Inflation and Student Loan Updates

Greetings all,

Welcome to our monthly newsletter which focuses on current events and is provided only to our ongoing clients. This is meant to be a deeper dive into issues that are front and center in the minds of our clients and we encourage you to reach out if you have any questions or comments on any of the points mentioned. Have something you’d like to learn more about? Let us know and we will be happy to cover it in one of these newsletters.

If you haven’t yet, take a listen to our podcast, The FI Entrepreneur. We just finished Season One and are starting to organize and record Season Two where we will spend more time digging into the how tos of entrepreneurship and financial independence. We also are planning to interview a number of guests, so if you or someone you know is active in the entrepreneurial or financial independence pursuits, please reach out and let us know! General Market and Outlook – As has been our habit in the last few months, we lead off with a general market outlook. As of writing this newsletter in mid-October, the S&P is down 23.32% YTD and this is after a strong 2.65% gain in the previous session. However, we believe the market is getting ready to turn around and we hope the next 12 months will prove far kinder than the last 12. We’d like to share a few informational sources you might find interesting. 

The first is from Ben Carlson’s Animal Spirits podcast. The title of the episode is Long Term Bullish and even if you don’t have time to listen to the episode, we recommend you spend some time looking through the charts that are presented. At the very least, take a look at the first chart presented. There you’ll find historical data that show a great trend toward positive returns in the years following declines in the stock market of 25% or more. Since 1950, there is only one time where the S&P 500 declined by 25% or more and then didn’t post a positive return in the following year. The average decline is -37.6% and the average return the following year is 21.6% in the chart referenced. We can’t be sure when things will turn around, but we can be confident they will. 

There are a number of estimates on this, but the average Bear market is most often estimated to be around 300 – 400 days long. Our current Bear market has been running for about 285 days. If we had to make a guess, given the current economic conditions, we could easily see this Bear market lasting another 3 to 6 months and increasing loss in the stock market by another 10% to 15%. Check out this article from Investopedia for some more historical perspective on Bear markets

The main takeaway here is that we don’t know when this current downtrend will end, but it will and when it does, you want to be invested in the market because that is the only way to be on the ride back up. Most gains in the stock market happen in short spurts and if you have reduced your holdings or paused your automatic investments, you are going to miss out on those gains. 

Series I Bonds – 
On the flip side, for money not needed for the next year (the funds are locked for the first 365 days), like a mid-term emergency fund. Currently, Series I bonds are yielding 9.62%. This rate is good for the first 6 months of purchase and then will reset to prevailing rates. Analysts are expecting a drop in the rate to the mid 6% range. This is a good thing, as it shows that experts are seeing signs that inflation is decreasing. If you have some cash on the sidelines and don’t want to expose it to the volatility of the stock market, then Series I bonds are a good place to park the money. The 9.62% rate will be readjusted at the end of this month, so you only have a few days to lock this in if you are interested. Prior to making the investment, reach out to us so we can discuss your situation and fully go over the details of this investment. 

Inflation and Interest Rates – 
Here also, we believe we are about to see a change happen. We are as certain as we can be that the Fed will increase interest rates again in November, probably by .75% as they have previously done. Once this is done though, we are less certain about future moves. This is for several reasons. First, inflation seems to be slowing down although the Fed is not willing to declare victory just yet. Second, a major driver of inflation, the residential real estate market is showing signs of cooling. As interest rates have risen, so too have mortgage rates, making existing homes more expensive and causing would-be buyers to delay their purchases. Limited supply in the housing market should keep prices relatively stable, with less rapid growth than has been seen previously. Third, the dollar is just too strong internationally and only continues to strengthen as the Fed increases interest rates. This causes problems around the world and the US will face pressure to slow down their rate increases. Check out this podcast for an excellent primer on how a strong dollar affects the rest of the world.  

Student Loans – 
Earlier this week, the official application for student debt cancellation was released. This allows student loan borrowers to receive up to $20k in debt cancellation (if they received Pell Grants, $10k if they did not). There are income limits to be aware of, $125k for individuals and $250k for families. Additionally, four states at this time are expected to tax the forgiveness if you do receive it. The application is simple and is only expected to take five minutes or so. There is no detriment to filing it out, so if you think you are eligible, you may as well give it a shot. Lastly, there are a couple of questions remaining involving legal challenges blocking the program, but we should have more clarity there by the end of the week.

Thank you so much for taking time to read our newsletter. We hope you’ve found some value here and in our services. If you have, please consider passing our information along to friends and family for whom you think our services would be a good fit. A referral is the greatest compliment we can receive! 

Have a great month and we’ll see you next time!

Best wishes,  The Bona Fide Family

Student Loans and Politics

Read. Listen. Watch.To say the first of the Presidential debates was memorable would be an understatement. Something that seems to have gotten forgotten in between all the one-liners and talking points was the subject of student loans. Many of our clients and their loved ones currently have student loans or will in the future, so we wanted to devote this month’s newsletter to what is an incredibly important issue to so many Americans. As usual, feel free to share these resources around and follow up with any questions you may have. We are here to help!Read: Bank Rate does a wonderful job of going over some of the most pressing questions many people have regarding President Trump and Biden’s respective stances on student loans. They give a measured and level-headed estimation of what is happening with student loan debt now and what may happen in the future.Listen: When saddled with a massive amount of student loan debt, one of the most difficult things to do is wrap your head around trying to make your payments and live your life at the same time! Luckily, due to forbearance, you’ve got some time to take a breath and do some planning. In this recent episode of the Student Loan Planner podcast, consultants Rob Bertman and Meagan Landress share their best tips to find balance with budgeting, saving, investing, and paying off debt without sacrificing your quality of life. Yes, it is possible to deal with your student loans and live your life! Make sure to scroll to the middle of the page where you’ll find the audio.Watch: In this episode of the Zack Beck Show, Zach goes over the proposals (and their probability for success) by both Trump and Biden (in a non-partisan way) and touches upon the offer Elizabeth Warren and Chuck Schumer made to Trump which would give him the power to cancel up to $50,000 in student loan debt for all Americans.If you find the information provided valuable, please pass this email along to your family and friends! Better yet, recommend them to subscribe to this monthly newsletter by signing up on our website!

You can click on the links below to access this month’s resources. Thanks for reading, listening, and watching!

Responding to COVID-19

As much has changed since our last newsletter out, we are deviating from our typical format to bring some tips in how to respond financially to our current state of affairs with regard to covid-19. We all need to take this one day at a time and handle the ebbs and flows as they come.

  • How is the rebate (aka stimulus money) going to get processed?: The rebate from the CARES Act will be is estimated on 2018/2019 tax filing but the final tally will be decided when taxes are filed in 2020. So if a taxpayer has a child in 2020, there is no immediate benefit from the stimulus but the taxpayer will eventually receive a rebate for the child when they file their taxes in 2021, presuming all other conditions are met. If the taxpayer’s 2020 income would be too high to qualify for the stimulus otherwise, no clawback is noted in the bill. The taxpayer is able to keep the money even though their 2020 income would have disqualified them. 
  • How should I use the rebate?:
    • If you have no savings, save it.
    • If you have some savings but have good reason to think you may lose work soon, save it.
    • If you have plenty of savings and reasonable job security, plan to spend the money or invest it back in the market.
    • If you spend it, try to patronize businesses that have been hard-hit has they will appreciate any business they can get right now.
    • Otherwise, take this as an opportunity to buy some stuff you’ve been putting off for a while, like home projects, new appliances, a car, etc., or give the money to institutions, charities, or churches that have been affected.
  • What’s happening with student loans?: Student loan interest and payments are waived until September 30, 2020. No action is needed on the part of the borrower to get this benefit. This will happen automatically by all of the loan servicers for Federal loans. The $0 payments will count towards PSLF. This is all fluid, however, so keep up to date with the most recent developments. What may have been correct a week ago (or even yesterday) may have changed.
  • Additional benefits from the stimulus bill:
    • Pre-mature distribution penalty of 10% is waived if pulling money out of retirement accounts in response to the impact of the Coronavirus. The money taken out can be contributed back to the account over the next three years, something not usually allowed.
    • Unemployment benefits have been expanded. You can file immediately with eligibility starting the very first week you are unemployed. The benefit can be as high as $600 per week for the first four months.
    • Michael Kitces put together a very helpful article that dives into specific examples for understanding the implementation and implications of the CARES Act. You can read more here.
  • Continue to do your part to minimize the spread of covid-19: Live life as you’re able to, as much as it was before this all happened. Support those on the “front lines” and thank them for what they’re doing. Many are putting themselves in harm’s way and are going unrecognized. Our life is a whirlwind like many others and we’re taking it one day at a time. “It is what it is” has become a mantra of sorts as we navigate these waters alongside you.

If you find the information provided valuable, please pass this email along to your family and friends! Better yet, recommend them to subscribe to this monthly newsletter by signing up on our website!

Debt Repayment

Firstly, thank you everyone for your prayers, patience, and understanding as we navigated the death of my father in June. It was a beautiful time to spend with family as we remembered the life and love of Jerry Martinek.

Secondly, I am focusing on debt repayment for this month’s newsletter. Let’s say you owe $50K and you happen to have $50K in the bank. Should you pay off the debt? That depends on the interest rate: how expensive is it to finance the debt? Many people turn to the total amount paid in interest as their guide, but most of that interest is overly-inflated with future value dollars.

Instead, use a time value of money (TVM) calculation on the future payments to determine what the net present value (NPV) is as a better guide of assessing the expense of financing the debt. I regularly run this calculation for my clients.

In short, the real cost to debt depends on the inflation rate which is an unknown variable. Given the latest interest rates, I consider debt with less than a 5% interest rate to be relatively inexpensive. Anything less than 3% is down right cheap! Debt in excess of 5% should be paid off in earnest.

  • Read: This is something that is not often considered, but is truly the right way to analyze what debt you may have: the time value of money (or TVM). Read more here from Investopedia.
  • Read: This  article from Financial Mentor provides a deeper understanding on net present value (or NPV), as well as an NPV calculator.
  • Watch: While this brief video from Harvard Business Review focuses on the net present value (NPV) for investments, the same principle can be applied for debt repayment.

If you find the information provided valuable, please pass this email along to your family and friends! Better yet, recommend them to subscribe to this monthly newsletter by signing up on our website!

You can click on the links below to access this month’s resources. Thanks for reading, listening, and watching!

Student Loans

A focus of mine in financial planning is student loans. Recently, a few headlines regarding that subject got my attention, so I wanted to focus on this pervading element of many young adults and their financial situation today:

  • ReadStudent Loan Hero was founded in 2012 as an unbiased solution to organize, manage, and repay your student loans. As every student loan borrower is in a different financial situation and no “one size fits all” solution is possible, their goal is to help borrowers understand their student loans and make intelligent repayment decisions. This helpful article outlines their answers to 20 of the most googled questions regarding student loans. 
  • Listen: Joshua Sheats from Radical Personal Finance conducted two interviews with Jay Fleischman, a bankruptcy attorney who specializes in student loans. In Radical Strategies, they cover strategies for dealing with loans that will give flexibility with your repayment plans, what to do if you’re in default on a loan, and whether it’s possible to get out of a student loan with bankruptcy. In Here’s What You Need To Do, Joshua and Jay tackle the process of analysis. Jay gives a step-by-step action plan for what you need to do in order to analyze your options. 
  • Watch: This video from Market Watch, featuring Rohit Chopra, highlights a variety of ways to approach your student loans, including income-driven repayment plans, how to qualify for student loan forgiveness, graduated and extended repayment plans, and when to challenge your student loan company.

Services SpotlightLoan Buddy is a new financial technology platform with a focus on providing solutions for advisors who are student loan planning for their clients. It allows me to provide a better student loan analysis for clients. Current clients can ask about it at your next meeting!

If you find the information provided valuable, please pass this email along to your family and friends! Better yet, recommend them to subscribe to this monthly newsletter by signing up on our website!

You can click on the links below to access this month’s resources. Thanks for reading, listening, and watching!

Transitioning Children to Adulthood and Considering the Option of Paying for College

Changing up my format slightly this month, I’m offering three podcasts on the topic of transitioning children to adulthood and considering the option of paying for college. With high school graduation season upon us, this topic is timely as ever. Therefore, I’d like to highlight the following:

  • Listen #1: Joshua Sheats is known for being radical (hence the name of his show, Radical Personal Finance). In this podcast, he discusses why he–as a financial advisor–refuses to save money for his kids’ college. His direct advice to an inquirer is this: “Don’t set up a college plan for your young child. It’s a bad idea and a poor use of money in light of all the other things you can do with money that are better.” Listen to find out why!
  • Listen #2: In this podcast interview between Meb Faber and Ric Edelman, the topic is broached of what the future will look like in respect to work and technology for the next generations. In essence, it is going to look far different than what we’ve known. The tendency is to believe that the future will be similar to what our parents and grandparents experienced as they aged. A linear progression – school, work, retirement, death. Ric believes this is going to change: the linear lifeline is going away. It will more resemble school, work, back to school, a new, different career, then a sabbatical, more school, and so on…a lifeline that’s more cyclical.
  • Listen #3: J.D. Stein from Money For the Rest of Us discusses the changing nature of employment and what humans can do about it. In this episode you’ll learn why job skills will be most in demand in the coming years, how the level of academic knowledge needed to complete jobs peaked in 2000 and has been declining since, and how robots and other information technology are substituting for labor.

If you find the information provided valuable, please pass this email along to your family and friends! Better yet, recommend them to subscribe to this monthly newsletter by signing up on our website!

You can click on the links below to access this month’s resources. Thanks for listening!!