Student Loan Help

This is my Bonds 101 blog designed to give you some basics on what a bond is.  I only feature three different types as not to confuse you (or me for that matter).  After you read this blog you’ll be able to walk into that cocktail party ready to flex some intellectual muscle.  Oh yes, you will be armed and dangerous!  Let’s get started and break a mental sweat before you put that mind back on holiday.

What is a bond?

A standard bond specifies the fixed amounts to be paid and the exact dates of the payments.  How much should you be willing to pay for a bond?  The answer deprends on the bond’s characteristics.  We will look at three basic types.

Zero-coupon bonds:  These are bonds which promise a single future payment, such as a U.S. Treasury bill.  These are very common.  Basically this is when you buy a bond for a set price, say $70 present value and the bond will pay the full note amount, say $100 in 5 years depending on the interest rate.

Coupon bonds: These are bonds which make periodic interest payments and repay the principle at maturity (a fixed time period is specified).  Coupon bonds do not have an individuals name on it (essentially they are unregistered).  Whoever is in physical possession of the coupon bond itself can collect the money.  Coupons are affixed to the bond itself.  The holder / owner of the bond will send in one of the coupons at a set time and receive an interest payment for the bond. U.S. Treasury bonds and most corporate bonds are coupon bonds.

Consols: These are bonds which make periodic interest payments forever; never repaying the principle that was borrowed.  Because governments are really the only borrowers that can credibly promise to make payments forever, there are no private consols.  So let’s say you by a consols bond for $500.  You will never get a direct payoff, but you will be ensured interest payments until the day you die.

So there you have it.  We’ve covered three different bond types to wet your pallet.  I tried to keep it pretty basic.  Converting the return on your investment by looking at yield to maturity is another blog for another time.  But for now I hope this helps. Now go rush out and get a “Fond for Bond” bumper sticker!

Last month I blogged about the 529 college savings plan and received some excellent questions that I felt would be beneficial to share with everyone (along with the answers of course). 

I pretty much just gave a snapshot overview of what a 529 plan was , but I’m going to get down to the nuts and bolts of it for you today.

Q: David, you are obviously very smart on financial matters and I would appreciate more details about the 529 plan if you get a chance.  I live in Vermont; do I have a good plan here?  If not, can I get into another state plan?

A: You’re right, I am a financial master, and semi-good looking too – ha-ha.  To answer your question Vermont is a Top 5 plan based on performance over the past 3 years.  They even offer a tax credit to the residents of the great state of Vermont.  Your state’s 529 plan is certainly solid, however, it is perfectly within your province to open a 529 plan in another state if you’d like.  Just because you live in Vermont doesn’t mean you can not open a 529 plan in Oregon.  Also, your child would not then be required to attend a school in Oregon either as many assume – this would simply mean your 529 account was located in that state.

Q: What are some of the main differences between state plans?

A:  One of the biggest differences between plans is who is running the plan.  For example in Massachusetts you have but one option, Fidelity.  In Nebraska it’s the Union Bank and Trust Company of Lincoln, Nebraska, and in Indiana it’s JP Morgan. 

Another thing to keep in mind is what types of fees are involved with each plan.  Are there monthly/yearly maintenance fees, program management fees, or start-up fees?  Obviously the higher the fees the less desirable the plan, unless of course that plan is performing at a very high level to overcome said fees.

Q: Is their a contribution minimum?  I can only afford to put $50 per month away?

A: These differ greatly from plan to plan and for residents vs. non-residents.  For example in Kansas the minimum contribution is $1,000, but only $250 for a Kansas residence.  Each subsequent contribution is $50 per month, but just $25 for Kansas residence.  In Louisiana it’s just $10 total to open an account while in Illinois, Nebraska, & Utah there are no minimum payments at all!  Keep in mind that some states also offer lower contribution minimums if you set up ACH.

Other things to keep in mind are state tax deductions.  For example, residents of Arkansas have a deductible in computing Arkansas taxable income up to $5,000 ($10,000 for married taxpayers) when they contribute to their state 529 plan. 

Also, about half of the state 529 plans offer rewards programs as well.  For example, Massachusetts has partnered up with American Express and offers rewards points that go directly into your child’s 529 plan.

I hope this information is helpful!  If you still have further questions or just want to tell me how fabulous I am, fire away!  I love to hear that I am a financial mastermind, look out Bernanke – I have some thoughts on this countries monetary policy too.  Happy Saving.

Hey guys, I thought it might be helpful to take a broad scope view of the Financial System here in the United States. I mean, I’m always preaching about saving your money and getting the best value for your dollar, but why does that really matter? Why does a dollar even have value? Here is a high level overview for you.

First off, there are five core principles of money and banking. The acronym to remember these five core principle is TRIMS, which stands for Time, Risk, Information, Markets, & Stability.

Time affects the value of financial instruments. Interest payments exist because of time.

Risk requires compensation. In a world of uncertainty, individuals will accept risk only if they are compensated in some form. The more risky the investment the larger the potential return.

Information is the basis of educated decisions. If you weren’t given proper information you couldn’t make intelligent decisions.

Markets are used as a meeting place where buyers and sellers come together. This is the core of the economic system. Think of it like a Match.com.

Stability in the economy reduces risk and improves everyone’s welfare.

So basically the value of your dollar changes over time. The purchasing power of your George Washington in 1950 was certainly worth more than it is today. In 2050 the dollar will be worth even less (assuming we still use currency at that point).

If you are willing to take some risk and invest in financial instruments than you may be able to outrun inflation. But some factors are simply out of our control. We don’t control monetary policy, nor have the power to turn the economy around when it is slumping. All we can do is educate ourselves and make sounds decisions based on the information provided.

Knowledge is power. Time is our ally. Happy spending.