What the Debt Limit Might Mean for Investors

Tom Levinson Life with Money

The subject of the United States debt limit has been in the news, and we want to discuss both what it is and what it might mean for you as investors.

What is the debt limit?

The United States has for many years maintained a debt limit, which provides a ceiling for how much money the federal government can borrow to pay what it owes. (Note that the debt at issue refers to current and past expenses already approved by Congress; it does not consist of any new spending in the future.)

The U.S. actually reached that limit back in January, but the government – specially, the Department of the Treasury – has taken some “extraordinary measures” to extend the debt limit’s deadline.
What the Debt Limit Might Mean for Investors
As best we know (or the U.S. government knows), the current limit will last through at least early June, at which point, unless and until Congress raises or pauses the debt limit, the U.S. won’t have the cash on hand to pay all its obligations.

You may be asking yourself, haven’t we been here before? The answer is yes.

Over the years, Congress has increased the debt limit many times, typically without any political fanfare. That hasn’t always been the case, though.

For example, back in 2011, Congress increased the government’s borrowing capacity right before it nearly hit its borrowing limit. As a result, the credit rating agency Standard & Poor’s downgraded the country’s credit rating (from AAA to AA+), citing among other things the “political brinkmanship” resolved only at the final hour.

What the debt limit might mean for the economy

If Congress does not reach agreement on increasing the debt limit, the result would be an unprecedented U.S. debt default. There is a broad consensus that the economic impact would be negative, perhaps significantly so – in the form of higher financing costs, debt downgrades, greater market volatility, and likely other impacts no one can foresee.

“There is an enormous amount of uncertainty surrounding the damage the U.S. economy will incur if the U.S. government is unable to pay all its bills—it depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of U.S. Treasuries.

“An extended impasse is likely to cause significant damage to the U.S. economy. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained—and completely avoidable—damage” (Brookings, 4/24/23).

What the debt limit might mean for investors

The current political debate over the debt limit is not new. Such contentious debates have occurred over time and are very likely to recur in the years to come.

An important truth to remember is that markets are extremely efficient at digesting information. Today’s prices reflect both what is known and what market participants believe may happen in the future. So the continuing uncertainty of a looming debt default is largely if not fully already priced into financial markets.

Further, “country debt is generally a slow-moving variable. Market participants can have well-formed expectations about future debt levels and effects on publicly traded securities, expectations that should be reflected in current market prices” (Dimensional Fund Advisors, 12/6/21).

From Park Piedmont’s perspective, we feel it’s important to remind our readers that there is always going to be uncertainty, risk, and opportunity – in the world and in the financial markets. For our clients, we recommend a return to your first principles: your goals, your time horizon, and your risk tolerance.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Grim headlines and warnings of uncertainty and short-term volatility may set off alarm bells in your brain, shouting, “Do something! Anything!”

At those times – particularly at those times – it is important to maintain a focus on your important priorities, and especially to pay attention to your relevant timeline.
focus on your target
There is ample data that market timing is not an effective strategy. Remember that successful market timing requires that you get the timing right twice:  when to get out of the market, and when to get back in.

Negative downturns and market volatility are undoubtedly disconcerting. But giving way to short-term feelings tends to defeat the benefits of long-term investing.

“The initial upsurge in prices from their lows often takes many investors by surprise, and they find it extraordinarily difficult to buy stocks that were available at sharply lower prices a few weeks earlier. … Add to this the likelihood of increased transaction costs and the potential tax consequences of a short-term trading strategy, and the odds of adding value through market timing grow even slimmer” (Dimensional Fund Advisors, 2/23/22).

Finally, and perhaps most importantly, we return to the importance of asset allocation and diversification. In the words of Nobel laureate Merton Miller, “Diversification is your buddy.”

The choice of investments and the allocation to different asset classes in your investment portfolio should be based on each investor’s risk tolerance and goals.

It should not be influenced by trying to predict the direction of future price changes for these investments, or by reacting to actual price changes by selling the investments that are declining. Or, on the flip side, by buying investments that have experienced recent gains.

While diversification through asset allocation cannot insulate investors from all risk, it is an important tool to cushion market volatility and help all of us withstand the lures of short-term decision-making.

If you have any questions or concerns – about the debt limit deliberations or any other topics – please reach out to your Park Piedmont advisor. We are here to be a resource and sounding board and are happy to talk.

Read “What the Debt Limit Might Mean for Investors” in the Piedmont Exedra.

The Hidden Curriculum of Money

Corenna Roozeboom Life with Money

My grandfather never invested in the stock market. It seemed to him that investing was an awful lot like gambling.

And gambling was a sin, so if A = B and B = C … investing in the stock market must be sinful too.
Gambling versus Investing [illustration of a hand holding playing cards]
The way my dad tells it, he’s not entirely sure his parents would have had money to invest anyway. They had five kids, and my grandpa was a principal at a Christian grade school in Iowa.

The school owned their house. The reduced rent was helpful, but it counted against his salary and didn’t build equity. When they eventually moved to the suburbs of Chicago, it was his school’s janitor who loaned him money for a down payment on a house.

Given my grandpa’s aversion to the stock market, my dad didn’t learn anything about investing at home. And despite enough schooling to earn his doctorate, he was never required to take a personal finance class.

So it wasn’t until he reached his 40s that my dad even considered investing. Nobody had ever talked to him about it until then.

• • •

I learned all of this just recently while our family sat around my dad’s dinner table.

“What do you wish you had known about personal finance in your 20s?” I asked as we ate.

People had a lot to say. There’s a lot we didn’t know in our 20s.Sharing stories about the hidden curriculum of money [illustration of a group of people with speech bubbles over their heads]

I wish someone had told me to start saving for retirement. I look back and think, “What did I spend that money on?”

Living as a graduate student in the humanities is … really hard.

Credit cards! People in their 20s – no, much sooner! – should know the dangers of credit card debt.

I asked my next question: “What hidden curriculum about money did you learn growing up?”

• • •

We’ve written about the hidden curriculum of money before – all the things we learn about money without being formally taught.

Talking about money is often considered taboo, so we’re left largely on our own to gather information. All of us pick up things here or there – from our parents, our peers, our faith traditions, the media.
The Hidden Curriculum of Money [illustration of a detective following a trail of fading footprints]
The thing is, it’s hard to know whether what we’ve picked up is well-informed or not. Take my grandfather, for example.

I wish someone had explained to him the difference between investing and trading. Maybe he would’ve felt differently if he had understood the distinction. Investing, then, wouldn’t have been about making bets.

I think he would’ve been drawn to Park Piedmont’s emphasis on humility – and the acknowledgement that nobody, even investment advisors, can predict the future (nor should they try!).

The first chapter of our new book begins this way:

Our approach to investing flows from a single bedrock principle: the future is unpredictable and uncertain. Indeed – and this is actually quite interesting – even having knowledge of the future doesn’t provide actionable insight as to how markets will behave given that future.

As we note, many in the financial services industry and media want you to believe that they know what will happen in the future – and that they’ll be able to successfully make bets on your behalf.

But the markets prove over and over that nobody knows.

Our book continues with an excerpt from our monthly column written in February 2014:

But most people remain skeptical, continually asking the same basic question … What is the market likely to do over the next “fill-in-the-blank” time period?
The Future is Unknown [illustration of a box with question marks floating overtop]
And when we answer that we simply do not know … there is always lingering doubt on the part of the questioner.

However, we think we are only stating the obvious, that no one can predict the future and that future stock prices, bond prices, interest rates, or economic growth rates are all subject to unpredictable future events.

Financial media and financial organizations wanting you to believe that someone knows the future is of course in their interest, so you will buy their reports, or research, or investment products, but unfortunately these efforts are all, in our view, an exercise in futility.

Maybe this humble approach to investing would’ve piqued my grandfather’s interests. Maybe not, but perhaps.

If so, in turn, maybe my dad’s hidden curriculum about money wouldn’t have been to avoid the stock market altogether.

• • •

Talking about money can be awkward – even, or maybe especially, with family. I don’t remember my parents talking about money much when I was growing up, so I wondered a few weeks ago how my line of questioning would be received.

It turns out that it led to a delightful dinner conversation full of family stories I had never heard before. I learned new things about everyone sitting around the table and about those who came before us.

And it also paves the way for future conversations about money – as family members get older – that may be trickier.

• • •

One more chapter to my grandparents’ story:

After my grandpa died, my grandmother lived nearly 25 more years and never remarried. Fortunately, she found a financial advisor whom she trusted.
Financial Advisor [illustration of two women talking about money]
According to my dad, my grandma’s advisor helped her realize that she wouldn’t be gambling her savings away.

Pious though she remained, she became a long-term investor in the stock market – and even a rather successful one.

• • •

We’re creating a financial literacy class for young adults, and your input is hugely helpful for creating our not-so-hidden curriculum about money.

  • What do you wish you had known about life with money in your teens and 20s?
  • What do you hope your kids or grandkids know by then?
  • Are there conversations about money you don’t know how to have with your kids?

We’d love to hear your thoughts. Please share your input. It will shape the class we hope will be helpful for the teens and young adults in your life.

Read “The Hidden Curriculum of Money” in the Piedmont Exedra.

How Intelligent Financial Guidance Can Help Beat Burnout

Tom Levinson Life with Money

One of the values that Vic instilled in our PPA team is the importance of reading the news every day. This has become an important part of our respective daily routines – waking up, making a cup of coffee, and browsing a variety of news resources before beginning our workday.
an illustration of hands holding a newspaper, with a pair of glasses on the table nearby
Not too long ago, in the middle of this routine one morning, a New York Times headline popped out:

Jacinda Ardern Says No to Burnout

As you may already know, Ms. Ardern was, until her recent resignation, New Zealand’s Prime Minister. As the article reported, one particular quote from the resignation speech particularly resonated:

“We give all that we can, for as long as we can, and then it’s time. And for me, it’s time.”

Each of us has heard burnout discussed in plenty of circles during our lives, but hearing it discussed so candidly on the world stage seemed monumental. We wanted to learn more.

“Burnout” is defined by the World Health Organization as “chronic workplace stress that has not been successfully managed.” The Washington Post traces the term “burnout” to the 1970s, when it started being used to describe the condition of frazzled, discouraged American workers.
an illustration of a burned out female employee asleep with her head on her desk, her laptop still open
Now, new studies are showing how prevalent the burnout crisis is around the world, especially as people continue to feel the ripple effects from the Covid pandemic.

A 2022 study by Microsoft polled 20,000 people in eleven countries and found that almost 50% of employees and 53% of managers said they felt burned out at work.

Another study found that 48% of American small business owners had experienced burnout in the past month, with female business owners (53%) more likely to experience burnout than their male counterparts (41%).

In certain instances, working too much is one culprit. The 40-hour workweek is widely regarded as the standard for full-time employment; however, barely four in ten full-time workers in the U.S. indicate actually working 40 hours, according to a Gallup study. The actual average workweek is closer to 47 hours for hourly workers and 49 hours for salaried employees.

The blurred lines between professional time and personal time, amplified during Covid and the accompanying surge in “24/7, work from anywhere” culture, have also contributed significantly to burnout.
An illustration of a man working on a laptop while sitting under a tree
At a deeper level, a recent newsletter from Anglican priest and New York Times contributing essayist Tish Harrison Warren suggests that loneliness and isolation, especially in a post-pandemic world, may also be a cause of burnout.

Warren writes that what people really need to feel less burned out is connection and conversation with others. “We know that the brain can do a lot of really hard things for a long time, as long as it doesn’t have to do them by itself.”

To grapple with burnout, some people are moving to part-time work. The Wall Street Journal reports that 22.1 million Americans were working part-time voluntarily in January. That’s nearly six times higher than the number of people working part-time but seeking full-time employment.

At the same time, a number of businesses have been testing a four-day workweek and finding highly encouraging results thus far.

Okay, so what does burnout have to do with money? This is a Life with Money article, after all.

Our answer:  the process of developing overall well-being includes a healthy work-life balance. This balance can be bolstered and cultivated by the intelligent use of one’s financial resources.

Here’s another way to think about it.

Many people, as they start saving during the early phase of their professional lives, assume they are saving for a retirement that is decades away. And for some of them, that may be the case.

But many others move on a different timeline.

Burnout is frequently a factor. Others may have an itch to start a new business, while others take time off to care for little kids or aging parents. Still others want to use their money and time to travel or study or just to imagine new possibilities for themselves. Covid and its extended ripples surely have played a role.

In any of those scenarios, it’s important to consider one’s financial obligations and opportunities. Questions inevitably arise. For example:

Is it financially feasible to hit “pause” on a career? Without a regular income from working, how long might one’s money actually last?
an illustration of a couple meeting with a financial advisor about beating burnout; the advisor types on her laptop while the woman takes notes
These are important questions at the intersection of planning one’s financial future and leading a fulfilling life.

Park Piedmont has lots of experience helping clients navigate these types of transitions in a thoughtful and financially intelligent manner:

  • Preparing long-term planning illustrations that show how long money is projected to last using various assumptions
  • Presenting options to maximize long-term retirement saving as a newly independent entrepreneur
  • Tapping existing accounts tax-efficiently to fund ongoing expenses
  • Evaluating the potential gains and drawbacks of new work life arrangements

Our advisory team is well-equipped to help.

There’s no one-size-fits-all solution to burnout, especially since it is widespread in our country’s work culture.

But if you or someone you know is experiencing some burnout, or just changes in your life goals; or if you’re exploring different ways to spend your time and trying to figure out how possible a shift in work-life balance may be, we’re here to be a resource.

While we don’t have a silver bullet for burnout, we’re happy to play a part in finding ways through it.

Written in collaboration with Kathryn Baranoski.

Read this article in the Piedmont Exedra.

Market Gains Across the Board

Nick Levinson Comments, Life with Money

After the large declines from 2022 in both the stock and bond markets, the first quarter of 2023 showed market gains across the board. US stocks rose 7%, developed country international almost 8%, and emerging markets international 3.5%.
Market gains across the board
With the 10-year Treasury interest rate declining from 3.88% at the end of 2022 to 3.48% on 3/31/23, bond prices – which move in the opposite direction of rates – rose in the 3-3.5% range for the quarter. This includes intermediate-term taxable bonds, inflation-protected bonds, and high-yield bonds.

These broad market gains have come against a backdrop of ongoing uncertainty in several areas.


US price increases continue to moderate, although more slowly than the Federal Reserve had hoped. Prices outside the US remain high as well.

Interest Rates

The Fed raised rates again at the end of March, but by only 0.25%, due in large part to the turmoil in the banking industry. Probably the biggest question, for the US economy at least, is whether the Fed continues to raise rates this year, and if so by how much.

According to Nick Timiraos from The Wall Street Journal:

“Stubbornly high inflation and tight labor markets led Federal Reserve officials to signal they could raise interest rates at their next meeting despite a greater likelihood of a recession later this year.”

“The fallout from the failures of two midsize banks led Fed officials to consider skipping a rate increase at their meeting last month, but they concluded regulators had calmed stresses enough to justify a quarter-point rate rise, according to minutes of the March 21-22 gathering released Wednesday.”

Banking Industry

There were two high profile bank failures in the US in early March, which the Fed and other government agencies addressed by providing short-term funding to the banks and guaranteeing deposits from bank customers.
Banking Industry
Most of the assets of both failed banks were purchased by other banks, and no other failures have occurred since (although Schwab’s bank appeared to be in trouble for a couple of weeks; see our article, “Making Sense of the Recent Bank Failures”).

Bank issues in other parts of the world appear to be limited; the highest profile problem appears to have been resolved with UBS taking over Credit Suisse in Switzerland.

Recession Fears

The WSJ article went on to report that “For the first time since officials began lifting rates a year ago, the Fed staff forecast presented at the meeting anticipated a recession would start later this year due to banking-sector turmoil, the meeting minutes said. Previously, the staff had judged a recession was roughly as likely to occur as not this year.”

Geopolitical Tension

Russia’s war in Ukraine continues, along with US-China tensions.


How the markets respond going forward will be determined by these and many other factors, some of which we already know about and others we don’t.

Two related stories from the past few weeks covered the impact of large technology companies on the broad stock market, and the question as to whether the Fed’s inflation target has been set artificially low.

The Impact of Large Tech Companies on the Stock Market

In the context of the 7% quarterly gain for the US stock market, the NASDAQ composite rose almost 17% for the quarter. The tech story, by Joe Rennison and Eli Murray of The New York Times, cited an even smaller set of companies as responsible for the gains:
The Impact of Large Tech Companies on the Stock Market
“The fate of the S&P 500 index – used by investors as a barometer for the health of corporate America … – often comes down to just two companies: Apple and Microsoft … More than $15 trillion in assets … are linked to the performance of the S&P 500 in some way … with more than 10 cents of every dollar allocated to the broad index flowing through to Microsoft’s and Apple’s market valuations.”

The article also notes that the recent performance “cuts both ways. In 2022, the S&P 500 slumped close to 20%, a drop that would have been much smaller without the lousy performance of the tech sector. Apple and Microsoft together accounted for roughly one-fifth of the index’s total decline last year.”

The article cites artificial intelligence, which Microsoft has a huge investment in through ChatGPT, as a possible source of continued growth for tech. But whether that leads to further stock market gains remains to be seen.

Is the Fed’s Inflation Target Too Low?

On the Fed’s inflation target, Jeff Sommer of The New York Times wonders whether 2% is too low.

“It’s worth re-examining the 2% target: how the Fed arrived at it, whether it still makes sense, and whether current rules allow sufficient flexibility in decision making.

“Inflation needs to come down, unquestionably. But with the financial tightening already underway, inflation may wane in a sustained way in the next few months. At that point, the cost in lost jobs and economic growth could be cruel and excessive if the Fed tightens further in an attempt to drive inflation down to 2%, a target that is, after all, an arbitrary one.”

Sommer concludes that “the Fed should aim high [PPA note: meaning allow its target to rise to 3 or even 4% over time]. Inflation needs to come down, but if it means throwing a lot of people out of work this year, the Fed already has the flexibility to move slowly and mercifully. It may be wise to do so.”

Read “Market Gains Across the Board” in the Piedmont Exedra.

Think Like a Freak

Nick Levinson Life with Money

I’m a relative latecomer to podcasts. I had heard a lot about them, of course, but hadn’t really tried them out until the last year or so. (I’m a notorious late-adopter of pretty much all new media and technology.)

We started with Serial, and then moved on to Office Ladies, featuring Jenna Fisher and Angela Kinsey dissecting each episode of our favorite TV series, The Office. Podcasts turn out to be a great way to spend an hour (or more if bingeing), especially on a long car ride with nothing much else to do.
More recently, I’ve started to listen to the Freakonomics podcast. Hosted by Stephen Dubner, an author and journalist, Freakonomics bills itself as exploring “the hidden side of everything.” While this seems a little excessive, I’ve found many of their episodes very informative and entertaining.

Recent favorites include ones about whether middle managers matter (they do, but only for staff retention purposes), and a three-part series on Adam Smith and his legacy (much more complicated than just the “invisible hand”).

Dubner’s Freakonomics partner is Steven Levitt, an economics professor at the University of Chicago. Levitt hosts his own podcast, People I (Mostly) Admire, which I’ve been listening to as well. Excellent recent episodes featured interviews with Peter Singer, a professor of Bioethics at Princeton, and Yuval Noah Harari, author of Sapiens and Homo Deus, among other sweeping works of history and philosophy.

Think Like a Freak

With this introduction to Dubner and Levitt’s work, I eagerly started their 2014 book, Think Like a Freak, which “offers to retrain your brain.” (Again, a little much, but they do seem to have fun with their subtitles.)

I thought they might have some interesting things to say about behavioral finance, which studies the real ways people manage their financial lives, as opposed to the “rational person” fiction used in classic economics. It turns out they do, and much of it complements the advice PPA has provided clients for many years.

I think it’s useful first to present the broad guidelines of their thinking. They use what they call the “economic approach” (page 9). This isn’t necessarily just about economics, but instead “relies on data, rather than hunch or ideology, to understand how the world works, to learn how incentives succeed (or fail), how resources get allocated, and what sort of obstacles prevent people from getting those resources.”
Think Like a Freak (or a Park Piedmont Investor)
In addition to the importance of understanding incentives, they focus on figuring out what to measure, and how to measure it; challenging conventional wisdom; and emphasizing that correlation (i.e., two or more things occurring together) does not equal causation (i.e., one or more of those things causing one of the others).

The book is full of other useful techniques and fascinating examples, including:

  • Think small (page 89), with a section on improving education by providing inexpensive glasses to low-income kids
  • Don’t fear the obvious (pages 78-83 and 101), with a discussion about the scientist who figured out the cause of ulcers
  • Strategic thinking (pages 140-2), with a story about the ingenuity of Van Halen frontman David Lee Roth
  • Sunk and opportunity costs (191), with arguments for the benefits of quitting in certain situations
  • Pre-mortems (page 199), which advocates for thinking seriously about what could go wrong before starting a new initiative, as a response to the Challenger space shuttle disaster in 1986

Dubner and Levitt don’t take up investing in any detail in this book, but they do have suggestions that we think can help in your life with money.

Try to Understand and Avoid Biases

Dubner and Levitt say (page 10) that it’s “difficult to think like a freak … It’s easy to let your biases – political, intellectual, or otherwise – color your view of the world. A growing body of research suggests that even the smartest people tend to seek out evidence that confirms what they already think, rather than new information that would give them a more robust view of reality.”
Financial Herding
“It’s also tempting to run with a herd. Even on the most important issues of the day, we often adopt the views of our friends, families, and colleagues … But running with the herd means we are quick to embrace the status quo, slow to change our minds.” (We’ve written about the financial perils of herding in relation to cryptocurrency.)

In personal finance, these biases are often expressed as assumptions that markets will continue to perform as they have most recently, either up or down. Park Piedmont encourages clients instead to “re-balance” your portfolios over time.

This involves buying more of the category that has performed worse and/or selling the category that has performed better, in order to return your portfolio to the asset allocation we worked together to determine appropriate for your situation. This also means buying low and selling high, which typically provides much better long-term returns than simply following the markets’ current direction.

Admit What You Don’t Know

As Dubner and Levitt put it (page 20):

“It has long been said that the three hardest words to say in the English language are I love you. We heartily disagree! For most people, it is much harder to say I don’t know. That’s a shame, for until you admit what you don’t yet know, it’s virtually impossible to learn what you need to.”
empty box
Admitting the limits of our knowledge, which we refer to as humility in developing investment strategies for clients, plays a key role in PPA’s investment approach. We favor indexed investing because it acknowledges how difficult it is to outperform the public markets for stocks and bonds.

The alternative approach – trying to pick winners and/or losers (i.e., short selling), and charging clients much more for the privilege – has been shown in countless studies to be difficult if not impossible, even for short periods of time. Better to own inexpensive funds in a diversified portfolio designed to accomplish your long-term goals.

Folly of Prediction

This is one of our favorite lessons, and Dubner and Levitt get right to the heart of the matter (pages 22-25):

“What we ‘know’ can plainly be sculpted by political or religious views. The world is also thick with ‘entrepreneurs of error,’ as the economist Edward Glaeser calls them, political and religious and business leaders who supply beliefs when it will increase their financial or political returns.”
Financial Pundits
“It can be hard to ever really ‘know’ what caused or solved a given problem – and that’s for events that have already happened. Just think how much harder it is to predict what will happen in the future.”

“Research shows that … prominent pundits … tend to be ‘massively overconfident’ even when their predictions prove stone-cold wrong.”

We see so many examples of this folly that it would be laughable, if only people didn’t sometimes take it seriously and act on it. Just this morning, I read a headline saying that JPMorgan calls a “recession inevitable by the end of the year” (InvestmentNews, 4/3/23).

A recession might or might not happen, and it’s important to try to understand the many factors that influence the eventual outcome. But there’s certainly no basis for saying anything in the financial area is inevitable.

We consider this irresponsible, and think it is likely designed to scare clients into actions that might generate short-term benefits for the firm rather than long-term benefits for the client. PPA avoids predictions in all cases, focusing instead on developing appropriate long-term allocations for clients that don’t rely on guessing which way the markets will go.

We’d love to hear if any of these ideas resonate for you and will continue to highlight what we consider interesting takes on the economy and personal finance.

Read “Think Like a Freak” in the Piedmont Exedra.

Which Education Saving Plan Makes the Most Sense for Your Family?

Nate Levinson Life with Money

If you’re a parent, or even contemplating becoming one, you know that starting a family leads to all kinds of “firsts.”
For many, it’s the first time you’ve sought out financial planning services. Life insurance, wills, trusts, saving for college – all of these can feel complex, maybe even a little overwhelming. So, in this week’s Life with Money, our focus is on education saving plans.

You can save for your child or grandchild’s education in a variety of ways, depending on your family’s needs, resources, and preferences. Three of the most commonly used funding vehicles for education saving are 529 plans, custodial accounts, and Coverdell Education Savings Accounts (ESAs).

Which education saving plan makes the most sense for your family?

• • •

529 Plans

A 529 Plan is an investment account that has tax advantages if the funds are used for certain education-related expenses. The main advantages are that the investments are tax-deferred and withdrawals from the account are tax-free if used for qualifying education costs, which include tuition, fees, books, room and board, and many others. The primary disadvantage is a lack of flexibility in the use of the accumulated funds for non-education-related expenditures.

You as the parent can set up and own a 529 plan to help fund the education of your child, who is the account beneficiary. However, a third party, such as your child’s grandparent, can also establish and own the account.
writing a check
A 529 plan is considered the property of the person who establishes the account (either the parent or third party), not the child. The owner can transfer the funds to another 529 plan for the benefit of a different student (such as a sibling) if the funds are not needed for the original beneficiary.

Each state in the U.S. administers a 529 plan, and 529 accounts can be used to fund education in any state, regardless of where the account owner and beneficiary live. There are “direct” plans, where you open and manage an account yourself, and “advisor” plans, which involve financial institutions and are generally more expensive. Each plan offers a range of investments including bond funds, stock funds, and “age-based” funds that shift the allocation from stocks to bonds as the beneficiary nears college age. Investment selections can only be changed up to two times per year.

There are no income limits on who can contribute to a 529. And while there is no specific annual contribution limit, each state plan has a maximum lifetime contribution cap, typically in the $300,000-$500,000 range. It’s important to note here that contributions in one year above certain amounts may trigger gift tax filing requirements, even if the lifetime 529 contribution limit hasn’t been reached yet.

In terms of tax advantages, over 30 states offer a state income tax deduction for contributions to a 529 plan, although there is no such deduction against federal income tax. For these reasons, 529 plans are similar to Roth IRAs in terms of the tax treatment (i.e., no up-front federal deductions, but tax-free withdrawals). The downside of a 529 is that if you need to take a distribution for non-education-related expenses, it will be partially taxable as income and potentially subject to a 10% tax penalty as well.

Lastly, you can withdraw an unlimited amount of funds from a 529 plan each year for post-secondary education expenses. However, distributions for elementary and secondary education, as well as for student loan repayments, are limited to a maximum of $10,000 per year.

• • •

Custodial Accounts

Custodial accounts can also be utilized for education saving. The main advantage is flexibility in use of the accumulated funds. The primary disadvantages are lack of control by parents and no tax benefits.

Similar to 529 plans, custodial accounts can be established by either a parent or third party (i.e., the custodian) with a child as the beneficiary. However, unlike a 529, you are not required to use the funds in a custodial account for education-related expenses; instead, the money can be used for any expenses related to the beneficiary.
saving for college
Also unlike a 529, custodial accounts are taxable, meaning that there is no income tax deduction for contributions and any income generated within the account (such as interest from bonds or dividends from stocks) is taxed in the year it is earned. Some of this income, above certain limits, is taxable at the parents’ higher tax rate, not the child’s rates.

There are two types of custodial accounts, known as Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. UGMAs and UTMAs primarily differ in terms of what types of assets can be held within them. While UTMAs can hold many types of assets, such as cash, securities (including stocks and bonds), life insurance, cars, and real estate, UGMAs are generally limited to only cash and securities.

Like a 529 plan, there are no income limits on who can contribute to a custodial account, and no annual contribution limits (although gift tax considerations apply here as well). Furthermore, the investments can be changed at any time without restrictions.

The assets held in a custodial account are considered the property of the child, but are controlled by the parent or third party until the child turns 18 or reaches the “age of majority,” which varies by state. At that age, the child is legally entitled to use the money as they please.

• • •

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) offer some tax benefits for education savings, but are limited by low annual contribution maximums.

ESAs are like 529 plans and custodial accounts in that they can be established by a parent or third party. Like a 529, the investments within an ESA are tax-deferred and withdrawals from the account are tax-free if used for qualifying education expenses. However, you cannot take any federal or state income tax deduction for contributions made to an ESA.
Similar to a custodial account, ESAs offer more flexibility in the account owner’s choice of investments, and there is no limit on how often the investments can be changed. Also like a custodial account, the funds in the ESA are the property of the child, but controlled by the parent or third party while the child is still a minor.

What differentiates ESAs from the other two savings vehicles is that there is an annual contribution limit of $2,000 per beneficiary per year. These contributions can only be made until the beneficiary turns 18, and can only be made by people with income below certain limits ($110,000 for a single taxpayer and $220,000 for a married couple who file a joint tax return).

Furthermore, any unused funds in the ESA must be distributed to the beneficiary by the time they turn 30, and will be taxable and subject to a 10% tax penalty if there are no qualified education expenses in that year. To avoid this consequence, the account can be depleted before the beneficiary turns 30 or transferred to a family member of the original beneficiary who is under 30 to be used for their education expenses. For these reasons, ESAs are more limited than 529s and custodial accounts in terms of how much can be contributed and by whom.

ESAs do provide more flexibility than 529s in terms of what are considered to be qualified expenses. Primarily, there is no limit on using ESA funds for elementary and secondary education, whereas this is restricted to $10,000 per year for 529 plans.

• • •

Financial Aid Implications

One final issue to consider is the impact of education savings on the financial aid process for postsecondary education.

In the U.S., the first step in applying for financial aid is filing the Free Application for Federal Student Aid (FAFSA). On this form, the filer reports the parents’ and child’s income from two years ago, and parents’ and child’s current assets. FAFSA uses this data to calculate the Expected Family Contribution (EFC), or how much the child and their immediate family can contribute to the education costs themselves. Any remaining education costs are eligible to be covered by financial aid.

In this EFC calculation, the assets and income of the student are more heavily weighted than those of the parents. So, the more assets and income that are considered “parental” as opposed to the child’s, the more financial aid the student will receive, all else being equal.
complex formula
EFC is determined via a complex formula, but an important factor to consider is that, for parents, 47% of their income and 5.65% of their assets are counted against their child’s financial aid eligibility. For the child, 50% of their income and 20% of their assets are counted against financial aid. So, a large factor in deciding among college savings vehicles is whether the assets in the account, and income generated by the account, are considered to be the parents’ or child’s.

The assets held within a 529 or ESA are considered parental assets if the account is owned by the parent. If the 529 or ESA is owned by a third party (such as a grandparent), the funds are not counted as an asset in the financial aid calculation at all, meaning that funds in these accounts have no impact on financial aid eligibility.

Income, such as interest and dividends, generated within a 529 or ESA do not count for financial aid purposes if the account is owned by a parent, and count as the student’s income if the account is owned by a third party. Custodial accounts, on the other hand, are more straightforward. The funds in these accounts are considered the student’s assets, and income is treated as the student’s income.

Based on these factors, 529 plans and Coverdell ESAs, which have identical financial aid treatment, are preferable to custodial accounts from a financial aid perspective.

• • •

Which Education Saving Plan Makes the Most Sense for Your Family?

529s, custodial accounts, and ESAs can all be useful education saving tools.

Out of the three, custodial accounts provide the most flexibility in how the funds can be used, but 529s offer the most tax advantages and financial aid incentives. ESAs have more investment and expense flexibility than 529s, and more tax benefits than custodial accounts, but are more limited in terms of who can contribute and how much.

Moreover, with custodial accounts and ESAs, the child has control of the money once they reach the age of majority, whereas the owner of a 529 retains control of the funds as long as they don’t transfer account ownership to someone else.

All these factors play into the decision of which education saving plan makes the most sense for your family. Contact us if you’d like further advice on this part of your planning. We’re always here to help.

Read “Which Education Saving Plan Makes the Most Sense for Your Family” in the Piedmont Exedra.

Making Sense of the Recent Bank Failures

Nick Levinson Life with Money

Recent economic and financial news has left many heads spinning and brought back reminders of the 2007-2009 financial crisis.

To help you make sense of the recent bank failures, below we provide an overview of economic events, share our current assessment, and take a look at the bigger picture.

Current Economic Events

Here are a few of the main events from just the past two weeks:

US Bank Failures:

Silicon Valley Bank (SVB) and Signature Bank (SB), mid-sized banks each with $100-200 billion in assets, failed due mainly to many depositors withdrawing their funds at the same time (i.e., a “bank run”), and were taken over by State and Federal authorities. SVB is under investigation for possible financial irregularities by executives. Most of SB’s assets were purchased by New York Community Bancorp, another midsize bank.
money and safe

Ongoing US Bank Weakness:

First Republic Bank (FRB) has also come under extreme pressure from depositor withdrawals, and its stock price has declined 90%. Several large banks and the Federal government arranged a short-term cash infusion, but that hasn’t appeared to allay concerns yet for FRB’s customers and investors. Charles Schwab, which operates a bank and is also one of the largest US custodians for brokerage accounts (including all of PPA’s clients), also appeared to be in financial trouble.

These concerns appear to have subsided (see our recent note to clients). Questions remain about other mid-size and small community banks, despite the Federal Deposit Insurance Corporation (FDIC) promising to cover all deposits at SVB and SB, as opposed to just those under the previous $250K maximum per account.

International Bank Troubles:

Facing possible bankruptcy, Credit Suisse agreed to a buyout by UBS with the encouragement of the Swiss government.

Ongoing Worldwide Fight Against Inflation:

The US Federal Reserve raised interest rates by ¼ of a percent in its ongoing effort to control price increases. Until the bank failures, the expectation was for a ½ percent increase due to stronger economic activity/slower inflation reductions in recent months. But the Fed decided on the smaller increase due largely to the negative impact of interest rate increases on the banking system.

The hope now is that banks will stay in business, but with reduced activity (i.e., fewer loans made to customers) due to higher rates and potentially stricter regulations. This in turn could slow the economy and allow the Fed to pause on further large rate increases.

Park Piedmont’s Assessment

Our assessment is that the US and other governments around the world have responded to these threats to the banking system quickly and forcefully, and that appears to have eased the immediate concerns about system-wide bank failures. Whether additional regulations prevent similar issues in the medium to long-term remains to be seen, of course.

The outlook for reducing inflation seems even less clear than it did two weeks ago, unfortunately. The Fed is caught between its “dual mandate” of controlling inflation (which would argue for larger rate increases over a longer period of time) and maintaining the stability of the US financial system (which would benefit from pausing the rate increases, if not actually cutting rates). This battle seems likely to play out at a minimum over the rest of this year.

The Bigger Picture

We read with interest Ezra Klein’s recent article, “Can We Slow This All Down, Please?”, which provides useful context for some of the larger issues surrounding the bank failures and broader economic/financial concerns going forward.
bank failures
Klein starts out by noting that “everyone involved in the recent bank failures looks terrible. Regulators did nothing, even though Silicon Valley Bank’s woes had been widely noticed. Bank managers failed at the basic work of hedging against the risk of interest rates rising. Midsize banks, including SVB itself, successfully lobbied Congress and the Trump Administration to be exempted from the regulations for too-big-to-fail banks. Venture capitalists sparked a needless panic that annihilated an institution central to their own industry. The Federal Reserve ignored inflation for too long, and the whiplash of its response has become a risk factor all its own … Change makes fools of us all.”

He cites three main factors causing the recent problems.

Low interest rates came to an end:

“Interest rates had, with few exceptions, been on a downward trend for 40 years. Since 2009 [PPA note: when the recovery from the last financial crisis began], they had often been near zero, and negative when adjusted for inflation … Then the Fed embarked on one of its fastest rate-hiking campaigns in history. As it did, all manner of assets that had levitated toward eye-popping valuations in recent years – stocks, cryptocurrencies … Swiss watches [PPA note: and bonds, since bond prices rise when rates fall] – began to tumble.”

The dangers of viral finance made an appearance:

“Digital information and banking mean bank runs can happen – and spread to other institutions – at astonishing speed … Everything from the fast rise and fall of crypto to the weird moment of meme stocks … reflects the digital acceleration of finance … It’s worth wondering whether speed should be seen and addressed as a financial risk factor unto itself.”

Financial regulators turned out to be fighting the last war:

“Lawmakers had tried, in Dodd-Frank [PPA note: the major legislation intended to address the causes of the 2007-2009 financial crisis], to define systemic risk in terms of assets: $50 billion or above, and you posed a systemic risk … The idea here was that we know what a systemically risky bank looks like: … the banks, and assorted other financial institutions, that caused the 2008 crash …

“As galling as it is that SVB got itself exempted from being regulated as systemically important, it’s not clear that regulators would have caught the bank’s problems even if Dodd-Frank had remained untouched since the Fed’s 2022 stress tests didn’t include interest rate risks.”

PPA agrees with much of this analysis, and we have incorporated several of these ideas into the advice we provide clients. For example, in the context of the historically low interest rates that preceded the current increases, we have avoided long-term bonds, which typically decline in price much more than shorter-term bonds when rates rise. We also try to avoid investment fads, focusing on broad-based stock and bond investments as the core of each client’s portfolio. Finally, we encourage long-term perspectives for our clients.

As our colleagues at Dimensional Fund Advisors (DFA) put it in a recent newsletter (03/21/23), “When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.”

Read “Making Sense of Recent Bank Failures” in the Piedmont Exedra.

Teaching Young Adults Skills for Life

Tom Levinson Life with Money

When was the last time you taught someone you love how to do something hard?

This question came up during a recent conversation I (Tom) had with Leslie Kahlenberg, one of our PPA team members. Leslie and her husband live in the Los Angeles area with their two teenaged sons. Their younger son, recently turned 15, is driving now. And Leslie was memorably describing the experience of driving with her son in bad weather for the first time when we started to reflect on learning new things.

The more I listened, the more I thought Leslie’s experiences offer something illuminating on the more universal experience of teaching people important things for the first time. It turns out, helping a 9th grader learn to drive in a downpour isn’t so different from teaching someone about money and intelligent financial decision-making.

So … I asked Leslie for more specifics.

Here are Leslie’s (very lightly edited) thoughts:

• • •

Usually, I feel confident in Leo’s skills as a driver, but in this one circumstance, I was more nervous than usual. It was, and had been, raining hard for several days and the streets and freeway flooded in some parts. I was trying to project to him that I wasn’t worried, trusted his judgment, and wasn’t too bad of a backseat driver.
learning to drive
I had to be mindful of how I offered guidance so he would be more likely to hear what I’m saying and, at the same time, understand the reasoning behind it.

I have an older car and it doesn’t have Apple CarPlay, so occasionally I’ll pretend I am the voice of Apple CarPlay when the opportunity for a teachable moment comes up. My hope is not to downplay anything, but instead, offer guidance in a lighter tone. Hopefully that can help him be more receptive to the lessons.

I don’t remember much about getting taught these things. The first day on the road alone I drove into the gas station from the wrong side of the road. Most of my experiences, including the ones we are having with Leo now, have been the result of trial and error. I think it’s important to share those embarrassing experiences as teachable moments.

• • •

Helping anyone gain new knowledge or learn a new skill can be a challenge. Where do you start? What do you say? And, as important, what don’t you say? How do you best offer feedback? When is it better not to step in? How do we offer guidance without being too much of a backseat driver?

Our routine, daily life offers an almost innumerable catalog of opportunities to delve into the world of money. With young people, this can be especially fertile ground.
talking with teenagers about money
While many adults prefer to avoid money conversations, the “next generation” is, perhaps surprisingly, interested – even eager – to talk about it. There isn’t a lot of concrete guidance on the subject. Financial literacy curricula, while highly valuable, are still missing from far too many schools. Moreover, kids often perceive money as an adult topic. This can make the discussion more intriguing. Talking openly about money can give them the sense that they’re stepping into an adult space.

• • •

Over the past few months, our team at Park Piedmont has been talking and thinking and continuing our own learning about how teenagers and young adults can best cultivate a well-informed skill set around intelligent financial decision-making.

Financial education is an integral part of our everyday work with clients, and we’re excited at the prospect of getting to extend some of that work with the young adults in our midst. Maybe that’s your high school or college-age kids or grandkids, or other young adults you know well.

We know this topic can sometimes be stressful and challenging – not unlike that first time teaching a teenager how to drive in the rain. But we’re excited about diving in.

In the meantime, if this is a topic you’re interested in for the young adults in your life, please let us know. We’d love to hear more of your thoughts, as they will help us continue learning about this important topic.

Read “Teaching Young Adults Skills for Life” in the Piedmont Exedra.

Stocks and Bonds Fell in February

Nick Levinson Comments, Life with Money

Stocks and bonds fell in February after recovering over the past four months from the declines of early 2022.

Bonds prices fell as the benchmark 10-year Treasury rate rose to 3.92% at the end of February from 3.52% at the end of January. This rate began 2023 at 3.88%, after starting 2022 at 1.51%. We discuss interest rates in more detail below.

Stock indexes dropped between 2% and 6% for the month, but all except the Dow Jones Industrials remained positive for 2023. The Nasdaq index, which includes most of the large tech companies, were up almost 10% for the year through February after tumbling more than the broader markets in 2022.

Stocks and bonds fell in February

Interest Rates Remain Key

The US Federal Reserve and other central banks continue their efforts to raise rates enough to fight inflation without triggering a major recession. Through January 2023, the Consumer Price Index declined from over 9% in mid-2022 to less than 6.5%. More recent data have shown a slowing of the rate of decrease, however, along with better numbers on employment. This reduces fears of recession, but also raises the possibility that the Fed will continue, and possibly even quicken, its pace of interest rate increases. In testimony to Congress on March 7, Fed Chair Jerome Powell said that “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Rates Rise Together

It’s important to note that when the Fed raises short-term rates, and longer-term rates determined by the broader bond market increase, it affects what you pay but also what you earn. As most of you probably know, 30-year fixed rate mortgages have risen to 7% and the prime rate, which determines the pricing on many adjustable rate loans, is up to 7.75%. For clients with “Pledged Asset Lines,” lines of credit secured by the value of your brokerage account, you’ve become aware that SOFR, the Secured Overnight Financing Rate, has increased to about 4.7%.

What you might not be as aware of is that the rates you’re being paid have adjusted upwards as well. Short-term Treasury bonds now pay 5% or more, and short-term bond funds yield almost 4.75%. High-yield bonds and bond funds are earning between 6-7%. Even very short-term investments such as purchased money market funds are paying 4.5-4.75%.

So the earning rates remain below the paying rates, but they are at least in the same ballpark.

What It Means for You

This is still a period of significant uncertainty. Depending on employment and other economic data, the Fed might keep raising interest rates for some time, perhaps another year. If that happens, there may be a recession and stock and bond prices will likely decline, although you will be earning more income from interest and dividend payments (remember, interest rates and bond prices move in opposite directions). At some point, though, inflation indicators will decline further, which should lead to recoveries in the stock and bond markets.

So as we suggested last month, we don’t recommend making any short-term portfolio adjustments for clients with long-term investment horizons. For clients with shorter investment timeframes, the wisdom of potential changes depends on your current exposure to the various parts of the stock and bond markets. In either case, we encourage you to check in with your PPA advisor if you’d like to discuss the implications for your specific situation.

Read “Markets Stumble in February” in the Piedmont Exedra.

Songs About Money: “Money Music”

Tom Levinson Life with Money

If you were making a mixtape or playlist of your favorite songs about money, what would make the cut?

Visiting with a few of our clients this week offered a nice opportunity to turn on the radio. And with the radio on, we could revisit that ongoing question.

On one of our recent Park Piedmont weekly team Zooms, we spent the better part of an hour discussing songs about money, getting input from our whole team. Our initial songlist runs the gamut from standards of the American Songbook to Hip-Hop, Disco to Rock, Country to Folk.

Take a look at our list and then let us know: what are we missing? What songs would you add to our “Money Music” playlist?
man listening to songs about money

  • For the Love of Money – The O’Jays
  • Money, Money, Money – Abba
  • Money Can’t Buy It – Annie Lennox
  • Too Much – Drake
  • 9 To 5 – Dolly Parton
  • Money Trees – Kendrick Lamar
  • If I Were a Rich Man – Fiddler on the Roof
  • Money – Pink Floyd
  • Money (That’s What I Want) – Barrett Strong, later covered by The Beatles
  • Supply & Demand – Amos Lee
  • Get Rich Quick – Little Richard
  • Money Don’t Matter 2 Night – Prince & the New Power Generation
  • Opportunities (Let’s Make Lots of Money) – Pet Shop Boys
  • Money Changes Everything – Cyndi Lauper
  • Mo Money Mo Problems – The Notorious B.I.G. feat. Puff Daddy and Mase
  • I Got Plenty o’ Nuttin’ – Porgy and Bess
  • She Works Hard For the Money – Donna Summer
  • Subterranean Homesick Blues – Bob Dylan
  • You Can’t Always Get What You Want – The Rolling Stones
  • $ave Dat Money – Lil Dicky