Assets

Most financial advice is about financial assets. The truth is, there are really five different kinds of assets that we should consider:

Personal Assets. Clothing, furnishings, and jewelry fit into this category. Most of this “stuff” decreases in value to less than half what we paid for it before we even get it home.
Household Assets. This includes real estate, cars, and appliances. Most of these items either appreciate in value over time or provide a fair value over their life (in relation to renting the service).

Employment Assets. Some employers still provide for a pension for their employees’ retirement. This pension has a value, and should be considered an asset. Since most companies have under-funded their pension plans, you might discount the value of this asset by half, but you should still consider it if it’s one you have available to you.

Social Security Assets. Since most of us have been force-fed the koolaid of having our 401(k) rather than considering what Social Security benefits may be available to us, we don’t even think about this benefit as an asset. Unless it is eliminated entirely, though, we should still consider the value of this future income stream as an asset, although we should also discount it somewhat, due to the fact that the system is vastly underfunded and will become overburdened over the next several years as the “Boomers” begin retiring and drawing benefits.

Financial Assets. This is the 401(k) plan, IRA, or taxable stock, bond, mutual fund or savings accounts that you’ve established. This one usually gets the most attention, because it tends to trump all the other types of assets. When you have plenty in this category, you don’t tend to worry about the other categories, because you can always use the money from here to buy the goods and services to cover those other categories.

Now for the good news – even though most of us don’t have anywhere near enough set aside in the financial assets category, it’s not impossible to build things up in order to make your future a little brighter.

According to a recent article by Scott Burns, there are a couple of “seductive illusions” that we need to avoid in order to get there:

The first of these illusions is that our personal assets will somehow contribute to our future security. Take a stroll through the Goodwill store and you’ll see the illusion of what those things are worth, should you ever need to sell them.

Secondly, and possibly the most harmful of these illusions, is that our household assets can be quickly turned into financial assets. This illusion is harder to break, because past generations have done this successfully: most residents of Florida and Arizona had very little in financial assets before they sold their household assets in New York or Chicago or California. It doesn’t work as well for those of us in the great Midwest, where property doesn’t “bloom” in value every year.

So – how can you tell if you’re doing the right thing with your assets? Here are some basic benchmarks to consider:
* If your Personal Assets are growing faster than your Financial Assets, your focus is in the wrong place and trouble is on the horizon.
* If your Household Assets are growing faster than your Financial Assets, you’re fortunate to live where you do. But you may be heading for a problem in the future, having to sell your home in order to provide funds to live on, because that’s where your money is.
* And a sign that you’re headed in the right direction – if your financial decisions revolve around reducing your mortgage or increasing your financial assets rather than purchasing or paying for Personal Assets, then you’re doing the right things. Keep up the good work!

What is College Really Worth?

About this time of year, many families of high school seniors will begin to have some very serious discussions about money, education, and the realities of what is affordable versus what is not. In many cases, this discussion will have a dramatic impact on the student’s future.

For many parents, this brings up a dilemma: perhaps you’ve saved some money, but not enough to pay for the incredible cost of tuition at some of the higher-end colleges. It seems that the saving that you’ve done is actually working against you, because you’re finding that having some assets to your name takes you out of the running for many grant options.

At the same time, your child has, well, good grades, but they’re not the valedictorian by any stretch. What’s the next alternative?

Of course, there are plenty of loan options to choose from, including home equity loans, “PLUS” loans, and loans from retirement savings plans.

Each of these options (and there are many others to choose from) has shortcomings. Home equity has a tendency toward a floating rate, which could become very expensive in the long run. PLUS loans are non-deductible and often carry floating rates, plus the repayment period begins immediately. Borrowing from a retirement plan is never a good idea – it’s hard enough to put money aside in the first place, let alone continue putting money aside and paying yourself back at that same time!

So the issue comes back to the original question: what is college really worth? Obviously a college education is worth the expense in the long run, but is an education at a prestigious institution really worth the additional cost?

There are really two answers to that question. First of all, most of the “prestigious” schools operate on a false pretense when it comes to the cost of attendance. It is extremely rare that a student would pay the “sticker price” to attend. There are so many endowments and scholarships available at these schools, most students don’t come anywhere near paying the whole amount.

The second answer is a resounding “No!” – meaning, the quality of the education and the cachet that goes along with it are likely not worth the additional cost, even if you were to be required to pay it. When making comparisons between various different schools you need to keep in mind that the name of the institution makes far less difference in terms of career success for your student than does the simple fact that the student has taken part in and passed this milestone in their life.

So if the question comes down to cost – and let’s face it, you know it will – focus more on making sure that your student can get an education at a quality school, rather than believing that the prestigious name institution is going to make a big difference in the long run. The education is the important part; we just need to remember that.