Young Adult-Sample Budget
Annual		Monthly
Income
Work	50,000		4,167
Allowance	12,000		1,000
Investment income	1,000		83
Total Income (100%)	63,000		5,250
Tax and Payroll Deductions (22%)	(13,860)		(1,155)
Net Available for Spending and Saving	49,140		4,095
Expenses
Housing Costs (25%)	15,750		1,313
Utilities (Phone, Elect, etc) (5%)	3,150		263
Food (5%)	3,150		263
Medical and Health (3%)	1,890		158
Transportation (4%)	2,520		210
Contributions (2%)	1,260		105
Dues and Subscriptions (2%)	1,260		105
Entertainment (10%)	6,300		525
Other (4%)	2,520		210
Total Expenses (60% of income)	37,800		3,150
Available for Savings/Investment (18%)	11,340		945
IRA/401k	5,000		417
Other Investments	3,000		250
Major Investment Goal	3,575		298

 

In the last issue of our newsletter, we provided a financial quiz and discussed the importance of financial literary for young adults.

This issue, we'd like to discuss some basic budgeting concepts for young adults. We have used variations of the above chart with families to review the important concepts. Many young people have had very little contact with a budget. Mom and/or Dad have just paid the bills. It shouldn't be that way.

 

Getting young adults into the budget process early has three big advantages. First, the transition to independence for the young adult after college can be very difficult unless the budget process is started early. Second, including the young adult in the budget process during college years makes him or her part of the process, accountable to the parents for his or her costs to the family. Third, it provides an opportunity for the young person to develop the financial tools and the discipline to create, monitor and stay within a budget after college.

 

In our hypothetical example, the young person has just gotten their first job, the job pays $50,000 per year and, for the first year, Mom and Dad will provide $1,000 a month to help make ends meet. Of course, many budgets are prepared without any financial help from Mom and Dad. In practice, in this economy, we see many parents helping their children financially in many ways.

 

Taxes and payroll deductions are often a big surprise for young adults. There's federal and state income tax withholdings along with social security and medicare contributions. For this hypothetical young person, taxes and payroll deductions took away 22% of the income. Hence, they had 78% left for expenses and investments.

 

Whether one is renting or buying a house, no more than 25% should be used for housing. As income increases, this percentage should actually decline. Utilities and food can often be budgeted at 5% each. The budget should include amounts for medical and health, transportation, contributions and dues and subscriptions. Representative percentages are shown. Of course, a certain amount needs to be provided for entertainment. And, a miscellaneous category for everything else. Our example shows that 60% of the gross income is budgeted for expenses.

 

Next, we strongly suggest that young people get into the habit of putting away money for investment, as they say voting is done in Chicago, "early and often". They should plan to participate in their company's 401k plan if available or do an IRA. They should make regular contributions to a general investment fund and perhaps a special investment fund for a specific major goal, such as a car or a down payment on a house. We have shown 18% as the portion of total income going to investments. But, the amount is not the important part. The key is establishing a lifelong habit of not spending all the current income, but rather setting some aside for the future.

 

As a training tool, we have suggested that young people are shown a budget similar to above when they are in college or late high school to acquaint with the issues and realities of life after college. At the same time, we have encouraged their parents to get the young adults involved in the current budgeting for the expenses that the parents are funding. The young adults should be aware of the amounts spent on their behalf and should be encouraged to realistically construct and present to their parents, a budget for their costs to the family while in school. Then, during college times, the young adult will be responsible to monitor the amounts actually spent for them and accountable to keep the actual spending in line with the budget.

 

When the process works properly, the young adult leaves college with a diploma and something more, an understanding of the importance of budgeting and the tools and hopefully the discipline to live within a realistic budget. That's a great goal for young adult and family alike.

 

The Budget Debate goes on in Washington. 

 

Much of the political rhetoric would seem to frame it as a philosophical issue: liberal "Keynesian" philosophy vs. conservative "austerity".

 

That's missing the point.  

 

A quick look at the graph above shows that war and taxes, in addition to the economic downturn, are what is causing the deficit. Our budget process needs to start with a review of war and taxes and our national priorities. 

 

Since 2001, the U.S. has spent over $1.2 trillion dollars in Iraq and Afghanistan. The Department of Defense budget for 2012 is $553 billion. In the coming year, the U.S. will spend $122 billion on Afghanistan alone. 

 

If the U.S. were not waging war in Afghanistan, the same amount of money could reduce the deficit or it could be used for other priorities. For example, Cook County's share of the $122 billion is $2.8 billion and this could provide funding for elementary school teachers and/or VA medical care to military veterans. Charleston's share of the $122 billion is roughly $20 million.  

 

No one likes to pay taxes. That's understood. But the tax cuts implemented in 2001 and extended in December 2010, have added greatly to the deficit. The typical savings as a result of the tax cuts for a family making $40-50,000 has been about $860 per year. For those earning over $1 million, the savings have been $128,832 on average annually.      

 

The Center on Budget and Policy Priorities has reviewed economic data marking the ten-year anniversary of the tax cuts. Their calculations show the tax cuts did not spur strong economic growth. Further, they suggest that if the tax cuts were allowed to expire, it would result in halting the rise in debt over the next decade. That is, debt in 2021 could be roughly 65% of our GDP, not almost 100%. 

 

We'll continue to watch the debate on the budget in Washington. But, until they get war and taxes on the table in a meaningful way, the debate will remind us of Macbeth: "full of sound and fury, signifying nothing." 

 

For more information: 

http://www.huffingtonpost.com/2011/06/08/how-bush-tax-cuts-economy_n_873245.html.

We get this question often these days. Particularly from new clients and prospects. It usually comes right after we tell them that our goal is to provide affluent, enlightened investors with exceptional investment experiences and to protect and grow their assets.

 

DWM encourages clients to use Charles Schwab & Co., Inc. to maintain custody of their assets and effect trades for their accounts. When selecting a preferred custodian, we considered reputation, size, longevity, fees, technology sophistication, and level of services. Schwab was a pioneer in the business of exclusively serving independent, fee-based investment advisors and their clients. More than 5,500 advisors use Schwab and more than 1,800 Schwab employees are dedicated to providing custody, trading and operational support so that we can deliver timely, quality service to you. 

 

We also considered the safety of your assets in our decision to use Schwab. Charles R. Schwab, Chairman, puts it this way, "At Schwab, we are dedicated to the principles of safety and soundness. They form the heart of our relationships." Schwab is committed to staying financially strong with a sound capital structure. During the financial crisis of 2008, Schwab came through relatively unscathed. Most of Schwab's income comes from its brokerage services, including custody and execution of trades, and not from the sale or participation in proprietary and/or outside investment products.

 

Schwab keeps client securities separate from broker-dealer securities as required by the SEC. In the unlikely event of insolvency of a broker-dealer, these segregated assets are not available to general creditors and are protected against creditors' claims.

 

The Securities Investor Protection Corporation (SIPC) was created in 1970 to protect investments and increase investor confidence. If a firm fails, SIPC asks a federal court to appoint a trustee to liquidate the firm, with customers getting a pro rata distribution. If customer assets are unaccounted for due to recordkeeping errors or misappropriation, customers are reimbursed by the SIPC up to $500,000 per customer for all accounts held in the same capacity including a maximum of $100,000 in claims for cash.

 

In addition, at Schwab, customers receive an extra level of coverage through Lloyd's of London. This additional brokerage insurance provides an aggregate of $600 million, limited to a combined return to any customer from a trustee, SIPC, Lloyd's and other London insurers of $150 million, including up to $1 million in cash. This additional protection becomes available in the event the SIPC limits are exhausted and there are no additional funds available from the estate of the failed brokerage firm.

 

Certain assets purchased at Schwab Bank, including Checking and Savings accounts are FDIC insured. The basic FDIC insurance amount is $250,000 per account holder per insured bank and $250,000 for certain retirement accounts deposited at an insured bank.

 

Finally, here is some key financial data for The Charles Schwab Corporation as of March 31, 2011:

·         $6.5 billion in equity capital

·         Approximately $1.1 billion of freely available cash

·         Long-term debt-to-equity ratio of 31%

·         Net income of $243 million in prior three months

·         $1.65 trillion in total client assets

Schwab maintains a disciplined focus on risk management and operates the firm conservatively to minimize investment risks. 

 

We hope the above information is helpful.Of course, we'd be happy to discuss this in greater detail at any time.