Q&A Time: Debt Ceiling and College Graduation Gifts

Question:

I have some concerns about Congress failing to raise the debt ceiling and the ensuing effects on the stock market. I’m thinking it might be a good idea to convert all my holdings to cash, or cash equivalents, as the deadline draws nearer with no resolution. If in fact my fears are realized, we can jump back in when Congress reacts. What are your thoughts?

Answer

We feel the chances of the debt ceiling not being raised are zero.

• We believe this is a political dance, which will continue up to the last possible moment.
• We suspect there will be cuts tied to the increase of the debt ceiling.
  • Congress wants to increase the debt ceiling to $14.5 trillion, which will only carry us about two more years.
• We believe moving to cash would be the worst decision an investor could do.
  • Consider the tax ramifications of such a decision;
  • Time out of the market matters as well, and
  • If you are wrong, and the market moves higher, you lose as well.
    • According to The Wall Street Journal’s article “Why Market Forecasts Keep Missing the Mark”:
      • If you took away the 10 best days of the stock market, two-thirds of the cumulative gains produced by the Dow over the past 109 years would dissapear.
      • Conversely, if you missed the market’s 10 worst days, you would have tripled the actual return of the Dow.
      • The moments that made all the difference were just 0.03% of history: 10 days out of 29,694 trading days.

Question:

My son is graduating from college soon. My wife and I are split about what to give him as a gift. I think we should give him money towards a car. She thinks he we should send him on a trip to Australia. Since we’re talking about a healthy sum of money—about $5,000—financially, what would be the better use of that money? After last week’s show, I had considered starting a Roth IRA for him, but my son doesn’t have a job yet. So for now, I ruled this possibility out—what are your thoughts?

Answer:

While cars and vacations are nice, from a financial planning perspective, we look at three things: debt, income and savings.

Debt—Student Loans

If your son has student loan debt:

• Pay Down Debt
  • Applying the money toward that is a better use of funds;
  • Payments you make towards his student loan reduce the principal, and
  • Your son can deduct the interest on his income tax return

Income—Job

• Since your son doesn’t have a job lined up yet:
  • Help him get a job:
    • Pay for certification courses (i.e., CFP), and/or
    • Resume writing services.
  • Pay Living Expenses:
    • Pay his living expenses for a set amount of time, and/or
    • This should allow him to work for free and gain work experience.
  • Retirement Savings:
    • You cannot contribute to a Roth since he has no earned income, and
    • You could save it to a brokerage account and invest for the long term.
  • If he does get a job before graduation:
    • Contribute to a Roth IRA:
      • Through compounding interest, it has the potential to grow to a large sum by the time he reaches retirement age.

Savings—Emergency Fund

• If your child doesn’t have any savings, put 3-6 months of his expenses in a savings account or money market fund, and/or
• You should to tell him this money is to be used for emergencies only.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.