FAFSA Income and Asset Protection

In a recent post reviewed the common college funding formula the importance of the expected family contribution.   However, many families do not want or know how to create an expected family contribution (EFC) number. If they produce the number, it will likely be a guess.  This article discussed allowances and protections in more detail with how they affect the EFC.

Parents and students receive exclusions from the funding formula.  Different rates and funding percentages apply to both groups and depend on age.  Before we get into the details,  let us take a step back and look at the Expected Family Contribution.

Which formula do I use?

Three different formulas exist for the EFC calculation: Formula A for dependent students, Formula B for independent students without dependents other than a spouse, and Formula C for independent students with dependents.  Dependent students are the focus of most college planning articles since the majority is graduating high school students or college students who came straight from high school. Dependent students will be the focus of this article as well.

An independent student is considered independent if she meets one or more of the following (1):

  • The student was born before January 1, 1994.
  • The student is married or separated (but not divorced) as of the date of the application.
  • At the beginning of the 2017–2018 school year, the student will be enrolled in a master’s or doctoral degree program (such as MA, MBA, MD, JD, PhD, EdD, or graduate certificate, etc.).
  • The student is currently serving on active duty in the U.S. Armed Forces or is a National Guard or Reserves enlistee called into federal active duty for purposes other than training.
  • The student is a veteran of the U.S. Armed Forces (see the definition in the box on page 4).
  • The student has or will have one or more children who receive more than half of their support from him or her between July 1, 2017 and June 30, 2018.
  • The student has dependent(s) (other than children or spouse) who live with him or her and who receive more than half of their support from the student, now and through June 30, 2018.
  • At any time since the student turned age 13, both of the student’s parents were deceased, or the student was in foster care or was a dependent or ward of the court.
  • As determined by a court in the student’s state of legal residence, the student is now, or was upon reaching the age of majority, an emancipated minor (released from control by his or her parent or guardian).
  • As determined by a court in the student’s state of legal residence, the student is now, or was upon reaching the age of majority, in legal guardianship.
  • On or after July 1, 2016, the student was determined by a high school or school district homeless liaison to be an unaccompanied youth who was homeless or was self-supporting and at risk of being homeless.
  • On or after July 1, 2016, the student was determined by the director of an emergency shelter or transitional housing program funded by the U.S. Department of Housing and Urban Development to be an unaccompanied youth who was homeless or was self-supporting and at risk of being homeless.
  • At any time on or after July 1, 2016, the student was determined by a director of a runaway or homeless youth basic center or transitional living program to be an unaccompanied youth who was homeless or was self-supporting and at risk of being homeless.
  • The student was determined by the college financial aid administrator to be an unaccompanied youth who is homeless or is self-supporting and at risk of being homeless.

If the student does not meet one item from the listed above, he is likely a dependent student.


Simple or Long Form

Beyond knowing which formula to use,  families need to know if they qualify for the simplified formula, long formula, or receive an automatic zero for their Expected Family Contribution, EFC.

To gain a zero EFC, a parent’s income needs to be lower than $25000 and they may file a 1040A or 1040EZ (or they do not file a tax return.)  Also, anyone in the household who receives benefits from earmarked means-tested federal programs (Medicaid Program, the SSI Program, SNAP, the Free and Reduced Price School Lunch Program, the TANF Program7, and WIC) may receive a zero EFC.  If the parents are dislocated workers, a zero EFC may be obtained.

For the simplified formula, the criteria are similar to the zero EFC but incomes will fall between $25,000 and $49,999.

If the conditions above are not meet, you will using the long formula.  For most families,  headaches start from this point.


Asset and income allowances


What is the income and asset protection about?

The asset and income allowance provides some relief for the EFC calculation.  Certain things like state income tax, income protection, and social security tax reduce a families income and thus the EFC.



However, some items like retirement plan contributions (volunteer employee contributions) are added back into the formula and raise the family’s EFC. Saving for retirement in a qualified account means penalizing you twice for putting the dollar towards another goal. (See question 94 of the FAFSA.) Once, for making the personal choice to not save for education. Secondly, for making retirement plan contributions count towards the EFC.   (Watch my blog for more to come on this topic.)

Parent: Income & Asset Protection Allowance

The amount allowed for the parental income protection allowance depends on the number of students in college and total number in the household.

On the first review,  the table follows some logic with an increased protection allowance for household size increases. However, as you examine the amounts for protection, the trend seems to move in the opposite direction as the number of children increases.

Two points need to be made on this seemingly negative trend. First, this number helps calculate a families’ total expected contribution. Second, when more than one student attends college, the EFC becomes split over the number of college students.   The potential range of expected income a parent may use for the EFC calculation is between 0% to 47%.

Other allowances exist to offset against parents income as well.

US Income Tax Paid-  The amount parents pay in federal income taxes decreases the Expected Family Contribution.

State and Other Tax Allowance- Parents reduce the EFC by a stated percentage, based on location and income.  See the table below. (not all the states are listed in the table below.)


Social Security Tax Allowance- Like the Social Security tax of 7.65% of income goes towards lessening the EFC on first $118,501 of income.  Beyond the $118,501, only 1.45% of income may be used to offset the EFC.


Asset Protection Allowance- Parents receive an asset protection allowance based on income and if the household has one or two parents.  The oldest parent sets the protection age and as the parent ages, the higher the allowance becomes.  Below, you will find a list of items included and excluded from reporting as shown on FAFSA.gov.

Investments include real estate (do not include the home in which you live), rental property (includes a unit within a family home that has its own entrance, kitchen, and bath rented to someone other than a family member), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.

Note: UGMA and UTMA accounts are considered assets of the student and must be reported as an asset of the student on the FAFSA, regardless of the student’s dependency status. Do not include UGMA and UTMA accounts for which you are the custodian but not the owner.

Investments also include qualified educational benefits or education savings accounts such as Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans.

If you are not required to report parental information and you own (or if married, your spouse owns) any of these qualified educational benefit plans report the current balance of the plan as a student / spouse asset. The amount to be reported for a prepaid tuition plan is the “refund value” of the plan.

Investment value means the current balance or market value of these investments as of the day you submit your FAFSA. Investment debt means only those debts that are related to the investments.

Investments do not include the home in which you (and if married, your spouse) live; cash, savings and checking accounts; the value of life insurance and retirement plans (401[k] plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.).

Student: Income & Asset Protection Allowance

A dependent student’s portion of the EFC follows a similar process as the parents, but different protection levels exist as noted below.

Income Protection Allowance- The income protection allowance for students is a flat $6420 regardless of family size or how many students in the household are in college.

US Income Tax Allowance- The amount students pay in federal income taxes decreases the Expected Family Contribution.

Social Security Tax Allowance- The same formula is used as the parents to figure this allowance.

Asset Protection Allowance- The EFC formula aggressively uses reportable student assets to fund college.  20% of a student’s assets are figured into the EFC while up to 5.64% of a parents reportable assets may be used.  A second major difference between students and parents is the actual limit.  Students have a $0 limit on reportable assets that are protected.  The opportunity for students focuses on non-reportable assets. 2



Wrap Up:

As you can see, understanding the mechanics of the FAFSA form become complicated quickly. Piling on the tax side complicates the picture even more.  Understanding and working with both forms requires a process like the grafting of two trees.  After awhile, it is hard to know where one college planning begins and tax planning ends.  This is why working with a Certified Financial Planner who understands both areas adds more value to the college planning process.

Next Steps:

  1. Gather your recent tax returns and FAFSA.
  2. Make sure all of your data was reported correctly and identify opportunities to further reduce your EFC.
  3. If the second step becomes too complicated, find a Certified Financial Planner who specializes in college planning.
  4. Contact me with questions or to set up a one-on-one consultation.

Year-End Permanent Tax Savings

2016 will be closing quickly.  Like the Cubs, you can finish strong and put your finances in order for 2017.  One way to carry out this task involves a few simple techniques outlined by Sheryl Rowling in her article, “Permanent Tax Savings and Techniques (1.)”

Why is this important?

Every year taxpayers tell the Internal Revenue Service (IRS) a story.  A story about how their income originated and about important financial activities, like how much they saved in retirement accounts (found on the W2 for an employee’s work-sponsored plans), charitable giving, and business deductions.  Beyond these basic categories, your tax return reveals more information about your family.  Here are a few examples: that you may have student loan debt because you take a student loan deduction or that you may have a child in college.  Your tax return may suggest that you have a large portfolio; think about how much you report in dividends and interest.  For itemized filers, your tax return may reveal that you have a large home based on your mortgage deduction.

The aggregation of your tax data gives the IRS a good idea of your financial situation.

The Big Bad Wolf

Now imagine the IRS as the Big Bad Wolf in a financial story about the Three Little Pigs.  In this version, the wolf has the capability to rewrite parts of the story he doesn’t like.  big-bad-wolfWhich part will he likely retell?  Of course, it will be the part where he visits the third pig’s house.  Our nemesis will likely choose a way to blow down the house.  Now, not only will the wolf destroy all the homes, he will be able to gobble up not one but all three little pigs.

In the same way that our Big Bad Wolf will retell the story to his advantage, the IRS has the ability to influence your annual income story.  Think about how laws change and the interpretation taking place if you receive an audit.

Like the Big Bad Wolf, we can rewrite the story, this time introducing a cousin piggy who has built an underground bunker.  Here, the wolf has no building to blow down.  If properly stocked, all the little pigs will be safe for a long time.  Here is where you get to be the cousin piggy who built the bunker.

How to build your bunker

First, the cousin focuses on understanding a few basics about the wolf, specifically that thebunker strength of the wolf comes from his lung capacity.  So your objective will be to take away his breath.

Sheryl outlines tactics for knocking the wind out of the IRS by knowing that the “goal is to decrease taxes so that some or all of the reduction is never paid back to the government.”  Better yet, permanent tax savings may be realized by moving income from higher tax brackets to lower tax brackets or recognizing income without paying any tax.

Ideas for consideration (from the article.)

  1. Avoid short-term capital gains: Because ordinary rates are typically two times higher than long-term rates, review your trading and the turnover rates of your active mutual funds in retail brokerage accounts.
  2. Defer income to years subject to a lower tax bracket: This is where year-end planning may pay off. What will your income be for 2016?  What will it be for 2017?  Is there income you may defer into 2017 that may be taxed at a lower rate?
  3. idea-lightbulbRecognize zero-capital-gain tax opportunities: If you are in the 15 percent bracket or less, capital gains are not taxed up to a certain point. You may need to balance this opportunity with the chance to take money from your tax-deferred accounts and convert them to Roth at a rate of 10 percent or 15 percent, never paying tax again.
  4. Hold appreciated investments until death: The beneficiary receives a step-up in basis, thus avoiding any capital gains tax. However, Sheryl does address the possible volatility of the investment and the chance that it may go down, offsetting the potential tax benefit.
  5. Use the asset location theory: The author suggests that “moving appreciating investments to taxable accounts has the potential to permanently save the difference between ordinary and capital-gains rates on the appreciation.”
  6. Convert to Roth IRAs: Moving money, during a low-income year, from a tax-deferred account like an IRA to a tax-free account such as a Roth may help save in taxes paid over your lifetime.

As always, check with your tax advisor for specific advice about your situation.  Should you have questions or concerns, you can contact me at 317-805-0840 or ncarmany@thewatermarkgrp.com.



  1. http://www.morningstar.com/advisor/t/116935305/permanent-tax-savings-and-techniques.htm

The Financial Planners Plan: Save Money On Your Car

For most Americans, owning a car remains a part of everyday life. For the car enthusiast, frequent maintenance, as well as knowledge of how the car works, become part of regular conversations. For the non-car enthusiast, finding a trusted mechanic is like becoming a treasure hunter searching for gold on the seafloor with no boat. Frequent “trust me” conversations result in the spending of extra money while the owner does not even know what exactly the money is going toward.


I have been fortunate in that my background allowed me to build a small and useful mechanical skill set. My family had a trucking company and my dad often worked on cars. working-on-carsThis is how we spent a good portion of our time together. We built a show truck that won a few awards and appeared on a magazine cover. These skills have not been used much over the past 16 years as my professional career and family matured.

The Situation

For many years, my family—probably like yours—has been taking our cars to the mechanic to get the oil changed and for general maintenance. After all, we are busy going to soccer practice and traveling to see grandparents, friends, and relatives. Who wants to spend their limited time pulling a car apart or changing the oil in their own garage? Tools would need to be bought, oil disposed of… the list goes on and on.

My family was getting ready for a weekend getaway, the last one before school started. My wife took the car in for an oil change, as usual. We dropped the car off the night before and assumed that we would receive a call to pick it up once the oil was changed.

The News

As expected, my wife received the call, but much to her dismay the service person on the other end proceeded to describe a car in need of an immediate brake job. The cost for the brake job: $680. The representative discussed turning some rotors, replacing others, and new brake pads. Feeling pressured to make a decision and hearing me ask multiple brake-rotorquestions at the same time, Yvonne willingly gave the phone to me. (I could hear some of the conversation from the service representative.)

The conversation quickly changed as I asked questions about the brake job. When we had taken the car in, it had not displayed any warning signs of needing brake maintenance. How could it need an immediate brake job? Don’t brakes wear down slowly? During the last oil change, why hadn’t we been told that the car would soon need a brake job?

As you can imagine, not going on a trip already paid for was not an answer the family wanted. I asked the representative directly if the maintenance had to be done right away and if the safety of the car was at risk. He paused for a moment and stated, “Well, no. They can last for a little while longer.” I thanked him for the call and explained that we would be discussing his proposition to have the brake maintenance completed.

I completed the brake job myself, saving $350. The cost of the parts was $330, which included new pads, rotors, brake cleaner, and hardware.

Throw it in Reverse

Mechanics may try pressuring you into car maintenance; however, you need to watch out for neglect as well. My brother-in-law came to visit us on a business trip last year. His car had been to the shop for an oil change. Part of the maintenance involved a routine brake check. He was told the brakes were good for another year.

Yet when the car entered our street, a choir of screaming banshees strolled down the street with my brother-in-law. I immediately went on a short test-drive. The car ended apart in my garage that evening while we completed a brake job. (My brother-in-law was in for an evening and had to leave for business the next morning.) The car was unsafe to drive. He could have been in an accident with someone getting hurt.

Pump Your Brakes

I share these stories not to point fingers or claim to be a mechanic. Rather, I do so to share pump-your-brakesinformation about saving money on car maintenance and not feeling pressured to purchase a service. Take your time; ask as many questions as required about the service needed to uphold your car. Ask the service manager to speak to the mechanic directly and to see the parts so that you better understand the car and the maintenance proposed.

Planners Financial Plan: Car Insurance


My insurance agent sent me a text a few weeks ago. (We are friends and used to work together.) Like most people who are busy, I failed to reply in a timely matter.  The nature of his communication was a notice of our annual review and an opportunity to shoot the breeze to discuss life, family, and business.

A few weeks later, I noticed the bill for our car insurance sitting on my kitchen table. While visiting with Yvonne one evening, I opened the bill only to have my jaw hit the floor.  At that moment, I did not remember 2015’s premium, but I was positive it had been lower than the hefty number listed on the paper. Perhaps out of frustration, the bill found its way to the bottom of my mail pile.  The urge to examine, review, or even think about the premium upset me.  Eventually, I had to pick up the bill and review it, so I put our coverage under the microscope as well.

Basic Terms and Provisions of Auto Policies

First, here is a simple a review of policy terminology. (Your policy language may be different. Please see your agent with specific questions about your policy.)

Bodily Injury Liability: This is the medical portion of the policy and pays for expenses for cases in which you are at fault.  Often the policy will have numbers that display a “100/300.”  The numbers describe the maximum payout for a single person’s injury or the maximum payout for all occupants of the other auto (1.)

Property Damage Liability: This portion of the policy will pay for damage to the other auto in an accident for which you are deemed at fault (1.)

Medical Coverage: This portion of your auto policy will cover medical costs after an accident with your personal injury.  Coverage requirements are different for each state and benefits from insurers vary.

Comprehensive: Comprehensive coverage addresses costs pertaining to a car if it is stolen or damaged by something other than an accident (3.)

Underinsured Motorist: This helps provide coverage if the owner of the other car in an accident is uninsured or underinsured (3.)

Coverage Pricing

Below is a comparison of my coverage from 2015 to 2016 and the change in price. (My policy has added items not listed in the terms above.  Categories are listed as noted on my policy.)


As you can see from the table, the increase is credited mainly to bodily injury, uninsured motorist bodily injury, and underinsured motorist.  After creating the table and knowing which categories increased, I was still perplexed. No one in my family had been in an accident, no claims had been filed, and we owned the same cars, which were now a year older.

The Question

Finally, I called my agent to inquire about why the premiums had increased.  First we talked about families, friends, and business. Then the time came for me to ask about the increase.  Interesting enough, a bad feeling came over me for wanting to understand.  It seemed like I was questioning his integrity (I am lucky enough to have a good agent) or implying that he was personally pulling one over on us.  So I paused for a moment, realizing this must be similar to how many couples feel when they sit down with a “financial advisor.” Still, the question would not come out.

After regaining my exposure, I did ask.  My agent took the time to explain general trends in driving and how the technology in cars has been adding to the cost of fixing them after an accident.  (Here is an article he shared with me to help explain these trends (4.) While no one can expect to be happy about seeing a premium increase, at least I now understood why.

My next question focused on ways we could better manage the premium.


In preparation for my call, I examined my current coverage limits and even used a calculator to see what it recommends for insurance coverage. The recommendation from the Geico calculator is listed below, while my current coverage can be found in the previous table. My current coverage and what the calculator recommended are similar.*


While knowing that I had proper coverage felt good, my issue of increased premiums had not been solved.  My agent and I explored changes in coverage and deductibles, and looked at comparable cars.  The one likely alternative would have saved me $131 with a payback that would have taken me 3.8 years to achieve.

So after all the personal analysis and discussion with my agent, Yvonne and I decided to just write the check. The payback period was too long and we felt comfortable with the coverage we have.

Why not get another quote from a competitor?

As I mentioned before, an unpleasant feeling arose when I started asking why the premium had increased.  My friend, without hesitation, acknowledged my concern, discussed how he was not happy about it either, and moved into his own search for an explanation.  He stayed calm and listened to my monologue of personal analysis.  I suspect he knew the correct answer was to stay with my current policies as is, yet he helped guide me to the correct solution with great questions.

As a learner, this is important to me.  He exercised great patience and empathy: two qualities I have yet to encounter in other agents.  So if this means paying a premium, I will write the check as long as there is personal value.

Important takeaways from this experience:

  1. Take the time to understand your car insurance policies before you have an accident.
  2. Make sure you have an agent who is willing to take the time and educate you.
  3. Some things that directly affect you are out of your control.
  4. Complete an annual review of your policies. Through this review, we discovered that my motorcycle was not insured. I thought it had been for a few years, but we did not catch the lack of coverage because a review had not been completed. (This is a story for another day.)


  1. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  2. “Medical Payments Insurance Coverage | DMV.org.” DMV.org. Dmv.org, 2016. Web. 14 Oct. 2016. <http://www.dmv.org/insurance/medical-payments-coverage.php>
  3. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  1. http://www.cnbc.com/2016/05/27/auto-insurance-rates-rising-at-fastest-rate-in-almost-13-years.html
  2. https://www.geico.com/landingpage/coverage.htm#set8

*use of the Geico calculator is neither an endorsement nor recommendation of the company or calculator

Comprehensive Planners vs Spot Checkers

Here and Now

Get good grades, go to college or trade school, and then land a high-paying job.  That is what we tell and teach our youth.  Have you gone through the same cycle?  How has it worked out? If you are like me, you have encountered many twists and turns along the way.

As I stop now and look back, I realize the disservice I have done my children through whathere-and-now I have told them. Here in this moment, I see that the finish line has been a life filled with the promise of a later, greater life at retirement.  This thinking had led to a personal longtime mantra of “working towards the later, greater version of yourself.” Am I not great now?  If not, what is stopping me from pulling that greatness forward to now, this moment?

How do we define the extent of this greatness?  Culturally, we do it by comparing incomes or net worth (in other words, to share an old favorite saying, “He who dies with the most toys wins,” a saying often heard during my childhood and adolescent years).  After completing thousands of financial plans, I see the reality of this saying. Here is the updated version: He who dies with the most toys usually has much debt, and sometimes leaves his family with an empty bag.

Fearing that they would leave family members with an empty bag while heading towards the finish line of retirement, generations before us completed anecdotal planning—what I like to refer to as Spot-Checking.  Am I saving enough for retirement? Yes, buy this mutual fund, the returns will help. Are you sure?  Ok, save more and protect your family.  Buy this permanent life insurance.  Have more stuff? Here, buy another policy.

After you buy the product, you fall into an advisor black hole, a place where you surface only after the book of business has been cycled through.  Consider the following for a moment. When did you last hear from your insurance agent?  At your policy renewal? If not then, when? How about the last time a significant event took place in your life?  Did you hear from your investment manager?  Has your estate lawyer checked in to inquire about life changes?

Chances are you spoke to one of these professionals when a major event was taking place in your life for which you needed their expertise.  Often, we do not seek this “expert” counsel until the event has already passed, limiting the effectiveness of the help.  It would be similar to watching your house burn halfway down, then deciding to call the fire department.

This planning has been going on for decades, with our parents, grandparents and continuing with most of us today.  The experts come in to address the singular issue or give peripheral solutions. The client does not know what he does not know.  On down the road, we go to the next event.

Change is in the Air

The recent ruling stemming from the Department of Labor and requiring advisors to act as time-for-changea fiduciary will change the way financial “advisors” work with client’s retirement assets.  The client (and not the product, sales agent or company) will be placed at the center of the relationship.

New companies are popping up, like the XY Planning Network, where advisors commit to putting the client first.  The Garrett Planning Network is another example.  The people working in these circles care about your financial picture and do not want to come in for a spot-checking exercise.  As proof of intent, review how your advisor gets paid.  Is it commission based? Could she win a trip for selling large volumes of product (often the case with annuities)?

Next Step

Review the last time you had a major financial event. Did it go the way you planned? What next-stepwould you change?  Could you have prepared ahead of time?  If so, what would the preparation entail?

Addressing these questions is only a small portion of the ways in which a comprehensive advisor helps. Instead of calling after the house has burned halfway to the ground, work with a comprehensive planner and install a sprinkler system in your financial house.  It will not stop a fire from happening, but it will keep the house from burning down.

Here is an example of this in my life.

Recently, I started working with a client who lost her mother. (Her dad passed away a few years ago.) Overwhelmed, she did not know where to turn.  We took care of her immediate needs by consolidating accounts, going through policies, and working with her CPA to file the estate tax returns.  The client was happy with the progress we had made in a short time.  However, she was still overwhelmed by the money, so I turned the conversation to her future.

It took time, but she was eventually able to paint a picture of a desired future, honoring the values of her parents by paying for her children’s college and paying attention to the way she spends money. We accomplished this progress by starting not with products but with what she values and why those values are important.  We even paused to see if her calendar and checkbook currently matched those values.

I went back and started crunching the numbers. As I went through her data, a loan on a 401k was found. We discussed why the loan had been taken out and how we develop behavior biases with our finances.  Since the conversation, she decided to take action by looking for ways to pay off the loan and increase her retirement savings with a recent pay raise.

As the early wrap-up of the plan implementation took place, I found unclaimed property in her name.  She put these funds towards the loan, saving her taxes and tax penalties if her employment ended. Plus, she did not have to take cash flow from her current spending.  She has fortified her plan by building momentum along the way. She is confident and living a life based on her values.

Spot On

Spot checkers who come in only to sell a product or help make an isolated investment change or portfolio tweak usually do not go the extra mile to check the unclaimed property, walk through the process of paying down a 401k loan, or having debt conversations about matching a calendar and assets to personal values. This is how a comprehensive planner helps. This is how financial wisdom is built.  The best part will be seen as her children learn from Mom’s money wisdom.

Questions or comments?  Use the contact me link to send us a message.


As a parent, I often remind my children to behave when I leave them with friends or relatives, and most of the time they do.  However, many children, including my own, pass through extended periods during which they transform from cute, lovable beings into gremlins (often in the presence of parents) that spread toys, food, and clothes all over the house, leaving a wake of mental stress and making parents question their sanity.  It is during these moments that parents continually provide feedback and coach their children on proper etiquette, thereby developing citizenship.  Without this oversight, bad events can happen, like the teenage parties we have seen in movies – or, worse yet, someone becoming injured.

As a financial planner who has been through two major market swings, I have met parents who did not have proper oversight of their financial lives, resulting in the same destructive consequences of a teenage party.  One large difference does exist: The parents who move quickly to correct a minor’s behavior often do not have someone holding them accountable for bad financial behavior.  In fact, most do not even realize that a bad habit exists.  Here are a few of the most common investing behaviors to correct.


confidenceJay Mooreland points out in his article “The Cost of Ignoring Behavioral Biases,” that overconfidence is the belief that we always make correct decisions in our best interest.  Often, a case of overconfidence surfaces during the NCAA college basketball tournament when a fifteen seed upsets a second seed.  It is part of what makes March exciting, but it leaves the normally disciplined basketball team wondering what happened.


Past performance is not a guarantee of future returns.  Investors see this and understand its meaning, yet they look at what has performed the best over the previous year or quarter and put investment dollars in the hot arena.  This is a form of anchoring; we look to the past to predict the future with anecdotal data to help us “justify decisions.”  Need proof? Watch retail investor dollars over an extended time.  Money flows into areas that have done well and out of underperforming areas.


Think about the last time gas prices rose.  We saw a decline in travel, and we started carpooling or riding our bikes to work.  What happens when an item goes on sale?  People wait to see a price decline in desired items before completing a purchase.

Yet in the stock market, the opposite normally happens.  People rush to buy at times when the market has done well out of fear of missing out or out of greed for money.   Warren Buffet has a famous quote: “Be fearful when others are greedy and greedy when others are fearful.”


Fear and greed are powerful emotions.  Fear, the stronger emotion, can paralyze a person, Frown .jpgpreventing him or her from taking action or causing him or her to run away.  We do not like being wrong, as regret makes us lose confidence.  Instead of facing the effects of a bad decision, no decision is made.

I still encounter people who moved to cash after the 2008 crisis and who will not reinvest even if their circumstances require it.  I ask why, only to hear, “What if the market goes down again?”


In my post, Risk Characteristics, the importance of perceived risk was discussed.  If the perceived risk does not match the real risk, normal behavior may not be pursued.  For example, over the past five years, many US investors have overweight US stocks.  Why?  Because performance is compared to the S&P 500.  There are two main effects: 1. Risk increases by reducing diversification, and 2. Buying at or near a top happens.  The cure is simple.   Keep a globally diversified portfolio and rebalance to lower risk and to buy asset classes while they are down.


How many of these behaviors do you exhibit?  Who is holding you accountable for achieving your vision?  If you do not have answers to either of these questions, perhaps it is time to consider discussing your details with a professional. If you do have the answers, are you learning from the mistakes?  A good planner will be there to coach you toward the correct behaviors while not passing judgment or making you feel like a failure.

Here are two parting quotes:

“The risk is in the behavior of the investors.” Howard Marks

“That truth is that human behavior is a better predictor of whether or not we’ll reach our financial goals than anything else.”  Dr. Daniel Crosby


  1. http://www.theemotionalinvestor.org/wp-content/uploads/2013/10/Cost-of-Ignoring-Behavioral-Biases.pdf
  2. http://www.morningstar.com/cover/videocenter.aspx?id=690334
  3. http://www.theemotionalinvestor.org/behavioral-investing-insights-featuring-psychologist-dr-daniel-crosby-incblot/

The Financial Planners Plan: Emergency Funds

If I received a nickel every time someone asked me for financial advice, I would be rich. Around the cooler, in the grocery store, and at family gatherings are just a few of the places where people seek information. “What should I buy?” or “What is hot in the markets these days?” When I explain that financial planning yields better results than just managing an investment portfolio, people quickly agree and follow up with “What is the outlook for the economy?” Most advisors enjoy these conversations because of exciting gains or “knowing the most about capital markets.”

I, however, think it is time for a different post. This blog post outlines the realities of the Carmany household and how we deal with the challenge facing us. Now we must rebuild our emergency fund.

Basics of an emergency fund

While studying for the Certified Financial Planner designation, potential certificants learn about the importance of an emergency fund. “Save three to six months’ worth of expensesEmergency fund in case an emergency happens.” This cornerstone is usually one of the first steps in a financial plan. Often, I find people misusing the fund for nonemergency conveniences. What is an emergency? The web defines an emergency as “a serious, unexpected, and often dangerous situation requiring immediate action.” Buying a TV or taking a last-minute trip to get away from stress are not emergencies.

I will admit, my own past demonstrates abuse of earmarked emergency funds. For example, we bought our last car out of convenience rather than to meet a need. See, my family was getting ready for one of our annual trips to visit family. Our normal hustle was under way for our departure the next morning. The yard needed to be mowed, and our SUV needed to be pulled out of the garage so that we could access the mower. As soon as I started the car, I noticed it was running funny. My first thought was to deal with it after mowing the lawn. Once I looked over the SUV and completed my research, I found two bad sensors to replace. (We were going to take the SUV on our trip.) I had no idea how to deal with this riddle. I thought about it as we closed up the house for the evening. Amazed at the string of bad luck (the washer and window also broke the same evening), I quickly went out and bought a new SUV for my wife (one she likes) on credit the next day using part of our emergency fund as a down payment, all because I did not want to slow down and deal with the situation.

We recovered and have since moved on from the car buy.

My current situation

Currently, as I write this, my family faces our second and much larger emergency fund depletion. This time, however, it is real, as in “not having water turns the household upside down.”

We moved three years ago to a bigger house as our family expanded with my youngest daughter. I did not plan to move at first, but a couple of months after my wife, Yvonne, found out she was pregnant, she set a hard date. July 15 became our deadline and we had four short months to find a home, get our current home ready to sell, and move.

We made the deadline with time to spare and have been happy with the choice we made. There have been large outlays. The largest one so far is getting 85 percent of the house Billreplumbed. The water pressure from our well had been slowly dropping, so a plumber suggested that we replace our well pump and a few other items. The total cost: roughly one month’s expenses. After getting the work done, the plumber took the time to discuss with us the problems present in our current plumbing. He explained that his current fix may last a short while or longer. Guess which one it was? Two weeks later, here we are, getting the home refitted with new plumbing. The original pipes were not up to code and cheap material had been used. (I experienced personally how cheap it was, as one of the pipes cracked in the wall.) Total cost: several months’ worth of expenses.

The good news is, the house will be updated and our family will be able to get back to business as usual. Or will we?

Now what?

I now remember starting the emergency fund a long time ago. “Saving at $XX/ month, it will take T months to get back to the correct reserve amount” runs constantly through my mind. Additionally, the time taken away from funding other luxuries for the family will be put on hold. “Why did we buy THIS house? Why do WE have to wait to fund these other goals (which are luxuries)?” Sound familiar? It feels like starting at square one.

But I am not starting at the beginning. We now have the experience of dealing with a real emergency (having no water for the family). No credit card debt, no hassle over how to pay for it.


I hope sharing this post shows: 1. Financial planners are subject to the same pitfalls and challenges as the families we help. In many cases, the planner does not practice the sameTransparency techniques he preaches. 2. Many articles discuss the importance of an emergency fund, but do not discuss the next step after it has been used.

In my family’s case, the second family trip for 2016 will be placed on hold. We will get back to the practice of building the fund to a suitable level by cutting costs. In the back of my mind, I do wonder about another emergency taking place. What will we do with no emergency fund?

In this case, we will start moving down the line of liquidity. We have additional investments in taxable accounts which are accessible.

As we make progress in building our emergency fund, I will share updates. When you meet with your advisor, ask him about emergencies he has experienced and how they were addressed.

If he does not practice the same techniques he teaches, you may need to look for another advisor. I believe a great advisor practices the same techniques that his client does. In this case, I know firsthand how the process works (the bucketing system) and I help people maneuver through the emotional turbulence of the situation.

If you have questions about building an emergency fund or about the bucketing system, or if you just want to share your story, please feel free to contact me at ncarmany@thewatermarkgrp.com or 317-805-0840.



  1.        https://www.google.com/webhp?sourceid=chrome-instant&rlz=1C1AVNE_enUS679US679&ion=1&espv=2&ie=UTF-8#q=emergency%20definition

Working in Higher Ed and Planning for Retirement

Leveraging higher education retirement plans yields great value if done correctly. However, many complicated questions need answers. Should you save in a 403(b), 457, or IRA? Do the plans have different features? What about Roth choices? What if I lose my job?

Here, information will be shared to help make the complicated world of retirement planning simple.

Retirement plan choices.

Choices403(b) – Scott Dauenhauer notes in his book, “Wild West: Providing Fiduciary Advice to Public School Employees”: “The 403(b) was codified into law with the Technical Amendments Act of 1958 and was more of a pre-tax, tax deferred ‘program’…” (1). This took place before the Revenue Act of 1978, setting up the 401(k) (2) and the Employee Retirement Income Security Act (ERISA) of 1974 establishing the IRA (3). The 403(b), also called a tax-sheltered annuity, is for “certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers” (4). The IRS notes (4):

Individual 403(b) accounts will be opened up as one of the following types.

  • An annuity contract, which is a contract provided through an insurance company.
  • A custodial account, which is an account invested in mutual funds.
  • A retirement income account set up for church employees. Retirement income accounts can invest in either annuities or mutual funds.

As with its cousin, the 401(k), participants may contribute up to $18,000 for 2016, plus another $6000 if over the age of 50.

457 – The 457 is a special plan available to local and state employees (and other 501(c) groups). The 457 has the same contribution limits as the 403(b) and 401(k). A few key differences as noted by 403bwise.com are:

  • Assets in a 403(b) are held directly by employees, while 457(b) assets are held in a trust for the benefit of employees.
  • There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan when separating from service.

Additional catch-up contributions accompany the plan (5).

  1. Two times the current year’s normal retirement contribution limit, or
  2. Underutilized limits from past years. Note: Not all employers make this additional catch-up option available, nor are they required to do so. Check with your employer for details.

401(a) – Investopedia notes, “A 401(a) plan is a retirement savings plan normally offered by government institutions rather than by corporations. These plans are usually custom-designed and are only offered to key government employees as an added incentive to stay with the organization. The contribution amounts are normally set by the employer and are mandatory” (6).

Normally, each of the listed plans allows the participant to save money on a tax-deferred basis, with the tax benefit being realized now by seeing a reduction in income for the contribution amount. However, the new Roth provisions allow participants to put away money which has been taxed now and allow the money to grow tax-free. In this provision, tax diversification may be incorporated into a portfolio where the benefactor creates flexibility by hedging future tax rate changes. (Click here for a better understanding of tax diversification.) The Purdue plans allow for the Roth option on the 403(b) plan (7). Additionally, participants can save in multiple plans.

By creating a tax-diversified and investment-diversified plan, retirement planning will now be flexible.

Next StepsTIme for action

  1. Review your current plan for opportunities to improve your retirement picture by
    creating additional flexibility.
  2. Call me at 317-805-0840 or email me at ncarmany@thewatermarkgrp.com with questions or to review options.



  1. “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016.
  2. “Your 401(k): When It Was Invented-and Why.” LearnVest. N.p., 3 July 2013. Web. 22 June 2016. <https://www.learnvest.com/knowledge-center/your-401k-when-it-was-invented-and-why/>
  3. “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016. <https://en.wikipedia.org/wiki/Traditional_IRA>
  4. “Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans).” Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans). Interna Revenue Service, n.d. Web. 22 June 2016. <https://www.irs.gov/publications/p571/ch01.html>
  5. Otter, Dan. “Wise Information for K‑12 Employees.” Other Plan That May Be Available: 457(b). 403bwise, n.d. Web. 22 June 2016. <http://403bwise.com/k12/content/18>
  6. “What Is the Difference between a 401(a) and a 401(k)? | Investopedia.” Investopedia. N.p., 2015. Web. 22 June 2016. <http://www.investopedia.com/ask/answers/060215/what-difference-between-401a-and-401k.asp>
  7. Snapshot of Purdue University Retirement Programs. West Lafayette: Purdue U, n.d. <http://www.purdue.edu/hr/Benefits/currentEmployees/retirement/pdf/Snapshot_Retirement_programs.pdf>

Where do I start the financial planning process?

Starting lineMost advisors today have clients start the planning in one of two places.  The most common approach with asset managers begins with a thirty- to sixty-minute conversation creating an outline of the investing history, philosophy, and experiences. An investor questionnaire and account paperwork soon follow.

Holistic financial planning, the second starting position, focuses on your goals.  Retiring at 65, sending three grandchildren to college, leaving a foundation, and philanthropic giving are a few examples. After understanding your goals in a ranked way, the advisor creates a funding plan for those goals.  The partnership continues with overseeing and execution of the plan.  While this approach includes more facets than the investing approach outlined above, the process still falls short.

Many of the goals become numeric representations of a resource pool instead of an understanding centering on the person’s unique needs.  Research shows that people create higher levels of happiness by focusing on living a virtuous life versus our current hedonistic tradition (1).

Knowing your core values yields the best results in creating a financial plan.  (Click here to find your core values.)  Not only will it allow a decision-making framework to develop, it will often make the decision-making process easier.  When promoting values take center stage, the correct course shows itself.  Note, though, that as people age, values change. Typically, transitions happen every two to five years.

Finally, knowing your values helps set up the two main ingredients for financial success: behaviors and managing expectations.

Behavioral finance and economics have expanded exponentially over the past ten years.  Fifteen years ago, economics classes taught that the prudent man acts in a reasonable and logical fashion.  Now we know that emotions drive most decisions and influence behavior.  Denial head inthe sandThe key to finding financially friendly behavior starts with removing as much emotion as possible by automating one’s finances.  For example, set up auto journals, transfers, and payments to important accounts. Set up mortgage payments to automatically pay more than the minimum. Emotion is removed and little recurring effort is needed to create a favorable financial setting.

Many times we prefer to not recognize changing circumstances and rising undesirable emotions. If we change our orientation to ask what the most likely outcome is, what the most desirable outcome is, and what the worst-case scenario is, we better adapt to changing environments. The element of surprise is removed, or at least reduced, lessening the impact of irrational reactions.

How does one manage the complex world of multiple accounts and taxation?

First, the focus should be on what NOT to do.  Financial planning for most people means earning the highest returns while avoiding market volatility.  Yet when these same people complete investor questionnaires, they recognize that the more return one wants, the more risk is built into the portfolio.  Also, other investors focus on avoiding taxes, leaving behind more fitting opportunities.

Establish a simple yet effective method using financial buckets to help navigate the complex financial world of today. Understanding how and when to access funds for specific events from a portfolio will not only help reduce stress, but allow you to create a better plan because you know how the bucket basics work. (Look at this series to better understand how to set up a bucketing method.)

Wrap Up

TIme for actionComplete a core values exercise to better understand what motivates you.

Examine your calendar and checkbook; can you see the core values represented in the time and money spent? If not, focus on what needs to change and align the two.

Develop goals and an action plan.

Automate your finances.

Check your progress.

Helping educators through this process supplies a high level of satisfaction.  If you have questions or concerns about your plan, contact me at ncarmany@thewatermarkgrp.com or at 317-805-0840.



  1. The Pursuit of Happiness. The Pursuit of Happiness. N.p., n.d. Web. 07 June 2016. http://www.thinkadvisor.com/2011/11/28/the-pursuit-of-happiness

Brexit Stage Left

Exit stage leftThe financial news scrolling across computers, tablets, and smartphones leaves investors wondering what the UK vote to exit the European Union, “EU”, means. The markets and Prime Minster Cameron seemed very confident the vote would result in the UK staying in the EU. Now, not only do we have UK leaving the EU, but Cameron planning on stepping down as Prime Minister.

Economics of the UK

The UK is roughly 4% of the world GDP and slightly larger than the GDP of California.  Also, the UK has been the fastest growing G7 economy for the past four years. Globally, the UK is the fifth-largest importer and ninth largest exporter.

The current economic strength of the UK suggests leaving the EU may not be a wise move.  British companies may lose important trade advantages that benefit EU members. In addition, the decision to exit the EU may result in London losing its role at the financial center of Europe.

What we do know?

We do know the markets receive periodic and unplanned surprises yet continue to move books and what do we knowforward over time.  People often react and make behavioral mistakes in times of event driven market turmoil with the selling of securities and abandonment of long-term plans and strategy.  The markets will likely put stocks on sale and give some investors the opportunity to buy at a discount. The global and UK economies will adjust over time to the new conditions and prices will reflect the changing conditions.

What to do now?

  1. Does your portfolio need to be rebalanced? If so, make the proper adjustments.
  2. If you were planning on putting large amounts of cash to work, perhaps now is a great opportunity.
  3. Continue your dollar cost averaging your 401k or work retirement plan. During times of large market swings, a dollar cost averaging approach pays off.  This is also true for dividend reinvestment plans.