Category Archives for "Financial Planning"

Feb 13

10 Things to know about the 529A

By Chris Chen CFP | Financial Planning

Ten things to know about the 529A Account

529AIn the week leading up to Christmas 2014, the US Congress passed the Achieving a Better Life Experience Act (the ABLE Act) , creating the 529A account to provide tax advantaged benefits for disabled individuals. It is a significant change to the financial planning landscape for special needs beneficiaries, with the potential for helping many families with disabled members.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A account is meant to allow tax advantaged accumulations and distributions for a wide range of expenses for the disabled beneficiary. The following lists some of the specifics, similarities, and differences that the 529A Account features:

1. The 529A Account uses the Social Security definition of disability. In addition it can benefit only people who have been diagnosed with a qualifying disability prior to age 26.

2. Like the 529 College Plans, the 529A plans will be set up on the state level. Presumably, the same state agencies that oversee the 529 College Plans will be responsible for the 529A, although that may differ from state to state.

3. There can be only one 529A account per beneficiary, normally in his or her state of residence. That is different from the 529 college plans, for which there is no limitation on which state plan is used, and where the distributions are made.

4. Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.

5. Contributions in the 529A are with after tax money and are limited to $14,000 a year (in 2015) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.

6. Investment growth in the 529A is tax-free.

7. Distributions are tax-free so long as they are used for qualified expenses. Otherwise, earnings on distributions are taxed at ordinary income rates with a 10% penalty added. Qualified expenses include housing, transportation, health and wellness, education and more.

8. Having a 529A does not disqualify the disabled individual from Federal and State aid, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Effectively that caps the 529A Account to $100,000.

9. Should the 529A account balance exceed $100,000, Supplemental Security Income would be suspended, but not terminated. Once the balance falls below $100,000, benefits would be resumed.

10. The limitations on contributions and on balance levels suggest that the 529A could be used as a hybrid between an investment account and a checking account.

In the next post we will discuss some of the subtleties and implications of the 529A for planning for disabled love ones.  Let me know if you would like me to email you a link to the next post!

(a previous version of this post appeared on Nerdwallet.com)
Jan 10

New Year Resolution

By Chris Chen CFP | Financial Planning

New Year Financial Resolution

New Year Champagne

New Year Financial Resolutions

According to the Fidelity New Year Financial Resolutions Study (that was completed late in 2013) 54% of Americans were considering making a New Year resolution regarding their finances, as compared to 35% who reported this in 2009. As New Year receded into a snow storm, there were probably even more of us who made a financially-related New Year resolution, in addition to others.

The top three financial New Year resolutions are:

  • saving more (54%)
  • Paying off debt (24%)
  • Spending less (19%)

Survey respondents favored long term financial goals over short term goals by 53% to 39%. The leading long term financial goal was saving for retirement in a tax deferred account such as a IRA or a 401(k) (53%), followed by savings for college (35%) and saving for retirement health care costs (28%).

However, our good intentions notwithstanding, almost half of us were concerned that the continuing uncertainty around the economy, the debt ceiling struggles, and the ongoing threat of higher interest rates could deter our good resolutions. In addition, as we all know from experience, New Year resolutions are not easy to implement. How are you doing with your New Year resolution?

While we may not be able to help you stick to your gym routine, we can help you with financial New Year resolution. Here are a few things to keep in mind:

  • Make a plan! It is very easy to stray when you haven’t set specific goals for yourself.   We can show you how to get your plan in order.
  • Determine risk. The proper level of risk is different for every investor. We can help make sure you are not taking on more risk than you are willing to take. If you are concerned that the market has become too exuberant, pay particular attention to risk.
  • Consolidate. Are your investment accounts scattered? Combining old or ineffective accounts can maximize your return and make tracking your investments much easier.
  • Know what it is costing you. Beware of hidden fees and costs that can impact your investments. We make sure you are aware of all costs and fees to ensure you know exactly where and how your investment dollars are being spent.

Every good New Year resolution needs a support system. A best friend to keep you honest at the gym. A house mate to give you the eye when you head to the fridge. And a financial planner to guide you to the most informed investment decisions. Contact us so today so we can help you put your New Year’s resolutions back on track.

 

A previous version of this post was published in the Boston Globe

Jan 04

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

By Chris Chen CFP | Financial Planning

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

529AIn the week leading to the Christmas holiday, the US congress passed the ABLE Act of 2014 as part of the Tax Increase Prevention Act of 2014. ABLE stands for Achieving a Better Life Experience. The Act creates the new 529A plan. It is a significant change to the financial planning landscape for special needs beneficiaries.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A is meant to help people with disabilities as defined under Social Security rules and will allow tax advantaged distributions for certain expenses for the disabled beneficiary including housing, transportation, health and wellness, education and more without disqualifying the disabled individual from Federal and State aid.

As with the current 529 plans, for funds not used for qualifying expenses, any investment growth would be taxed as ordinary income plus a 10% penalty. Additionally, the funds can be rolled over tax-free from one ABLE account to another and the designated beneficiary can be changed from one disabled person in a family to another in the same family.

In theory the 529A will be limited to the same maximums that apply to 529 plans in their respective state. However, in practice the maximum amount that can be held in a 529A will be limited to $100,000.  Above that amount, the beneficiary may lose his or her qualification for Medicaid coverage.  In addition, a maximum of $14,000 can be contributed annually to a 529A.

There are other differences between the 529A and the current 529 plans. For example, it appears that the 529A will only be able to be used in the beneficiary’s resident home state. Hence, if the beneficiary moved, it may require rolling over the 529A from one state plan to another. That is different from the college 529, for which families can use the best state plan that they can find, including out of state plans.

The 529A is a great new tool to add to the panoply available to help disabled people. It will allow more middle-income families to plan support for their disabled family members with an easy to use framework that should be relatively low cost. The 529A comes with built-in advantages such as lower costs and tax advantages. On the other hand, there are restrictions for annual and maximum contributions to the 529A. On balance, the new plan should be very attractive to many middle class families.

It will take some time for 529A rules to be finalized and for states to roll out the plans. Hopefully, Massachusetts will be at the vanguard!

(an earlier version of this article also appeared in the Boston Globe)

Aug 30

Gender Lens Investing

By Chris Chen CFP | Financial Planning

 

Gender Lens Investing

By Harshita Mira Venkatesh

gender lens investing“Study after study has shown that when women are fully empowered and engaged, all of society benefits” according to Deputy United Nations secretary Asha-Rose Migiro.

While there are plenty of initiatives on a global scale to empower women in society, much progress still needs to be made in the corporate world: only 13 of the 500 largest corporations in the world have female CEO’s.

Women have been hindered in the corporate world because on average, they have less access to capital than men. In practice, this means that if a man and a woman both held the exact same job then on an average the woman would be earning less, and would face more discrimination because of her gender.

Additionally if the woman were from a minority race, the level of discrimination increases and her access to capital decreases even further.  In broader terms, women haven’t been able to succeed not because of genetic predisposition but because of the dearth of resources available to them.

As investors and global citizens we need to begin re-evaluating the success of the companies and organizations today through gender lens investing.

Gender lens investing means evaluating companies based on how their contributions to enhancing the status of women either by evaluating them on criteria such as:

1) The number of women they have on their boards, in senior management or in the work force.
2) The efforts the company makes towards enhancing the status of women in the community though their Corporate Social Responsibility Efforts.

From an Investors Perspective How Effective is Gender Lens Investing?

A 2012 study from the Harvard Business School showed that companies with an average of three women on the board of directors have a Higher Return on Equity Invested (by almost 60%) compared to companies with absolutely no women on the board of directors.

It has also been observed that micro-finance institutions catering towards women clients have fewer write-offs and see regular streams of loan repayment.

And in 2009 a Silicon Valley study showed that venture funded companies which were run by women have 12% higher returns on average.

This just goes to show that gender lens investing may just be smart investing.

How should you begin gender lens investing?

As of this writing, there are 333 mutual fund products which cater to ESG criteria (Environmental, Social and Corporate Governance), and several of these products were modified with a gender lens investing focus. Here are a few notable ones:

The Calvert Foundation launched WIN-WIN (Women Investing in Women Foundation) which was started in 2012 and aims to invest 20 million dollars in organizations which empower women.

The PAX Elevate Global Women’s Index Fund, seeks investments that closely correspond or exceed the performance of the PAX Global Women’s Leadership Index (the first and only broad market index consisting of highest rated companies in the world in advancing women’s leadership as rated by PAX gender analytics). The fund has returned 8.13% annually since inception in January 27, 2011 till December 31, 2013. In this very same period the Index has returned 7.86% annually.

GWEF (Global Women’s Equity Fund) was a purely gender lens investing oriented fund launched by the Toronto based Global Women Equity Corp. in 2013. The fund tries to invest in companies which have demonstrated support for women’s causes and are leaders in promoting women in the corporate workplace.

On July 9, 2014 Barclays launched a Women in Leadership Index and ETN (Exchange Traded Note). The Barclays index includes 83 U.S.-based companies that are listed on the NASDAQ or the New York Stock Exchange and have at least $250 million in market capitalization. Thirty-five of these companies have female CEOs.

Gender lens investing doesn’t seek to isolate successful male dominated companies. Rather gender lens investing asserts that gender heterogeneity in corporations is conducive to more educated decision making and better performance.   To learn more about gender lens investing consult your financial professional regarding the options available.

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This blog post is contributed by Harshita Mira Venkatesh, a student at the University of Rochester majoring in Financial Economics and Applied Mathematics.  Harshita was also a summer intern at Insight Financial Strategists LLC for the Summer of 2014.  She intends to pursue a career in equity research analysis.

Note:  All content provided on this blog post is for informational purposes only. We make no representation as to the accuracy or completeness of any information on this site or any information found by following any link on this site. The information is general in nature and may not be applicable or suitable to an individual’s specific circumstances or needs. Application to an individual situation may require considerations of other matters. The investments featured in this blog post are for illustration purposes only. No representation is made as to their suitability for any individual’s portfolio. If you have questions about the mutual funds described, please contact your investment professional.

Jul 24

Five Considerations For Managing Your Employee Stock Options

By Chris Chen CFP | Financial Planning

Five Considerations For Managing Your Employee Stock Options

Five Considerations for Managing Your Employee Stock OptionsAccording to the 2010 General Social Survey, approximately 8.7% of Americans in the private sector have Employee Stock Options. More have restricted stock, restricted stock units, phantom shares, and so on. The odds that you own them yourself are good especially if you are in senior management. If you are among the lucky few, it is a financial opportunity to build wealth in a way that is difficult with a regular salary. However, because of their special nature Employee Stock Options require special planning.

Employee stock options allow you to purchase your employer’s stock at a pre-determined price. When you exercise the option and purchase the stock you are expected to make a profit. As you ascend in seniority, you are likely to receive more employee stock options and eventually they may form a large portion of your compensation.

A long time ago when I used to receive employee stock options, a mentor instructed me that ESO were a unique opportunity for an employee to build wealth. I agree. However, employee stock options are more complicated than traditional financial instruments such as stocks, bonds, or 401(k) accounts. Their actual value can be volatile, and the impact on your portfolio wealth uncertain if you do not plan for it.

Five key steps to watch are: 

1. Know what you have

Consider what kind of instrument you have. Most people get Non Qualified Stock Options (NQSO); others get Incentive Stock Options (ISO). The major difference is how and when they are taxed. It is important to know what you have so you can plan accordingly

2. Plan for taxes

The good news is that employee stock options receive tax benefits under current Federal law. The down side is that you will eventually owe taxes. NQSO are taxed as ordinary income when they vest. They also incur payroll taxes. ISO are taxed when the underlying stock is sold, i.e. after you have exercised the stock. If you sell the stock more than one year after you exercise it, it will usually be taxed at capital gains rate.  With planning you can make sure that you are ready for the impact.

3. Beware of the risks of ownership

Owning Employee Stock Options may carry additional risks, especially as you get more of them. As Wealth Strategists we recommend that you should not concentrate too much of your wealth in a single stock. As an employee you are already exposed to the risk of your employer: you work there and you depend on your employer for your income. You need to evaluate how much more of that risk you can afford. If in addition to having employee options you also own stock in your employer either directly or in the company 401k, we need to talk!

Of course employee stock options need to vest before you can do anything about them. However, when they vest you can mitigate the concentration risk by diversifying or selling a portion in the most tax efficient manner, then reallocating the proceeds to other investments.

4. Harvest your gains

The optimal time to exercise employee stock options and sell them, is soon after they vest, with allowance added for the tax differences. According to Options Pricing Theory, beloved of MBAs, gains can be maximized by postponing exercise until shortly before expiration. In practice, a bird in the hand is worth two in the bush: you never know when the next market downturn is coming.

5. Plan for Re-investment

Two pressing problems at exercise time are: 1) where to get the money to pay the taxes, and 2) what to do with the proceeds.

One example of a way to handle can be to balance the additional income from stock options with a temporary increase in 401k or IRA contributions. The additional 401k contribution reduces your taxable income, as well as your cash flow. That is balanced by the increase in taxable income and cash flow that comes from the exercised options or sold stock.

In that way your tax level may remain at equivalent levels. And you will have stored away the gain.

Option wealth comes with many complex issues to consider. However, it is an exciting opportunity for you and your family to build or fortify a nest egg and further secure your financial future. As Wealth Managers our primary goal is to help you plan strategically to maximize the value of this unique opportunity.

(a version of this post appeared on boston.com).

 

Jul 01

Socially Responsible Investing

By Chris Chen CFP | Financial Planning

 

Socially Responsible Investing

By Harshita Mira Venkatesh

At a Symposium on Impact Investing held at the Vatican during the third week of June, Pope Francis appealed to sustainable investors to support social justice through their actions. According to the Pope: “It is important that ethics once again play its due part in the world of finance and that markets serve the interests of peoples and the common good of humanity.”

Changing ourselves as individuals is merely the first step. The second more imperative question to ask is: how can we make the companies and organizations around us behave and act in a systematically conscious manner for the advancement of society? As individuals some of us may feel overwhelmed by the scale of such a question. The answer was highlighted by Pope Francis during the symposium: we should make our investments count .

Impact investing or Socially Responsible Investing is when you not only invest in a corporation but also in the message they spread. For instance:

Starbucks is one of the most powerful coffee chains in the world. While they brew their signature coffee blends, they simultaneously aim to keep the underlying coffee bean environmentally equitable by using “Green Coffee” or fair trade coffee.

Ben and Jerry’s make wholesome dairy products and they also donate more than 7.5% of their pre-tax profit to various charities around the world.

Dell supports 4,615 charities around the world. In addition the Dell Social Innovation Challenge aims to mentor and nurture social entrepreneurs who have potentially socially consequential ideas.

Whole Foods may be our local grocer; internationally the organization supports 40,000 impoverished female micro-entrepreneurs.

The list goes on. It may be worthwhile to note that while these companies have achieved paramount corporate Socially Responsible Investing standards, they are also highly profitable enterprises. Socially Responsible Investing does not mean forfeiting gains, just choosing how to obtain them.

The inevitable question arises: do these organizations use their socially conscious efforts to mask their corporate greed?

None of these organizations are not 100% socially responsible in their actions.  Yet they have taken stride to mitigate their harmful activities as well as promoting social causes.  It is precisely this trend that we as social investors should campaign for.

There are a wide array of Socially Responsible Investing funds available offered by several well established fund managers as well as specialized advisers. These funds screen companies based on their ESG (Environmental, Social and Governance) standards. They simultaneously attempt to retain a diversified portfolio to mitigate the underlying risk.

  • The Calvert Social Index Fund is an index fund benchmarked on the Calvert Social Index® established to measure the performance of US-based sustainable and responsible companies. It has a diversified 699 issues in its current portfolio and a four star rating from Morningstar. The average return annually over a ten year period ranging from 4/01/04 to 3/31/14 for the A-shares is 6.15%, while the return of the Calvert Social Index during this period is 7.21%.

  • Another notable one is the Parnassus Fund which is benchmarked against the S&P 500. The average return of the A shares (post tax and excluding distribution fees) over a ten year period (01/01/04 to 12/31/2013) is 6.99% .The return of the S&P 500 by comparison for this period is 7.39%.

  • The iShares MSCI KLD 400 Social ETFis indexed to the MSCI KLD 400 Social Index (a free floating adjusted capitalization weighted index consisting of companies which comply with strict ESG standards). The fund’s performance since inception (11/14/06 to 12/31/13) has been 6.11%. The Index by contrast had a 6.65% annual average return over the same period.

  • The Green Century Balanced Fund contains a diversified portfolio of stocks and bonds. It is benchmarked against the S&P 500 Its return over the last ten year period has been 4.97% (04/01/04 to 3/31/14), compared with 8.34% for the S&P 500 over the same period.

These choices are not exhaustive. However, they demonstrate that there are Socially Responsible Investing choices that are valid from an investment standpoint. These Socially Responsible Investing options are diversified and varied. They are constructed in such a way that you need not sacrifice on returns in order to be socially conscious.  

If you are interested in Socially Responsible Investing, take some time to research the possibilities and consult your Financial Planner regarding the investment options available and how they may fit in with your goals and your portfolio.

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This blog post is contributed by Harshita Mira Venkatesh, a student at the University of Rochester majoring in Financial Economics and Applied Mathematics.  Harshita is also a summer intern at Insight Financial Strategists LLC for the Summer of 2014.  She intends to pursue a career in equity research analysis.

Note:  All content provided on this blog post is for informational purposes only. We make no representation as to the accuracy or completeness of any information on this site or any information found by following any link on this site. The information is general in nature and may not be applicable or suitable to an individual’s specific circumstances or needs. Application to an individual situation may require considerations of other matters. The investments featured in this blog post are for illustration purposes only. No representation is made as to their suitability for any individual’s portfolio. If you have questions about the mutual funds described, please contact your investment professional.

May 30

The IRS thinks you are cheating on your Spousal Support

By Chris Chen CFP | Divorce Planning , Financial Planning

 

The IRS thinks you are cheating on your spousal support

Spousal SupportAccording to the Journal of Accountancy, the IRS has increased resources devoted to scrutinizing alimony, or spousal support.  

As is well known amongst divorcing individuals and the professionals who support them, the tax code allows the payor of spousal support to deduct it from taxable income, while the recipient must include it in taxable income. So if Kevin pays Kate $30,000 of spousal support a year, he can reduce his taxable income by that amount while she is supposed to claim it as income, and pay taxes. 

Predictably, divorced couples don’t agree about spousal support any more than they do about anything else. On March 31 2014, TIGTA , the Treasury Inspector General for Tax Administration, an IRS watchdog, issued a report identifying a large tax gap between spousal support deductions by payers and the corresponding income claimed on ex-spouses’ returns.

With its mouthful of a title (“Significant Discrepancies exist  between Alimony Deductions Claimed by Payers and Income Reported by Recipients“), TIGTA clearly wants us to pay attention.  TIGTA found that for the 570,000 returns that they analyzed for the tax year 2010, deductions exceeded income by more than $2.3 billion. More than 47% of returns showed discrepancies between the spousal payments deducted and the income reported.

According to Mike Conti, a CPA in Boston, TIGTA estimated that the IRS revenue loss from spousal support errors could add up to $1.7 billion over a five year period. Although that is small compared to the estimated $385 billion tax gap experienced in the US, spousal support is now a target for the IRS that has been identified and quantified. 

In fact, the IRS reported adjusting its audit filters to catch more high risk returns. The WSJ reports that the IRS is developing “other strategies” to address the spousal support tax gap. In other words, divorcing individuals, at least those paying and receiving spousal support will be at a higher risk for an audit.

There are enough things going on in a divorce that a potential IRS audit may not make it to the top of the list of concerns.  However, given that it is now completely predictable, it is better for divorcing individuals to pay the extra attention and avoid the audit or be ready for it.

For people paying spousal support as well as for those receiving it, it is important to ensure that:

1. You fully understand what is alimony and what is not. Separation agreements are written in a legal style that is not always clear to non-lawyers. If you are not sure, if you have questions check with a financial specialist such as a CFP® professional, a Certified Divorce Financial Analyst (CDFA) or a CPA.

2. You agree with your ex on what spousal support amount you are putting on your respective tax returns. Having a discrepancy between what he files and what she files could put both of you at greater risk for an audit.

3. Your separation agreement correctly specifies spousal support. If it does not and you get audited, alimony could get disallowed. If you have not done so already, take the opportunity to verify that your separation agreement correctly specifies spousal support.

4. You get professional post-divorce support. You will need it anyway for any number of other issues. Analyzing spousal support and filing taxes correctly are just two of them.

5. Avoid pushing the envelope on this issue. It is simply not worth the additional aggravation. 

(a version of this post appeared on boston.com)

 

Mar 03

Roth IRA or Traditional IRA?

By Chris Chen CFP | Financial Planning , Retirement Planning

stockmonkeys.comAs a Financial Planner, I often get asked if people should save money in a Traditional IRA or a Roth IRA. In a Traditional IRA, we contribute money on a pre-tax basis (i.e. we do not pay taxes on our IRA contributions), we let it grow tax-deferred, and we pay taxes when we withdraw the money in retirement. In a Roth IRA, we contribute after-tax money, we let it grow tax-free and we pay no taxes when we withdraw the money in retirement.

That last point (“we pay no taxes when we withdraw the money in retirement”) is, of course, the one that gets our attention. We don’t like paying taxes, and the thought that we could have tax-free income in retirement is really motivating, so much so, that, sometimes, it can be the only thing we focus on.

However, the Traditional IRA vs Roth IRA story is not quite that straightforward.

The reality is that we WILL pay taxes whether it is for a Roth IRA or a Traditional IRA. With the Traditional IRA tax deduction, we reduce taxes at contribution, and we pay taxes when we withdraw the money. With a Roth IRA, we pay taxes before we contribute the money. At the risk of disappointing many readers, allow me to repeat: the Roth IRA is NOT tax-free, it is taxed differently.

When you do the math you will find that if you 1) invest in the same way in a Roth IRA vs IRA, and 2) are taxed at the same rate on your Roth IRA contribution today, as on your Traditional IRA withdrawals at retirement, you will end up with the exact same amount of money to spend in retirement. Call us: we will show you the math.

So which one is best? The answer is that it depends.

In general, it makes sense to invest through a Roth IRA when we think that our tax rate in retirement will be equal to or higher than our current tax rate. If we think that our tax rate in retirement will be equal or lower than our current tax rate it makes better sense to invest through a Regular IRA.

How then should you decide?

It depends on your situation.

For instance, if you are at the peak of your earnings, and you can calculate that your income in retirement will be significantly less than it is today, a Traditional IRA calculator will tell you that you will save tax money immediately. Since you expect to be in a lower tax bracket at retirement, you will end up paying less taxes.

If you are currently a low earner, and expect to have higher income in retirement than you have now, a Roth IRA calculator will thell you that your cost in taxes will be relatively low, and you will not pay any more when you retire.

Because there are many phases in our working life, there are times when it makes better sense to invest through a Roth IRA or Roth 401(k), and other times when it makes better sense to invest through a Traditional IRA or a Traditional 401(k). Conversely, there will be times in our retired life when it will make better sense to withdraw from a Roth IRA, and others when it will make better sense to withdraw from a Traditional IRA.

There are some other constraints. For instance, the traditional IRA max contribution is significantly lower than the 401(k). In addition, if your income is above the Traditional IRA income limits or the Roth IRA limit you may not be able to contribute.

It is about balance and careful financial planning. In the right circumstances, the proper balance between Roth and Traditional IRAs could save you a significant tax bill. In my opinion, it justifies a consultation with a professional financial planner.

 

Check out out other retirement posts:

Is the new tax law an opportunity for Roth conversions

Rolling over your 401(k) to an IRA

7 IRA rules that could save you time and money

Doing the Solo 401k or SEP IRA Dance

Tax season dilemna: invest in a Traditional or a Roth IRA

Roth 401(k) or not Roth 401(k)

 

 

Dec 16

What is Bitcoin, exactly?

By Chris Chen CFP | Financial Planning

What is Bitcoin, exactly?

BitcoinWhat is Bitcoin?

Bitcoin is a cryptographic protocol operating on a peer-to peer network created in 2009. This protocol is utilized in the form of a currency, allowing for direct transactions between individuals. Simply put, and as implied above, Bitcoin is an anonymous digital currency, which circumvents financial intermediaries in transactions.

Bitcoin can be considered in 4 parts:

1. How are Bitcoins created ? Bitcoins are created through a process called “mining”. The fundamental basis Bitcoin is founded upon is an algorithm, which regulates the speed at which Bitcoin can be “mined” and the manner in which it is used or transferred. In terms of speed, essentially, a computer program, accessible to anyone, works to solve an equation. Once it solves the equation, that person is awarded a certain amount of Bitcoins. The time it takes to solve an equation get progressively harder leading to diminishing returns, as the cap of 21 million Bitcoins gets closer (i.e. there is no additional money supply).

2. How does Bitcoin work? Bitcoins have two encryption keys: one public and one private. The public one has a similar role to an account number and the private one has a similar function to a PIN. Anyone can see the public one and the private one is stored in a “wallet” on the user’s computer or mobile device. These wallets store multiple Bitcoin addresses, created at the users’ discretion. To undertake a transaction, the user would simply give (whether directly or through a Bitcoin client) their private key, which can then be verified versus the public key to confirm the legitimacy of the transaction. Transactions are recorded in a public ledger in what are called “block chains”.

3. Why do people use Bitcoin? Bitcoin is used for its comparative advantages over other forms of currency and transaction methods. It is worth noting that one major attraction to Bitcoin, the anonymity factor, has drawn criticism from certain sectors (i.e. the US government). Websites, most infamously Silk Road (which was closed by the FBI in October 2013), use Bitcoin as a safe currency when dealing with illegal transactions (e.g. drugs, arms). Concern is that as Bitcoin becomes more liquid and volumes start increasing, it will become a target for money-launderers. Other comparative advantages which stand out are simply the fact that it is digital – giving it greater flexibility of usage – and that it is not subject to conventional political pressure or externalities. This second point derives from Bitcoin’s decentralisation, making market influences by a central bank (e.g. printing money) or a government (e.g. Cyprus’ proposed tax on bank deposits) irrelevant. Furthermore, the greatest attraction, at least from the financial side, is that Bitcoin is essentially frictionless; the digital currency has virtually no transaction fees, making cross-border transactions a main driver of future growth and monetisation.

Today, Bitcoin has limited usage. There are a number of services allowing individuals to obtain Bitcoins, through an intermediary or directly on the market (BTC China is the largest one at present, with c. 48% of Bitcoin activity). While large retailers do not accept Bitcoin, there are several services for the purchase of gift cards (e.g. Gyft), for example, providing an indirect method of accessing the retail market. Other website and small-scale retail also provide goods and services.

4. Every Bitcoin has two sides. Bitcoin suffers from a number of problems, many of which mirror the currency’s positives. The largest worry people have and the largest hurdle for Bitcoin and digital currencies in general is the lack of regulation and consumer protection. Simply put, what people don’t know, they don’t trust. While government and central bank action is certainly debatable, these institutions provide the authority to back a currency. Similarly, fees for companies such as MasterCard are used to insure users. The result of the lack of regulation, among other reasons, is a volatile and illiquid currency. Consumer confidence would go a long way to solving many of Bitcoin’s problems, with regulation, a potential platform, market penetration and less speculation key factors in controlling this.

From a technical perspective, digital currencies and especially Bitcoin have encountered difficulties of scalability and monetisation, with deflation a potential concern given the technical limit of 21 million Bitcoins. While perhaps simply growing pains, the currency has not gained any meaningful traction concerning scale and monetisation.  While the number of transactions have been increasing on absolute levels, normalised compounded monthly growth rates have been about 10%, compared to a previous rate of 13.6% (since the start of 2012).

(This guest blog was contributed by Patrick Chen, a graduate student in Finance at the Institut des Etudes Politiques, in Paris, France.  Insight Financial Strategists LLC does not provide Bitcoin advice or services.  This is published as an interesting topical topic ).

Oct 24

News for Stafford Student Loans

By Diane Pappas | Financial Planning

Gordon College Students pondering student loans

Did you notice that the interest rate on your child’s Stafford student loan changed for the 2013 – 2014 school year? In fact, in the case of the unsubsidized undergraduate and graduate Stafford student loans, the rate actually went down!

On August 9, 2013 President Obama signed the Bipartisan Student Loan Certainty Act of 2013, changing how student loan interest rates are determined. The bill links student loan rates to the Federal 10-year Treasury rate, plus a small margin. The new rates are retroactive, effective for all loans disbursed on or after July 1, 2013. This affects all students who took out Stafford student loans for the 2013-2014 school year.

As the Mom of a sophomore in college, this is good news for me, since I try to pay the accrued interest annually on my daughter’s unsubsidized Stafford student loan in an effort to reduce her student loan balance upon graduation. Just to make sure the interest rate had in fact been applied, I logged onto our Nelnet account to confirm the new rate. As long as the T-bill rates stay low, I should see lower interest payments.

Although the interest rate on the unsubsidized Stafford student loan went down from 6.80% to 3.40%, which is great, it is not without a trade-off. Federal student loan interest rates are fixed for the life of the loan, however, the rates for new loans will fluctuate, based on the current market. The new Stafford student loan interest rates are in effect from 7/01/2013 to 6/30/2014. This means that there is the potential for higher interest rates and payments down the road, which may be devastating for newly employed graduates trying to establish a spending budget. Existing Federal student loan interest rates are still fixed for the life of the loan, so my other daughter, who graduated this year with $27,000 in Stafford student loans, doesn’t need to worry about the possibility of higher payments.

The interest rates for the current 2013-2014 academic year are as follows:

  • 3.86% for undergraduate Stafford loans (both subsidized and unsubsidized)
  • 5.41% for graduate Stafford loans (a decrease from 6.80%)
  • 6.41% on all PLUS loans (a decrease from 7.9%)

The undergraduate subsidized rate actually increased from 3.4% to 3.86%, but the unsubsidized undergraduate and graduate interest rates both decreased from 6.80%.

The good news is the bill immediately lowers rates for most borrowers and it has no expiration date, so students will not have to wait for Congress to act to extend interest rate reductions as in the past. Parents and students who chose to pay the accrued interest on unsubsidized loans while the student is still in school, should take advantage of the lower interest rates to make those interest payments while rates are low.

The bad news is that market-based interest rates are not static. As the economy improves, they will rise and the experts predict that may happen quickly. The bill does cap how high the rates can go – 8.25% and 9.5% for subsidized and unsubsidized Stafford student loans respectively and 10.5% for all PLUS student loans for parents. Those caps are all higher than where the fixed rates stood prior to July, so depending on the level of debt, some students may be very affected by an increase in rates in a couple of years.

I did a quick calculation to see how the new rates and caps may affect my sophomore upon graduation. Assuming I paid all accrued interest and she graduated with a loan balance of $27,000 and the interest rate remained at 3.86%, her monthly payment would be $272. If the interest rate hit the cap of 9.5%, her payment would be $349. Although a difference of $77 does not seem insurmountable, it will have some impact on that student’s net available income.

The new student loan interest rate deal only fixes one thing – interest rates. It does nothing to address the larger issues plaguing higher education, namely ever rising tuition, over-borrowing and the mounting student debt crisis. Let’s hope Congress will address these issues some day soon.  Study hard kids and get that job!