The four quadrants are somewhat self-descriptive, but in one line summaries:

A blind optimist would choose to believe life will be easy and success inevitable with no needed work.

A reality optimist would choose to believe that life can be rewarding, but some sacrifice and hard work will be required.

A catastrophic pessimist would choose to believe that no matter how much work we do, life will be miserable without hope.

A mild pessimist would choose to believe that there can be some good in life that we can work for, but the rewards probably won’t outweigh the efforts.

As you begin to determine which group you function in, you’ll also begin to think of people you know who obviously function from another group.  Which quadrants we function in determines a great deal of our outlook in life.

We filter news and reports differently.  Our framework of goals and priorities (or lack there of) depends on if we believe them worthy and achievable.  Our focus and attention will tend to drift either positively or negatively.  And our faith – both what we place it in and the degree of confidence in the power of that source – will guide our every day decisions and enhance or degrade our trust.

We believe that the most healthy paradigm to operate from is reality optimism.  In fact, this serves as a core component of how we as a financial planning and wealth management firm operate.  Families who give no priority to planning their finances because they naively believe everything will turn out ok may end up in severe need.  Families who believe that the world is perpetually failing (the apocalypse de jour, as one writer puts it) have no choice but to stash their cash and turn into hoarders.  And families who may not believe the world is failing but still view life from a negative standpoint have few reasons to find joy and to enjoy blessings.

This leaves us with one option: reality optimism.  This paradigm chooses to believe that, yes, things certainly can be better; that yes, there are dangers in the world; that yes, there will be hard work and sacrifice involved; that yes, the deferral of instant gratification may hurt; that yes, each quarter we won’t see double digit returns in our investment returns … but that ultimately, good will come, and that the rewards far outweigh the effort.

And the best part of it all: each one of us has the choice of how we view the world.  One view may come more natural to us than another – and we should guard ourselves against that: not becoming hopelessly pessimistic nor, of equal importance, becoming recklessly optimistic.  But we should strive to align ourselves to be realistically optimistic – because realistic optimism will create our filters, determine our framework, define our focus, and strengthen our faith all for the better.

The reality optimism paradigm is the only view that allows for joy, for celebration, for contentment, and for a life of generosity.

To clarify our focus, we’re going to outline a specific goal: ethically planning to maximize a family’s financial aid to assist in paying for a child’s education.  But before a family even begins this discussion, they must ask themselves how certain they are that their child, or children, will be attending college.  (We don’t mean to glaze over this important topic, but it’s beyond the scope of this post.)

Evaluating the certainty of your child’s future education is extra tough when you consider that the best time to begin planning for college is when the potential future student is still in diapers.  Depending on the degree of certainty that a family feels that their kid(s) will be attending college, a plan should be developed with an increased amount of flexibility proportionate to the increased amount of uncertainty.  To keep it simple, we’ll examine a situation in which a family feels relatively certain their children will be attending college at some point.

In this situation, there are four strategies to assist us: maximizing retirement account savings, maximizing education saving accounts, proper titling of 529 assets, and negotiating with a financial aid counselor.  Please keep in mind this is not an exhaustive list – only a starting point.

1 – Maximizing retirement savings 

When we talk about retirement savings, we’re talking about employer sponsored 401(k) or 403(b) plans, Traditional IRAs, Roth IRAs, Simple IRAs, and most other tax-advantaged saving accounts ear-marked for retirement.  The reason it’s advantageous to save into these accounts is that the FAFSA does not require money in these accounts to be reported, and thus be considered assets available for college needs, as it does non-retirement specific assets.  This may qualify a family for more financial aid.  In addition, tax laws allow money from most of these retirement accounts to be used for qualifying education expenses.

It should be noted though, that any income you do take from these accounts in one year may end up qualifying you for less aid the next year as your family reported income will have increased.

2 – Utilizing education-specific savings

There are many different forms of education-specific savings, all with their advantages and disadvantages, but we’re only going to look at two right now: state-sponsored 529 plans and Coverdell Educational Savings Accounts, or ESAs.  Families who establish 529 orESAplans deposit money into the accounts, and the earnings grow tax free as long as the withdrawals are used for educational expenses.  Additionally, the qualified withdrawals used for college aren’t included in the family’s federal income tax return, and aren’t required to be added back when reporting family income on the following year’s FAFSA filing.

There are many complexities that should be explored with a specialist concerning 529 andESA’s, so please do more research before deciding upon utilizing one.

3 – Proper titling of assets

If you remember back to how the Expected Family Contribution (EFC) is calculated, you may recall that 20% of a student’s assets are “expected” to be used for college expenses, as well as up to 5.6% of a parental asset.  However, what was not mentioned was that 0% of a grandparents’ assets are counted.  Knowing this, if a family has strong relationships spanning multiple generations, a good planning technique could be to set up 529 plans for the student with the grandparent as the owner.  Doing this may allow for more financial aid to be realized.

4 – Negotiating with financial aid counselor

No matter how complex this whole system seems, college financial aid officers generally have great latitude in determining the aid package that the student receives.  Officers are required to use “professional judgment” to adjust the figures of aid packages, oftentimes creating various ratios between gift aid and self-help aid.  Knowing this, don’t be afraid to ask for a better deal for your child.  Bear in mind you don’t want to come across as offensive and lose any aid offered, but you ask in a graceful way, most officers will try and work with you.

We’ve covered a lot of ground – and as hard as it is to believe, we’ve just barely scratched the surface with all of this planning.  The steps outlined above are a good starting point, but please enlist the services of your student’s guidance counselor, a tax professional, or a financial planner to tailor a plan for your own family’s unique situation.

As a brief recap, financial aid is broken into two categories: self-help and gift-aid.  Most planning involves maximizing the gift-aid portion, and that’s what we’ll continue to focus on.  The government looks at three factors in determining how much gift-aid a family will qualify for: The Cost of attendance at a school (COA), Outside Resources, and Expected Family Contributions (EFC).  We’re going to look deeper into the internal equation that determines the EFC now.

Calculating EFC 

In order to determine the appropriate investment types and the proper titling of those investments, it’s important to know which ones offer the most favorable impact on a familiy’s federal financial aid eligibility.  The formula “expects” the following resources to be used for the cost of attending a specific school:

20% of student assets

50% of student income

2.6% – 4.6% of parental assets

22% – 47% of parental income

Student Contributions

There are some exceptions and limitations to these expectations that should be noted.  The assets of a student are pretty universal, in that they include all money, investments, business interests, and real estate.  However, a student is allowed certain allowances (a set income protection amount, certain taxes, and a possible allowance for negative parental expected contribution) before 50% of the students’ income is expected to be used.

Parental Contributions 

As for the parents, the range of percentages is tied to income levels, meaning that the higher the parent’s income, the more assets or income is expected to be used for the cost of college.  Expected assets of a parent include money, investments, certain business interests, and real estate.   Each family is allowed certain income allowances, and then a sliding scale based on level of income is used to determine the expected income.  The total contribution of assets and income expected of the parents is divided by the number of children currently in college.

What’s NOT Included 

Different types of assets you may have noticed were not mentioned above as part of the expected contribution.  This is because retirement accounts such as IRAs, 401(k)s, Roth IRAs, etc. are not counted in determining the EFC– making them great planning tools.  Also excluded from the EFC:

Equity in your primary home

Family owned businesses

Cash value of insurance policies

Annuities

Accounts owned by grandparents to be used for college costs

(A brief note should be made concerning IRAs: even though recent tax changes have allowed withdrawals for education expenses allowable, the extra income received in that year may adversely influence your expected income contribution when calculating  the EFC for next  school year.)

The complex calculation of financial aid has sometimes been compared to the complexity of navigating the IRS tax code – and that comparison may not be too far off.

We’ll wrap up the series next time with a brief listing of what you can do to best plan for the future college costs for your family.

To begin, we should talk about what financial aid is available for students at colleges or universities.  Knowing this will help then determine how much savings should be planned to save.  Financial aid is often thought of as something only available for families with low levels of income and assets, but as we’ll see, this is not the case.

When talking about financial aid, it’s beneficial to define some terms and to break financial aid into the same categories that the federal government and college institutions consider: “self-help” and “gift aid.”  Self-help is exactly what it sounds like – aid that ultimately will require the student to help him or herself.  This includes interest-subsidized loans (which the student will repay later) and work study programs (which the student currently works for).

Gift aid is also exactly what it sounds like – a gift that the student is not required to pay back.  These include grants and scholarships.  Gift aids are a more beneficial aspect of financial aid because nothing more is required of the student.

There are several determining factors when calculating how much financial aid a student can qualify for, and these are important.  The first factor is student merit, which includes scholarships (athletic, musical, academic).  When these are considered, they will qualify the student for either more or less financial aid.  The second factor is financial need, broken down into income-based and asset-based.  Knowing how financial need is calculated is extremely valuable for a family planning on how to maximize their financial aid qualifications.

Since merit-based scholarships are somewhat student-specific and will be difficult to plan for in advance, families should spend some time educating themselves about the elements of how financial need is calculated.  There are three elements of the equation: Cost of Attendance at a school (COA), Outside Resources, and Expected Family Contributions (EFC).

Cost of Attendance.

Each college and university is required to make their cost of attendance at their school available for prospective students based on federal guidelines.  This cost typically includes all elements of the school experience: tuition, room and board, text books, etc.  As you might imagine, the cost of private colleges is significantly higher than many public colleges or universities.

Outside Resources.

Scholarships (part of the student merit) are considered an outside resources, as are payments of tuition made by the grandparents of the student or by any employer.  Any resources that will be utilized will reduce the calculated Cost of Attendance, which will then decrease the need-based financial aid on a dollar-for-dollar basis.

Expected Family Contribution.

This is the main consideration, and a large part of the college planning process.  We’ll spend the next blog talking more specifically about the EFC, but for now it’s suffice to summarize that this amount is calculated through the Free Application for Federal Student Aid (FAFSA form).  The form considers income and assets of both the student and the parent, and then divides the parents’ expected contribution by the number of family members currently attending college at least part time.

Let’s use a brief example.  Say your child is looking at attending a college that has an annual Cost of Attendance of $30,000.  Your child happens to qualify for a $2,000 academic scholarship.  According to the FAFSA, your Expected Family Contribution is $17,000, broken down into $4,000 from the student and $13,000 from the family.  If you start with the $30,000COA, subtract the $2,000 from the scholarship as Outside Resources, and then subtract the $17,000 ofEFC, you’re left with $11,000 of financial need.

$30,000 (Cost of Attendance)
-$2,000 (Outside Resources – Scholarship)
-$17,000 (Expected Family Contribution|
$11,000 (Actual Financial Need)

The school will then attempt to put together a package of financial aid to meet this $11,000 figure.  This package can be a combination of grants, loans, and work-study from federal, state, and college sources.

Next we’ll dig in deeper to see how the FAFSA formula works internally, and how families can make sound financial plan arrangements to maximize their financial aid in an ethical manner.

Worry Wealth

Worry wealth is characterized by an obsession of safety over the protection of wealth.  The constant question that people in this category ask is how much of my money is still intact?  Risk taking is at a minimal, and answering the question of “How much is enough?” is difficult, if the subject is even addressed.  The main characteristic lacking from someone with a Worry Wealth mentality is peace.

Whiney Wealth

Whiney wealth is identified by individuals always lamenting the endeavors of their wealth and the world around them, for better or for worse.  If things are good, they’re about to get bad.  If things are bad, they’re about to get worse.  Questions and concerns are usually focused on the short term, with a distinct flavor of pessimism towards the present and future days.  The main characteristic lacking from someone with a Whiney Wealth attitude is joy.

Worship Wealth

Worship wealth is noticeable by a humbled realization that God is using us, as individuals, to change the world through what’s been entrusted to us.  Worship wealth is an intentional teaming up with God to be a positive influence on the world around us – both through planned giving and a sacrificial, generous lifestyle.  The main characteristic noted by everyone around an individual with a Worship Wealth mentality is gratitude.

Which do you fall into?  If you consider yourself a Worrisome or Whiney steward, how can you move more towards an attitude of Worship with your wealth?  There are no standard answers to these questions, but they should be wrestled with.  Pray for wisdom to know what God is calling you to do, what God has placed on your heart to fulfill with the money He’s entrusted to you.  And then begin to view each financial decision you make as an act of Worship, not of Worry or Whining.

Bare Financial Services is a member of Kingdom Advisors, and we’ve come to place a tremendous value on what the organization stands for and how it has impacted our lives as financial planners – and subsequently the lives of our clients.

To those of our readers who may not be familiar with what Kingdom Advisors is, it’s an organization founded by Larry Burkett and now currently led by Ron Blue – two pioneers in the world concerning Christian philosophy of money.  The story of how Kingdom Advisors arrived at its current state can be found on their website, but today they exist to help advisors like us “to realize and activate their spiritual calling for meaningful Kingdom influence and impact.”

Or said differently: they advise advisors on how to advise their clients on stewardship.

Our mission statement as a company is “to advise and lead clients in a life of stewardship by applying biblical principles to the financial planning and wealth management process.”  Kingdom Advisors helps us accomplish this by instruction, access to other experienced advisors, and encouragement from members around the country.

We believe as a company that to be an exceptional professional, you have to be the exception, not the rule.  This means that while the financial planning industry can offer as many technical designations and training as we could think of, there is another element of our calling that we believe is critical: training in biblical counsel.  That’s the reason we’ve chosen to join Kingdom Advisors, and feel proud to be associated with such an outstanding collection of like-minded professionals.

T #4 – Title decision.

This step involves the actual transfer of title of your various assets.  The number one rule of stewardship applies especially here: no matter who the asset is titled to, the ultimate owner is God – we’re merely stewards.

Depending on what assets you are transferring in your wealth, it’s important to think long term.  If you’re transferring a business or a farm – what will happen if it becomes extremely valuable in 10, 20, or 30 years from now?  What happens if it becomes worthless?

To avoid sibling rivalry, it’s wise to figure out what is important to each heir, and using that information combined with the previous Timing decision, make the appropriate provisions.  It may surprise parents to find out what each child finds valuable.

T # 5 – Tools and Techniques decision.

After four previous steps that built upon each other, we now reach the decision commonly referred to as “estate planning.”  You can see that a lot of thought and context has needed to be built before arriving here.  Setting up trusts, wills, and other legal documents are only a handful of pieces in a much larger puzzle.

You’ve answered the “what, who, when, and why” questions, and this step involves the “how” question.  You want to keep your estate planning as simple as possible while still achieving your overall goals.  The tools and techniques aren’t the objectives themselves, they’re merely agents to accomplish your objectives.  Bringing in the right team of advisors at this stage is critically important – so be sure to find a good attorney, accountant, and financial planner who you trust and who share the same values as you do.

T #6 – Talk decision.

The sixth and final T is the talk decision – which is by no means a one time decision.  This is where you’ll want to communicate the specifics of your wealth transfer plan to your heirs, and it will probably take place more than once, especially if things in your scenario or the scenario of your heirs change.  The talking should allow a family to align their individual expectations with reality, and not be surprised when the actual transfer takes place.

Family conferences are a great opportunity to promote family harmony as well as to pass on the wisdom we mentioned in the Transfer decision.  You have a great opportunity to transfer the tangible wealth alongside the intangible wisdom that you’ve accumulated throughout the years.  These conferences also can serve as a good platform for you to evaluate the readiness of each family member to possibly receive the wealth at some point.

Looking back over the Six T’s of Wealth Transfer, you’ll notice that the actual tools used for the wealth transfer are preceded by four crucial steps.  Possibly the most common mistake that many families make is jumping first to the “how” before addressing the “why.”  It’s difficult to proceed to the next T without sufficiently satisfying the preceding T.  This holistic view of wealth transfer aligns with the holistic view of stewardship – we as stewards cannot make isolated decisions.

The discussion about wealth transfer varies strongly among various families, but we believe there are six common decisions that need to be discussed throughout the process, which we call the Six T’s of Wealth Transfer.  We’ll discuss the first three T’s now and the last three T’s in another blog.

T #1 – Transfer decision.

This initial step is deciding whether to make the transfer or not, and then deciding who receives the wealth you currently are in charge of.  This wealth could be in the form of investments, a farm, a business, or any other asset of value.

A good principle to keep in mind here is what is commonly called the treasure principle: the fact that you can’t take your wealth with you, but you can send it ahead of you (Matthew 6:19-21).  You’ll also want to consider the unity principle, which is affirming that you and your spouse are in complete agreement over this decision.  Our spouses are meant to complete us, not compete with us.

Lastly, yet maybe most significantly, you’ll want to consider the wisdom principle of transferring wisdom to your heirs before transferring wealth.  Proverbs 20:21 tells us that “an inheritance gained hastily in the beginning will not be blessed in the end.”  Wisdom may lead to wealth, but rarely will wealth alone lead to wisdom.  Be sure the next steward is well prepared to handle what you are passing on.  Ask yourself “What is the best/worst thing that can happen if I transfer my wealth to ____?  How likely is this to occur?”

T #2 – Treatment decision.

After making the decision to make the transfer, you then will need to decide how much each heir will receive.  For some families, this may be difficult if an illiquid yet valuable asset is being transferred, such as a business or a property.  A good guiding principle is that since you love your children equally you should treat them uniquely.  Fairness may not always mean equality.

In most scenarios, you will most likely be the best person to judge the readiness of your children to receive an inheritance.  A lot will need to go into this decision, such as their independence, their character, and their own financial situation.  Will the same amount of money be a blessing to one child yet a debilitating crutch to another child?

T #3 – Timing decision.

Next you will need to begin discussing when to transfer the wealth.  The key governing principle within this decision is an acknowledgment that the timing of the transfer needs to maximize the use of the wealth by you, your heirs, and the charities your support.

Ron Blue says you should “Do your givin’ while you’re livin’ so you knowin’ where it’s goin’.”  Translated: you’re going to know best how you allocate and distribute your wealth, so the surest way to see that it will be used to your liking is to be around when it’s being distributed.  This isn’t to say you should squander your wealth in haste in your last years, but it does run contrary to a lot of beliefs.

Timing will also be significant especially when giving money to children – as you don’t want to use the money to manipulate behavior, change their lifestyle, or destroy the need to provide.  You’ll also need to take great caution in not being swayed by your children’s demands or expectations.

When considering charities, you’ll also want to ask yourself how confident you are that the values you cherish in your charity won’t change over time.  The answer to this question can help determine whether you do your giving now or after you pass on.

We’ve covered three T’s and still have three more to go – be sure to check back in soon for the remainder of the wealth transfer process.

Does this make setting goals and making resolutions meaningless?  Not necessarily, as we believe even the act of making goals is a step in the right direction – especially financial goals.  So, how do you stay within the 15% of those who keep their resolutions and hit their goals?  There’s really no set formula, but the following ideas may be of assistance.

Make your goals realistic.

Setting unrealistic goals, such as paying off the your home’s $250,000 mortgage this year, aren’t just unrealistic – they actually serve as de-motivators.  According to research done by David McClelland and John Atkinson back in the 1960’s, we should set goals that we have a 50% chance of accomplishing.  That way our mind doesn’t give up too easily on goals that we have no shot of achieving, nor do our minds simply glide effortlessly toward a goal that isn’t much of a stretch at all.  The key principle is to ensure that our goals are within reach yet simultaneously will require more effort than we displayed in years past.

Make your goals visible.

This is key, as most everyone agrees to the old adage “out of sight, out of mind.”  A lot of people will earnestly make their resolutions and set their goals in January, possibly write them down on a hidden piece of paper somewhere, and then not even be able to recall them a few weeks later.  If we can’t even remember our goals, what chances do we have of achieving them?  One idea is to print these goals somewhere you will see them frequently: on your bedroom mirror, on the refrigerator, inside your car, anywhere your eyes will frequently be drawn to.  One of our favorite ideas is to laminate the goal sheet to make it water-proof, and hang the sheet in the shower.  That way, either early in the morning or late in the evening, you’ll be reminded of your drive to accomplish what is laid on your heart.

Make your goals social.

We don’t mean you should post your goals on Facebook or publish them in the church bulletin, but rather you should share your goals with a select group of trusted friends.  This could be your family, but doesn’t have to be.  What is important is trusting who you’re sharing these personal goals with, and then giving them the permission to hold you accountable to them.  Then set up a regular time to get together with these goal accountability friends to make sure there is ongoing review, and not something that’s just going to be brought up next Christmas dinner.

That’s really it – there’s no magic ingredient to accomplish your goals.  But there are certain ideas we all can implement that can at least increase our likelihood of achieving our goals, whether they’re financially related or not.

The fascinating aspect of retirement is that it means so many different things to so many different people.  This poll reflected that.  For example, 25% of those business owners surveyed plan to retire before age 65, while 17% don’t ever plan to retire.

From those who do plan to eventually “retire” from their own business, 39% plan to alternate between periods of work and leisure, 21% plan to volunteer their time, 14% plan to work part time, 10% plan to work full time elsewhere, 9% plan to never work again, and 4% plan to start new businesses.  The remaining 3% still don’t know.

What we’ve learned from our time in this industry is that retirement has one basic element common across all definitions: freedom.  You can choose to work if you’d like now, since you’re no longer required to out of necessity.  You can choose to volunteer your time now, since you’re financially free to do so.  You can choose to never work again, since your income can be derived from places other than labored earnings.

There’s tremendous freedom in this idea – but also potential risk.  For some individuals, their primary identity is their job, and when that job is no longer there, it can be a difficult transition.

The key is to have a plan – a plan to get to retirement and a plan to spend retirement.  Most retirement planning is focused on getting to it, ensuring you have enough money saved up and then creating distribution plans to provide for a rising income stream, and this is certainly necessary.  However, as you inch closer to your actual retirement day, you need to also start thinking about how you will fill your suddenly large margins of time.  Be intentional with this stage of life – it’s a blessing.

A term that Ron Blue of Kingdom Advisors often uses is “rehirement” – a concept that we’ve adopted into our own discussions with clients.  This time of re-hiring can be viewed in multiple ways, but ultimately it’s rooted in the idea of being “employed” to fulfill God’s agenda in your later years.

Here’s a few questions you can ask yourself as you consider your rehire/retirement stage of life:

What are some activities you wish you could have done that work prevented you from doing before?

What skills can you bring to the volunteer world that can be beneficial?

What individuals in your industry could benefit from a seasoned pro willing to mentor them?

What places have you and your spouse never visited but wish to?

There aren’t any right or wrong answers to these.  What was satisfying and fulfilling for your neighbor, or brother, or mother may not necessarily be satisfying or fulfilling for you.  Explore around and ask yourself some good questions.  If you plan well, you’ll have the freedom to craft and live out a retirement that is satisfying and fulfilling in ways unique to your own specific calling.