local butcher and carrying it home in an eco-friendly reusable bag is considered “trendy.” So, why don’t we consider banking local?

It might be worth examining the institutions we give our business to, and whether our bank is supporting our community. The definition of capitalism is increasing cooperation between strangers. Maybe it’s how we define “stranger” that is really the threat of “too-big-to-fail.”

*John E. Girouard, CFP, ChFC, CLU, CFS, is the author of “Take Back Your Money” and “The Ten Truths of Wealth Creation.” He is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, Md.*

Don’t Repeat Vanderbilts’ Mistakes

October 23, 2014

Most people remember the Vanderbilts as one of the wealthiest families in our nation’s history – creating immense wealth to be passed on for future generations to prosper. Right? Wrong.

What Cornelius Vanderbilt got right was creating a shipping empire that began with nothing and amassed a multi-billion dollar fortune.

What he got wrong was planning for the future of his fortune.

There are three stages in everyone’s financial lives from the accumulation phase to the protection payout phase and, finally, to the legacy phase. We spend our lives working tirelessly to provide for our loved ones, then we work to preserve that wealth believing that what is important is what we leave behind when we are gone.

This is only half of it.

Just ask Cornelius Vanderbilt. Seventy years later and his fortune has been squandered by the same family he was seeking to provide for.

You don’t have the fortune of a Vanderbilt. Few do. For some it is about money, but we should all begin to think of wealth, and for that matter estate planning, in a different way. We should all begin by asking ourselves: What is true wealth?

When I ask my clients what they think the most important thing to pass on to their beneficiaries is, they say financial assets dead last. But many, if not all, estate plans start and stop with a dollar amount.

If it’s just the money, then you should rejoice. This summer the D.C. Council approved a package of extensive changes to the tax code including raising the state estate tax exemption from $1 million to $5.25 million and bringing it in line with the federal tax code.

This may sound like an opportunity, and it is for the financial industry, which is trying to convince you to buy their last engineered product designed to pass as much of your wealth onto your children a legally possible. That’s a great instinct but too often people are persuaded by financial industry sales pitches that offer no advice other than how to make their estate plans as tax–efficient as possible.

Remember the Vanderbilts? You should.
Cornelius’ estate plan was flawless, but what he forgot was that, with money comes great responsibility. When it is handed to you on a silver (or gold) platter, your children, those same beneficiaries, often lose out.

It is important to sit down and create an estate plan, but it is just as important to sit down with your children and teach them your values, the meaning of hard work and the importance of charity.

There are a number of tried and true ways to do that, including family foundations to continue charity work, and leaving your money in a fashion that encourages entrepreneurship, such as a family “bank.” That’s what has sustained Europe’s Rothschild family of bankers for two centuries.

It’s the job of a financial planner to look at your hard earned dollars and make sure you can sleep at night knowing that you left your money in competent hands.

There’re many ways to set up an estate plan. I can show you how to plan for the next generation’s future while accomplishing your own goals. I can tell you how to make the most of the new tax rules in Washington, and how to ensure your children get the most of what you leave behind.

But the most important advice I can give my clients is to think about the good they want their money to do instead of the ease of luxury it might provide. I suggest that they ask themselves what they should do today to make sure their fortune and their legacy last longer than 70 years.

John E. Girouard, CFP, CHFC, CLU, CFS, is the author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, Md.

District Gets an ‘A’ for Return On Solar System Investments

September 10, 2014

If you had $25,000 to invest, which of these three options do you think would provide the highest return with the lowest risk—dividend-paying stocks, 30-year U.S. Treasury bonds, or solar panels?

If you said stocks, you’re in good company. That’s what people are talking about these days—blue-chip dividend-paying stocks that are currently yielding between 3 and 4 percent in a low-inflation environment. If you said bonds, which offer a similar yield, you have plenty of company as well in the crowd that is turned off by stock market volatility.

However, you’d have given up control of your money—to Wall Street, to government regulation, to the fortunes of the companies, the competence of management, trends in industry, the next recession, geopolitical events and so on. You could make out like a bandit, but you could also lose more on your principal than you’ll earn on dividends.

Finally, the IRS gets its cut, reducing that $1,000 (at 4 percent) in dividend income on $25,000 worth of stock market exposure to as little as $800.

Solar panels, on the other hand, will not become more valuable over time, and you couldn’t sell them off your roof to meet a financial emergency. But if your instinct was to choose solar panels anyway, congratulations! You understand a basic concept that I spend much of my time explaining to clients—the best investments are generally those over which you have the greatest control of risk, cash flow and taxes. In the case of solar panels, these days in the District, neither stocks nor bonds can come close.

The financial return on a $25,000 investment in solar-retrofitting a home in the District includes several layers of tax credits (not just deductions), reduced electric bills, income from selling excess power back to the grid, increase in home value and saleability. D.C. homeowners currently enjoy the best of urban and federal tax breaks, earning an “A” ranking from, a consumer-driven information web site.

Using the theoretical $25,000 system as a example, the site estimates that after tax breaks and other savings, the cost would fall to about $10,000 at the end of the first year, pay for itself within five years and increase the value of an average home by about $35,000—with no increase in assessment for property tax purposes.

There are two lessons here. First, in D.C. you can go green and enjoy a healthy rate of return. Second, doing so illustrates a basic tenet of investing—before you let yourself be seduced by those juicy dividends and appreciation potential of stocks, consider investing in something you control, whether it be solar-upgrading your home, whole life insurance, real estate, your business or profession.

Your financial life is like a bucket with holes in it that constantly leaks money—living expenses, taxes, inflation, etc. To keep the bucket full you can try to pour more in by chasing the latest fad on Wall Street. That’s the hard way. The easier way, and the way you have the most control, is to plug up some of the holes by investing in things like solar that make you money by saving it.

John E. Girouard, CFP, CHFC, CLU, CFS, is the author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, Md.

World Cup Fever Strikes Georgetown

June 18, 2013

With the kick off to the World Cup fast approaching, bars in DC and around the Georgetown area are preparing for massive crowds and crazed soccer fans.

The World Cup will begin at 10 a.m. Friday in the opening match between South Africa and Mexico followed by France against Uruguay at 2:30 p.m.

The time difference between the Eastern Standard time zone and South Africa have placed game kick offs at 7:30 a.m., 10 a.m. and 2:30 p.m. in the District. Due to the early morning start, DC has given bars permission to open early for the duration of the World Cup, with the ability to serve alcohol at 8 a.m., according to the DCist.

However, if you’re unable to catch a game live, several bars will be airing them after work hours, according to the DCist.

The first United States match will be against England at 2:30 p.m. on Saturday. The game will be shown in many bars and restaurants in the city, but it will also be shown on two outdoor screens in Dupont Circle.

Several bars and restaurants in Georgetown will be offering FIFA World Cup drink specials. Here are a few to get you started, but visit OnTap for more ideas.

Garrett’s Restaurant and Railroad Tavern (3003 M. St.) has a unique round-the-world special. During different countries games, the bar will offer various drink specials. As part of U.S. games, the bar will have $3 Bud and Bud Light drafts. Germany’s matches offer $4 Jager shots, $5 Tanqueray and tonics accompany England’s games and Italy comes with $5 Peroni, For more information, visit the bar’s Web site.

McFadden’s (2401 Pennsylvania Ave.) will serve a large list of specials beginning every morning at 10 a.m. and earlier during the final rounds. Highlights are $3 Bud Light drafts and $5 burgers and wing plates. The bar will also hold a World Cup pre-party on Thursday with $3 from 9 p.m. until close. Visit their Web site for more information.

Mr. Smith’s of Georgetown (3104 M St.) will not open early for matches but will record and play games all day long. They will also offer Budweiser bottles for $2.95. Check out their Web site!

Old Glory (3139 M St.) is considering opening early, around 8 a.m. or 9 a.m., and will have happy hour all day, World Cup bottles, $3 domestic beers and specials on other drinks. They will be showing the matches on HD flat screen TVs.

Uno Pizzeria Chicago Bar & Grill (3211 M St.) said they should be showing the matches and will open early at 8 a.m. Certain drinks and drafts will be half-off. Happy hour will be from 4 p.m. to 7 p.m. and from 10 p.m. to midnight.