15 Tips Every College Grad Should Know

15 Tips Every College Grad Should Know

Originally published on May 23, 2019, and updated on June 11, 2020.

“Logic will get you from A to B. Imagination will take you everywhere.”  Albert Einstein

Congratulations on making it to your special day, Graduates!

As a parent, I have two teens in high school with college aspirations. In my other role, as a professor, I always attend every college graduation for my college students. However, this year was an exception due to the pandemic so ceremonies were not permitted. I truly grieved for all college grads and the missed opportunity of completing college on campus this spring. The alternative, video conferencing of your graduation just doesn’t cut it for you and your family. Hopefully, your schools will be able to arrange a commencement ceremony in the future.

Focus On Your Accomplishment

Graduating from college is a great achievement. I share in the thrill of the completion of an important goal that you worked for and persevered against a plethora of odds that are personal to you. For many students, you may be the first in your family to achieve this wonderful milestone of graduating from college. I remember my own parents’ beaming faces when I crossed over to where they could not go.

Now, I hope you get your chance to hear countless words of guidance and inspiration, some worthy and some worthless, to direct you to your path of success. These mileposts are truly precious. You just may not know it yet.

This advice is not only for my children, my student grads, but also to my younger self in that I wish I had listened to.

#1 Invest In Yourself

No one else will do what is best for you except your family, and they already did their part. Therefore, your future is up to you. Your returns on investment are virtually infinite and long-lasting based on your efforts to develop your personal skills, creativity, and talent.

Pick up new skills whenever the opportunity opens up or simply teach yourself. Learn a new language, coding, machine learning, or how to debate. Go to workshops, take part in online tutorials, and travel where your interests lie.

#2 Hard Skills And Soft Skills Are Important

Eliminate a weakness, whatever it is,  by making it a strength. In college, you may not have enough experience in public speaking, writing, problem-solving, or in advancing your tech skills. You need both hard skills and soft skills. Hard skills are job-specific and relate to your field. They come from courses you took in college or elsewhere, training or certificate programs.

While employers are looking at skills listed on your resume, they are increasingly focused on your personal attributes. These traits are referred to as soft skills. They refer to communication abilities, creativity, attitude, critical thinking, and decision making.

How successful you can work as part of a team effort matters greatly to your future boss and colleagues. Collaborative skills are harder to assess than your college grade point average.

#3 Find Your Passion

Be conscious about what you like and don’t like. We naturally gravitate to moving in the direction of what we enjoy doing. It will take time to find your predilection, so be patient. There is no set time limit on finding your dream job and it may not necessarily be found your first job.

Stephen Colbert’s words at Northwestern University’s commencement in 2011 are memorable: “If everybody followed their first dream in life, the world would be ruled by cowboys and princesses.”

Don’t stress about it. Take the time to explore what makes you excited to learn more about it.  Seneca, the stoic philosopher said,  “What progress, you ask have I made? I have begun to be a friend to myself.”

#4 Be Productive At Your Own Speed

Social media may sometimes cause us to think that our friends and colleagues have so much more than us. Online postings often amplify everyone’s accomplishments and may make the rest of us seem like we are being left behind.

Remember Aesop’s fable “The Tortoise And The Hare”? The tortoise, taunted by the hare, challenges the hare to a race. Overly confident, the hare took a nap, while the slow and steady tortoise, moving very slowly, surpasses the hare, and wins the race.

Like the hare, don’t be careless with your time, whether at work or your free time. A slow but steady pace worked just fine for the tortoise.

#5 Adopt A Healthy Lifestyle

Be good to yourself and your body. Eat healthy, exercise daily, see your family and friends, and keep up a positive attitude. It may be harder to do when you first start working. Don’t lose your focus on what matters to you. Of course, you want to make a good impression on your boss and your colleagues. That goal is not mutually exclusive from being healthy.

When you’re in college, you naturally have more flexibility and more time. However, when you work with others, your schedule may be more regimented and demanding. That often means working long hours well into the night and on unpredictable projects will happen. Over time, you will better understand the rhythm of your office and be able to gauge when you are needed to stay late and help your colleagues out. Make sure to take healthy snacks with you to work and learn how to cook easy recipes when you have free time.

It may be easy to justify not going to the gym and eating fast food at first. However, over a relatively short time, those bad habits you swore you wouldn’t do may be reducing your energy level. As such, it is counterproductive to treat yourself badly. Poor health may lead to lightheadedness, absenteeism, and poor decision-making. You may be in your 20s now but you won’t be forever.

#6 Embrace Lifelong Learning

Recently, I overheard a student soon-to-be grad in my class tell another, “I am so tired of learning…I just want to make lots of money!” He spotted me and we shared a giggle, and he said, “Prof, I know what you’re going to say…about that Warren guy.” And I did.

Billionaire Warren Buffett spends 80% of his time reading and famously goes through 500 pages daily of trade publications and stacks of reports. This has been a habit for most of his life. It is not just Warren Buffett who devours reading, but many of the most successful: Oprah, Mark Zuckerberg, Elon Musk, and legions more.

Reading and learning will make you sound interesting to be around. I traveled a lot for my job with salespeople, bankers, and company management. I also enjoyed being able to talk to everyone about new topics or learn something I didn’t know before, and vice-versa. It made long distance trips and time away from home more fun.

Learn Something New And Valuable

Know what you don’t know and become your own school. Develop expertise and deepen your knowledge in something valuable like improving race relations. In recent weeks, our country has awoken to racial injustice and disparity. Disparities have existed for a long time. While some progress has been made, wide gaps exist for people of color. Peaceable protests have spread across the country, amplifying calls for action. People are interested in improving our country as reflected in this week’s New York Times Best Seller lists which provide a plethora of views on solutions to racial despair.

Embrace lifelong learning which has lots of benefits and no downside.

Charlie Munger, Vice-Chair of Berkshire Hathaway (and close friend and partner of Warren Buffett) says and it’s one of my favorite quotes: “I never allow myself to hold an opinion on anything that I don’t know the other side’s better than they do.”

#7 Take Time To Reflect

Look around you and be more engaged with the people surrounding you. Any downtime we may have is usually taken up by our smartphones. Although smartphones connect us with people, places, and things at lightning speed, it may also be disrupting our productivity, hurting our memory, and making us less sociable with those in front of us.

Our phones are disrupting us from being in the present moment. Put down your phones and take time to simply reflect and be curious. Not all of our notifications are worth a look at our phone. We all are looking too much at the tops of people’s heads at the dinner table at home, in the restaurant, at work, in the classroom.

I understand the difficulties of being phone-free for even a few hours. Recognize when you are mindlessly checking emails or texts that could be better spent reading brain food posts on like Farnum Street. I always feel a tad smarter after i inhale their wisdom. Speak to someone new or simply take a moment to enjoy the beauty of the world.

#8 Cultivate Social Skills and Networking

If you are fortunate you will enjoy healthy longevity and meet people from all walks of life. In school and when we have free time, we spend time with the people we most enjoy. As you begin your first job after college you will be connecting with throngs of new people at many different levels.

Always be ready to make a good first impression. It may matter greatly who you are being introduced to. Be respectful, a good listener and ready to learn. It doesn’t mean you have to agree with everything you are being told. Know that you are the “newbie” in the circle and being quietly assessed.

Nurture the people in your growing network as an important asset that may pay future dividends. At some point in your career, you may want to reach out to that person you met at a conference. If you don’t already have a Linkedin account, create one and update it regularly.

I am connected with many former students on social media, and enjoy watching their careers grow and encourage them to stay in touch.

#9 Perfect Is The Enemy Of The Good

This is the beginning of your professional life. You don’t know what to anticipate in your new environment. Expect to make mistakes and learn from them. If you haven’t already done this on your interview for the job, read their annual report and any articles to understand the company. Competence is what you are aiming for when you first get started in your new job.

Congratulations on getting your first job. It is often hard to find an opportunity during a weak or recessionary economy. When you first take your job, investigate your company benefits package.

Related Post: A Guide For College Grads On Your Company Benefits Plan

#10 Paying Your Dues

Initially, you are likely not getting the “cool” assignments. You may be doing a lot of the grunt work or doing something you believe is beneath you. Everyone goes through this feeling.

Remain enthusiastic as your co-workers and boss may be wanting to see how you handle the easy work before they give you more tasks. Be a team player. Collegiality and respect matter. Don’t be that person that no one wants in their group or a specific project.

Volunteer to help others so long as you as fully completed all your work. When I hired associates to work with me I often had “eager beavers” wanting to do everything everyone else was doing, leaving behind the work that they were asked to do or do a quick and shabby job. Don’t be that person.

#11 Seek Opportunities To Learn New Skills At Work

As you get deeper into the swing of your job, complete tasks on or ahead of schedule, become a sponge. Learn as much as possible and partake in any company-sponsored training offered to you. Challenge yourself with the most difficult tasks.

I heard a great story from a now successful executive at a major newspaper firm, who migrated from an entry-level job, by completing her work efficiently, then helped others, picking various skills making herself invaluable. She is now an executive running operations of a major communications firm.

#12 Be A Self Starter

When you are new to your job and the work environment, there are others you may be able to go to ask questions. While you can inquire of your peers and boss, make sure you first take the initiative to learn on your own first and research the issue. A motivated person is someone who can begin a job or a project without having to be encouraged or having “their handheld.”

#13 Social Media Habits And Emails

As soon as you begin your search for a job in your career, review your online presence. Make sure it is ready for “primetime.”  More than 90% of employers will search your social media profile, looking for red flags before they arrange an interview with you.  Separately, so will your landlord and others. Assume everything you have posted can be publicly seen or shared. That’s legal and not an invasion of your privacy.

Once you are working, you may be writing and answering a lot of emails. Make sure your emails are well written, free of obvious spelling and grammatical errors. There is no such thing as a private message. Never denigrate anyone in an email. If you have something negative to say then a one-to-one meeting is always better. Oh, and leave out any slang.

#14 Take Risks

As you build your confidence, take risks. Failure may be the result but it is always worth trying. As Oprah Winfrey said at Harvard University, “Failure is just life trying to move us in another direction.”

Among the most inspiring quotes made at a commencement speech was Steve Jobs at Stanford University in 2005, only six years before he passed away: “Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose.”

#15 Be Happy

There have been a number of studies that have shown college grads are happier in life than high school grads. Going to college improves your quality of life, you can earn more, you may have greater access to health care and your marriages may be better. At any age, background, or income status, education is desirable.

You have a long life in front of you! Make use of what you are learning, skills you are building, people are meeting.

If you haven’t taken a personal finance course, here’s a graduation present for you, worthwhile at any age:

Thank you for reading! Please share with others and subscribe to get our free weekly newsletter.

What has most inspired you in your life? One of the most common questions asked when interviewed for a job is this: “what is the biggest risk you have taken in your life?”  Please share any of your thoughts related to how you will build your skills in your career?

 

 

 

9 Ways To Avoid Lifestyle Inflation With A Savings Plan

9 Ways To Avoid Lifestyle Inflation With A Savings Plan

Lifestyle inflation happens when our income rises, we increase our spending.

Like a balloon that gets larger, we tend to spend our expanding pocketful of extra dollars.

It happens when we get our first job after college, get raises, bonuses, or change jobs for more pay. We conjure up what we had considered buying before this newly found financial freedom and spend it quickly. Instead, we should be using this money wisely.

To avoid lifestyle inflation, we need to understand our budget when we start our first job and throughout our career.

Briefly, there are 9 ways to use our savings, which we discuss below after we put a budget in place:

  • An emergency fund.
  • Set up a budget.
  • Spending limits.
  • Pay down debt.
  • Pay down student loan repayment.
  •  Retirement savings.
  • Leveraging the power of compound interest.
  • Diversify your investments.

College Students Are Probably Better Budgeters

When we go to college, we become frugal out of necessity.

College needs for money for the academic year are housing, meal plans, public transportation or car costs including insurance, gas, repairs, parking permit, textbooks/supplies; cellphone/cable/streaming; clothing, food outside of meal plan, entertainment, clubs/ activities; clothing, computer, travel, laundry, and personal items.

Parents may share or pick up school-related costs such as housing, meal plans, car insurance, clothing, textbooks, travel, and computer. Students may also have their mobile phone and streaming through shared family accounts. Parents may provide their kids a monthly allowance or an emergency fund for miscellaneous expenses.

Students are most likely going to pay for lifestyle needs like meals and alcohol off campus, gas or public transportation; additional clothes, entertainment, gifts, personal items, and any club they belong to.

Working Through College Helps

The average full time college student makes $195 per week and may stay on for winter break or during the summer. Many college students may work 30 hours per week or more at a variety of jobs on and off campus.

The majority of college students make between $7,500 to $42,000 per year while in school according to Bizfluent. The wide gap is likely due to hourly differences for full-time students  and for part-time students who may work at  full time jobs.

According to a 2016 Digest of Education Statistics article, 43% of full time students were employed and 78% of part time college students were employed.

A 2016 LendEdu survey  illustrates college students attitude about money, jobs, budgeting and saving:

Current financial situation:

  • 49% of students were in fine shape versus 51% barely making ends meet.
  • 42% were saving money monthly, 58% were not.
  • 71% were saving some part of their income while 29% were saving zero.

College Jobs

  • 73% of college students worked during studies: 16% had an on-campus job, 24% had part time off campus or internship, 28% had a summer job and 5% had full time employment

Budgeting/Emergency Fund

  • 59% were very knowledgeable or moderately knowledgeable about budgeting.
  • 57% were budgeting either using an app or doing it by hand.
  • 43% were not tracking their monthly spending.
  • 19% had an emergency fund while 81% did not.
  • Their biggest monthly expense, the largest categories were: food (38%), rent (29%), alcohol/drugs (25%) and clothing (8%).

Knowledgeable about Personal Finance

  • 51% were very knowledgeable or moderately knowledgeable about the need for saving for retirement.
  • 34%  took a personal finance course in college, 21% hadn’t but planned to and the rest have no interest in taking such a class.

Personal Finance Goals: 29% want to pay off student debt, 19% start saving for retirement, 23% plan to build good credit and 20% want to save for vacation and/or a special vacation.

This survey indicates a need to learn how to better manage money at a young age in order to have more financial security and freedom long term.

First Job Post College Leads to Lifestyle Inflation

A college student with less funds is more budget-oriented. They may have accumulated some cash while in school or parental contribution but they use it sparingly.

Once getting their first job, a $50,000 plus annual income feels pretty sturdy in former students’ hands, and quickly disappears. Their college life of squeezing dollars seems to dissipate quickly. If they are living at home, they may feel even richer.

Salaries for your first job after college in 2019 will probably be in the $52,000 per year range, a 3% bump from Korn Ferry’s previous estimates. Salaries will be higher for majors like aerospace, software or mechanical engineers.

Your gross monthly income is $4,333. However, you will be paying your bills with your monthly take home pay, net of taxes, of about $3,300.

 

Related: A Guide For College Grads On Your Company Benefits

Start A Budget As Soon As Possible

The  monthly income may seem like a lot of money to someone just out of college. However, it needs to support a lot of fixed monthly bills, including rent, utilities, student loan debt, public transportation or car payments, gas and health insurance payments.

Three musts that should be added to your fixed monthly payments are savings for retirement, emergency fund, and investing accounts.

There are variable expenses, largely discretionary. These costs include food (groceries at home and eating out), clothing, entertainment, personal care and services.

With that in mind, we can calculate average monthly expenditures for major categories drawn from the Bureau of Labor Statistics (BLS) Consumer Expenditures Survey of 2017, the last full year of publication. This survey tracks the average American as well as provides respective demographics.

Post College Demographic Consumer Unit

The post- college graduate after a few years in the workforce falls comfortably in the “25-34 years” group, with age of reference person being 29.8 years old. There are 2.8 people in this consumer unit, including a child under the age of 18 years old.

This household has 1.5 earners with 1.7 vehicles. Of this group, 75% went to college.

The 25-34 year reference person earns $61,145 aftertax annually or takes home about $5,095 per month.

Average total expenditures are about $4,610, falling into the following:

Housing is the biggest expenditure category at $1,660 per month

When you are just out of college and working at your first job, you will likely be renting an apartment with two or three other people. Over a  period of time, however, as you move through your 20s, you will want your own place for privacy and potentially, a family.

Where you live will have implications on not just your housing costs, but your overall living costs. Living in an urban market like New York or San Francisco is much more expensive versus living in Columbus, Ohio regardless of whether you buy or rent.

Roughly 59% of this age group are renting while 41% are homeowners. Of this age group, 33% have mortgages.

Housing accounts for 36% of total expenditures. However, housing costs vary whether you own your home, pay a mortgage or are a renter.

This is a broad category and includes utilities, mortgages, maintenance, insurance, repairs, telecom, mobile, household supplies, furnishings, furniture, flooring, appliances, and household equipment.

On its own, utilities ( including gas, electric, water, telecom and mobile services) are 8% of your total housing costs. If you rent, some utilities may be included. Many homes have cut the cord and use mobile only though that may not work in some rural areas.

Be Cautious On Your Housing And Surroundings

You should keep your housing costs to 25%-30% of your total spending budget. Lifestyle inflation is going to play a big role in your housing costs getting out of control. If you want the biggest house in the high consumption neighborhood to “keep up with Jones” your costs could easily spiral out of control.

The house is often the least of the problem. Add in the decorator and furnishings, the luxury cars, the private schools, cruises and the country clubs, and other conspicuous spending, and suddenly your six or seven figure income is drained from spending and higher debt.

Food: $616 per month

What we spend on our food is dependent on the type of household we have. Our reference household of three, including a young child under 18, are eating home 54% of the time and 46% away from home. Food accounts for 13% of total expenditures.

As we all know, and I can attest in our household, eating out is far more expensive, especially when you add beverages.

It is a good idea to do comparison grocery shopping, use coupons wisely, eat out more prudently to save more. Food should account for 10%-15% of your budget especially if your household has four people.

Transportation: $760 per month

This category amounts to about 16% of total spending. It matters if you live and work in an urban market with access to a good public transportation system or need a car(s).

While NYC is super expensive, monthly metrocards are among its few bargains at $127 for a 30 day unlimited pass if you depend on the train. On the other hand, buying a new or used car, net of trade-in,  car insurance, finance charges, gas/oil, and repairs, can be costly. You can eliminate about $58 per month if you are handy with cars.

You should aim to keep transportation below 10%-15% of your spending.

Gas, fuels, and oil cost $168 per month in 2017, lower than previous years, and can be a big swing factor. Shopping around for a used car that you buy outright and comparing vehicle insurance cost can bring down your monthly burden.

Cars are often a big part of our conspicuous consumption. For some, it is a functional device to transport us place to place. For others, the “dream” car has to go with the “dream” house. Resist spending that may go with your success and higher income.

A word about why budgeting is for everyone

In one of my favorite books, “The Millionaire Next Door“, authors Stanley and Danko portray the differences between the self-made millionaire and the typical wealth inheritor.

The one who became rich by working hard often bargain shops for low key used cars, saves and invests wisely. On the other hand, the classic wealthy person who has accumulated wealth through legacy tends to be a big spender for the sake of image. The latter exhibit similar traits to those in the early stages of lifestyle inflation, ramping about debt quickly.

Healthcare: $264 per month

This category is 5% of our total spending and largely associated with health insurance.  If you are fortunate this may be substantially paid by an employer plan. Medical services, medical supplies and drugs account for the rest. As your family grows and especially ages, healthcare costs rise for the household.

You should target these costs to stay in the 5%-10% level.

Apparel: $170 per month

Apparel is just under 4% of total spending and certainly is a variable annual cost. For budget purposes, you could always use a rule of thumb of 2%-4% of your total spending.

More likely, families will spend seasonally or back-to-school and special events. For young families with young children, clothes could amount to larger expenditures because of outgrowing (sizing out) or fashion-conscious teens. Shopping wisely really matters whether in the mall or online to keep spending down.

Entertainment: $220 per month

We entertain differently depending on our age, our household, hobbies, video, sports, music and whether we have pets. These variable costs are something we can exercise some control over. It is may be harder when we have children, however.

Here, entertainment is a tad under 5% but may increase if you count eating out as part of entertainment.

Personal Insurance and pensions: $549 per month

Your social security payments are your contributions deducted from your paycheck and are picked up into this category. Also, here are life insurance,  railroad retirement, government pensions, private pensions and retirement programs for the self-employed. This accounts for 12% of your monthly expenditures.

Education: $102 per month

Education is part of “Other Expenditures” but deserves its own mention. It includes tuition, fees and supplies for all levels of private and public schools, including colleges.

The relatively low amount may not fully reflect the burdensome student debt that is usually carried over a 10 year or longer time frame. Some students may accelerate their payments to get rid of their debt. Others pay just the monthly minimum which could be as low as $50 per month. Others make late payments.

Other expenditures: $269 per month

These are miscellaneous items that are largely personal care products, magazines, credit card memberships, legal fees, tobacco, donations,  and alimony. This amounts to 5.7% of total spending.

Those that can give to their favorite charities should donate higher amounts. A rule of thumb we have used is 10% though recognizing that is not possible for every year and for everyone.

 

Related : 10 Ways To Better Manage Spending

Related: Saving For Retirement in your 20s

What Does Your Budget Look Like?

Monthly income of 5,095 less total expenditures of $4,610 for the average 25-34 year household leaves $485 or almost 10% of net income

Your “monthly savings” of $485 or $5,820 can be boosted a bit especially if you can keep your housing costs to 30% of total expenditures or less. Certainly if you are renting or buying a modest home, and able to get an affordable mortgage, your savings will have room to grow.

You should target savings to be at least 10% of your total spending.

To combat the likelihood of increased spending as your income grow, you need to have a plan in place:

#1 Establish an emergency fund for at least 6 months of necessary expenses such rent, student loan payments, transportation, utilities, phone, food (even pizza). You may be living on your own or with roommates and they’ll be expecting your monthly contribution.

#2 Set up a budget. Once you know what your take home pay, you should think about what your fixed and variable expenses are. Keep your housing costs from expanding dramatically as you grow your family. Consider a used car and paying cash. It is not unusual to quickly ramp up spending for entertainment, eating out, clothing for work and play as your earnings grow.

#3 Spending limits. The problem is that the new freedom you have to enjoy more things with your new paycheck, the more likely you will spend more than you should. You want to live well within your means so you can grow savings. Bargain hunt and consider ways to avoid impulsive shopping.

#4 Pay down debt. if you are living home initially after college, that is a great time to put some savings away for your emergency fund and towards paying off debt. Reduce your high cost debt. This is usually your credit card balances which grow faster. Instead, pay your credit card balances in full. If you can’t, stop spending with your cards.

#5 Student loan repayment has to be an important part of your priorities. Education costs from the Consumer Expenditures Survey may be understated. Your household may have higher student loan repayments closer to the national average $304-393 per month.  Pay your fully monthly bill, not just the minimum for student loans.

#6 Consider increasing your loan payments. You may decide to pay more than your current student loan bill if you get a bonus or substantial raise. If you are able to handle paying back your federal and private (if any) student loans sooner that may be good. Look to pay the higher cost of debt first, usually the private loans.

If you buy your home or condominium, consider a shorter term for your mortgage, say 15 years versus a 30 year mortgage. The latter is a higher total cost because of the higher over interest costs.

#7 Retirement Savings. You may have a jump start to saving for your retirement if you began contributing to your 401K plan especially if your company has a matching contribution. There are tax deferred savings benefits. You need to save up to the amount that will trigger your companies’ matching  contribution. Allocate some savings for an IRA/Roth IRA.

#8 Leverage the magic of compounding interest. Relatively small and regular contributions in your 20s amount to substantial savings for your retirement decades later through compounding interest. Making a monthly contribution of $800 for 30 years at an 8% rate produces savings of $1,203,223.29. The earlier you invest, the better your retirement grows.

#9 Diversification is an important strategy. It is always recommended that you diversify your investments among different financial instruments and asset classes such as real estate.

By diversifying, you can reduce risk by buying different kinds of stocks in different industries, even in different markets (US versus emerging markets). You can never eliminate risk or loss altogether but you never want to put  all your  eggs in one basket.

Taking advantage of retirement savings: 401K and Roth IRA

In 2019, the maximum contribution you can make to your 401K is $19,000, likely a steep amount to make if this is your first job. Do make some arrangement for some percentage of your paycheck to be withdrawn for your 401K. It is a good habit and important to start as early as possible given the benefits of earning on a compounded basis.

You should also open up a  Roth IRA account to begin saving outside of work. In 2019,  the maximum amount allowed is $6,000. Maybe you received some graduation presents from family which would be perfect seed money to put into these accounts.

At an early age, post college, you can learn to how to reduce spending, save more to pay down debt, create an emergency fund and invest in your future. What has worked for you when you are budgeting? What ideas have you tried that worked for your household? We would like to hear from you!

 

 

 

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Your Guide To Basic Estate Planning In 6 Steps

Your Guide To Basic Estate Planning In 6 Steps

“Death is not the end. There remains the litigation over the estate.”

Ambrose Bierce

Have you created your estate plan?

Most of us want to avoid litigation especially over an estate. Having a plan helps you do that. The best time to think about your plan is when you don’t have a compelling reason to do. Keep your family’s best interests at heart with a well developed estate plan. By creating your estate plan  you will have control over your asset distribution during your lifetime to your loved ones.

A significant portion of your assets can be easily transferred to your intended heirs, avoiding often painful and lengthy probate court procedures.

What Is Part Of Your Estate Plan?

To design your estate plan in 6 steps we address the following:

  • Organize your assets into nonprobate propery.
  • Know who your designated beneficiaries.
  • Determine if you have joint ownership with rights of survivorship.
  • Set up your will for probate property.
  • Have a letter of instructions to loved ones.
  • Consider a trust if appropriate.
  • Donate assets to your charity.
  • Health care proxy or advance directives documents are essential.
  • Testamentary Letters.

 

Having a plan is important for your family and is in their best interests. Yet, only 40% of US adults have created a will or a living trust, with 81% of those age 72 or older and 58% of boomers, ages 53-71. Even younger people, especially if they have young children, can benefit from putting together an estate plan.

6 Reasons why you need an estate plan

#1 Assure financial support for your surviving spouse, your children and your grandchildren, and even later generations. The passing of a loved one is stressful and often traumatic. Adding financial stability is helpful.

#2 Make sure your wishes are carried out while you are of sound mind. We never know when our mental capacity diminishes through tragic means or aging.

#3 Avoid litigation for your family in the future. Make your intentions for distribution known so they won’t be  challenged in probate court which takes time and costly.

#4 Arrange your estate plan with capable professionals to steer away the potential publicity that can sometimes accompanies the passing of a loved one.

The Great Aretha Franklin died in 2018 without a trust or will forcing her sons to file documents in a probate court in Michigan. Prince’s estate was not covered by a plan when he died in 2016, and the distribution of his assets will likely take more time and more public scrutiny.

#5 Minimize taxes and costs when it is time for asset transfers.

#6 Support a favorite charity, address pet care and consider digital assets.

How To Start Your Basic Estate Planning

Start discussions with your attorney, tax accountant and financial advisor.Through frank discussions, your goal is to put together the most beneficial plan for your situation at the most effective cost. Make sure that you account for your digital assets which we fully address in this post.

You built your wealth. Now you want to properly distribute your assets according to your wishes.

Provide a plan for your family, make sure your assets go where you intend them to go and that the person you expect to be executor of your will, will be the one responsible for administering your estate will, in fact, be that person. Pick your potential executor.

A Simple Estate Planning Guide In 6 Steps:

Step 1

Set up most of your assets as nonprobate property. These assets outside the will and for many of us, are the bulk of our estate.

This property will automatically transfer to your designated beneficiary(ies) upon your death. One of the most important assets you will need to address is your home (eg. house, condominium, cooperative, vacation home) unless you rent only.

Your nonprobate property are assets that transferred to survivors by contract based on your designated beneficiary. Name beneficiaries for all of the assets that you can.

Your nonprobate assets will include:

  • retirement accounts, including 401(k) plans,
  • IRAs, pension plans,
  • payable-on-death clauses in bank accounts, investment portfolio(s),
  • life insurance policies or
  • by owning accounts with another person, usually a family member,  through rights of survivorship.

These assets are generally transferred directly to those beneficiaries that were designated by you.

At the time you opened these accounts, you likely designated your beneficiaries on a legal form.

Review beneficiary designations periodically

You may want to change your beneficiaries as you go through life.  For example, if you designated your mom when you first set up your accounts, it is probably a good idea to refresh your beneficiaries. Often, after life changes such as a divorce, remarriage or the passing of a loved ones, we want to update our beneficiaries. Sometimes we can provide for a contingent or secondary beneficiary. To understand the importance of designated beneficiaries, please read here.

Joint ownership with rights of survivorship

Husbands and wives (or parents and children) may have joint ownership of assets called joint tenancy with the right of survivorship.

Transfers can be made by property ownership designation These assets can include bank accounts, investment accounts, cars, and home(s). Upon the death of one owner, the surviving owner(s) will receive this property by operation of law, rather than through the will.

These assets will be a majority of our assets and its transfer is simplified.

In most cases, your intended recipent need only present an official death certificate and the funds or property will be transferred to his or her name in the ordinary course of business. These assets do not pass through the will or the probate process.

Step 2

Set up your will for probate property

A Will often called “Last Will and Testament” is a formal written document that directs how assets not addressed in Step 1 are to be distributed upon the death of an individual.

The individual making the will is called the testator. He or she designates how his or her remaining assets should be distributed after death.

Appoint a personal representative, commonly called an executor and give the executor the powers necessary to fulfill your wishes. Without a will, your state’s intestacy laws will dictate how your assets are to be distributed.

Don’t have co-executors

Sometimes people opt for co-executors, such as a  spouse and an adult child who they believe can work in unison. Relatives and friends are not great choices to perform the executor’s duties.

Choose one executor that is trustworthy. While co-executors may sound harmless, acting in unison in reality can be more difficult. Executors may be called on to pay off debts, liquidate assets, file tax returns and estate tax returns, and may need to get the court’s permission to distribute the balance of the remaining assets, including money.

Spouses have legal rights to each other’s estates

State laws presume that married couples share their fortunes equally.

Sharing your property with your spouse is a right. This is called “the partnership theory of marriage rights.” Property acquired during the marriage and titled in the name of one partner (except for property acquired via gift or inheritance) normally becomes property of both spouses. Any spousal rights to claim an inheritance from the other spouse under law are void upon divorce.

Any debts of one spouse are assumed by the estate, not personal liabilities of executor or the beneficiaries.

There are nine community property states where all the money, assets and debts acquired during the marriage is legally part of the joint property of both spouses.The rights of husbands and wives are equally protected.

 

Among the topics that a will should address are:

  • Decide what property, including personal property that has sentimental value.
  • Determine who will inherit the assets.
  • Designate a trustee and guardian to manage assets if there are children under 18 who may be beneficiaries under your will.  The  trustee and guardian can be the same.
  • Handle digital assets which may need you to designate access to family members the ability to see your social media accounts.

For your will to be effective and valid, the will must signed according to your state’s law.

Generally, a will must be in writing, signed before a minimum of two witnesses who can attest to your mental capacity and soundness at the time of signing the will.

A valid will is not likely to be challenged

Challenge-proof your will with your attorney’s guidance. The will becomes effective upon the death of the testator. Up until that time, a will can be changed as often as desired by the testator. The original (not copied) version of the last will should be kept intact and often stored in a safe deposit box or safe place.

Step 3

Leave your letter of instructions

Write a letter of last directions, separate from your will, that may provide your preferences regarding funeral and burial arrangements, who speaks at your funeral, contact information for family, friends, colleagues and such.

There may be items that weren’t part of your will but are important to you to let your surviving family members know about. In the event that any instructions conflict with direction provided by the will, the will trumps the information in this letter.

Leaving Guidance For  Family Is Helpful

Organize financial information, people to contact, important papers (this could be in the form of a memoir, for example) and provide the location of where these things may be found for your family. This letter doesn’t have the legal force of the will but may amount to personal information that family could use and you wish to share.

Step 4

Who Should Consider A Trust?

Trusts have additional features not found in wills.

A will may be more commonly known and the first place to handle probate property but trusts are increasingly used in estate planning. Use trusts when you have a more complex estate, have less liquid assets, and desire privacy as trusts avoid probates. Trusts provide some features that wills don’t.

Living Trusts

Trusts can be used before death, as living trusts.  These instruments can take effect while the grantor is alive and can give the grantor the right to make changes. These are called revocable living trusts and the grantor can be the trustee. However, if the grantor is unable to serve because of becoming incapacitated, a new trustee can be named.

Living trusts can also be made irrevocable meaning no changes can be made by the grantor.

Irrevocable Charitable Remainder Trust (CRT)

For people who have significant appreciated assets may want to consider setting up a charitable remainder trust. A CRT is an irrevocable trust that generates a potential income stream for you, as the donor to the CRT or other beneficiaries. The remainder of the donated assets go to your favorite charities. There are a number of benefits, notable income tax deductions while preserving the value of your assets. You can read more about it here.

Donating assets to a charity

CRTs are tax-exempt irrevocable trusts that reduce taxable income of the donor during their lifetime. The assets are irrevocably donated into the trust. Income is distributed from the assets to you and your spouse for a set period or for life. The charity you designate will receive the CRT assets when you and/or your spouse die.

Testamentary Trusts

A different kind of trusts are the testamentary trusts, usually contained in wills that go into effect after the death of grantor.

Step 5

Living wills and medical powers of attorney

 Prepare health care proxy documents, often called advance medical directives, that is, a living will and your durable powers of attorney.

Write a  living will detailing a person’s desires regarding medical treatment when they may no longer be able to express their wishes. This provides informed consent.

A living will is separate from your will made in consultation with your attorney, and signed by you. This medical directive can help reduce ambiguities during a difficult time on the use of feeding tubes, for example and being kept alive unnecessarily.

The Terri Schiavo case

Anyone remember the legal battle in 2005 surrounding Terri Schiavo and the right to die movement has spurred many of us to consider a living will as an important document. While sad it provided urgent awareness of why you need to address these possibilities.

Use the durable power of attorney to appoint someone you trust as your agent, to do certain things and take actions in your name if you are unable to do so. This agent is also called “attorney in fact.”

When the grantor is incapacitated or disabled

Under a power of attorney, the agent can bind you to contract obligations, sell, buy or close title to real property in your name, conduct banking or other transactions. Every state has its own requirements for ensuring valid powers of attorney. These powers must be made “durable” which means that the agent’s authority survives any incapacity or disability of the grantor. The point is not to go and buy a form online or at a store. You need to designate someone who is trustworthy.

These powers are used when the grantor is unable to physically appear at a bank, through injury, confinement or frankly just does not want to go. This instrument is crucial when caring for a person suffering from dementia, Alzheimer’s Disease or other limited mental capacity diseases. The most common uses of this power of attorney are in banking and real estate transactions.

Step 6

Upon your death, your executor will  become effectively the administrator and fiduciary of the will.

After appointing an executor, the appointment must be confirmed by the probate court upon your death. The executor’s role  is then effective and can be expressly relied upon by financial institutions and insurance companies.

This executor will submit a petition to the probate court in the jurisdiction where the testator passed away. Assuming no challenges, the court will formally appoint the executor by issuing Letters Testamentary.

Testamentary Letters

Usually, third parties require original letters so you have to get these directly from the court. They are not available online. These letters are court documents that allow the executor to act as a fiduciary under the supervision of the court.

These testamentary letters along with the legally binding death certificate are the key documents that give the executor the force to deal with potentially numerous parties that have an interest in your estate.

Final Thoughts

Estate planning decision-making can be difficult. However, it provides peace of mind by reducing some of the uncertainty that may arise for your family. Estate planning is in your family’s best interests.

Protecting your assets and having a plan to distribute them to loved ones should reduce potential angst that may follow. Engage an accountant to help you realize tax efficiencies.

Have you started thinking about estate planning? It is usually easier to do when you have no urgent reason to do so but are thinking of your family’s best interest. This guide is designed to get you started thinking about your plan but you need careful consideration and professional guidance.

Please share any thoughts or comments you may have. We would love to hear from you!

 

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