Financial Tip of the Month Archives

December 2008

Tips for saving money on gas

Although gas prices have declined in recent months, inflation isn't dead. In fact, history suggests that over time gas prices will continue their inexorable march upward. That's why prudent consumers should consider ways to trim their auto fueling costs now.

Generally speaking, gas costs can be reduced by improving your car's fuel economy, driving more efficiently, and buying less expensive fuel. The following suggestions address all three areas.

Let your engine breathe. Replace air cleaners at regular intervals. A dirty air cleaner reduces air flow, which translates to lower fuel efficiency. Every six months isn't too often.

Inflate those tires. Studies have shown that properly inflated tires can increase fuel efficiency by 3% or more.

Don't idle. Idling the car for even a minute uses the gas equivalent of starting the engine.

Start slowly. It's a good idea to accelerate slowly from a dead stop. This allows the carburetor more time to function efficiently.

Slow down. Don't put your peddle to the metal. If you're racing down the freeway at 75 mph, let up. Studies have shown that each 5 mph over 60 mph is like adding $0.24 per gallon to your gas cost.

Stick to good roads. Driving on rough roads can reduce gas mileage by up to 30%.

Lighten up. The more weight you carry, the more fuel is needed to carry your car down the road. So heft those heavy golf clubs from the trunk to the garage this winter.

Use cruise control. This device is standard in many modern cars. Cruise control will help you maintain a constant speed, a boon to good gas mileage.

Commute wisely. If possible, ride to work in a car pool or ride the bus. Why not save the gas and depreciation on your own vehicle?

Combine trips. Think a little longer about possible errands you can run while traversing town to the soccer game or wheeling to the nearest megaplex for a movie.

Research gas prices. These days you can lounge in an easy chair and surf the Internet to find the best gas prices in your area. Two web sites to consider are GasBuddy.com and GasPriceWatch.com.

One final idea: Next time you're in the market for a car, think fuel efficiency over snazzy electronics and leather seats. Your pocketbook will be glad you did.

November 2008

Should you withdraw funds from your 401(k)?

If you're like many Americans with retirement savings in 401(k) accounts, this has been a painful year. The broad stock market has plummeted, Congress's bailout plan hasn't performed miracles, and many sectors of the economy continue to struggle. Is this a good time to take your retirement savings and run?

The short answer is probably not. Historically speaking, the broad stock market has provided returns that exceed inflation, and despite the ranting of some in the financial press, it's likely to provide such returns again over the long term.

Raiding your 401(k) plan should always be considered a last resort. For one thing, if you're not at least 59½ years old, you'll be hit with a 10% penalty for early withdrawals (except in certain limited cases). Also, money you withdraw will be taxed at your regular tax rate. Say, for example, you're 35 years old and in the 25% tax bracket. If you pull $50,000 from your 401(k) account, your taxes will run a whopping $17,500. And that's not all. Even if your 401(k) account earns a measly annual return of 5% over the next 30 years, your $50,000 could grow to over $215,000. So a $50,000 withdrawal taken and spent today could cost you $232,500 in taxes and lost opportunity. A heavy price to pay.

Bottom line: If at all possible, find other ways to pay your bills. Here are three suggestions.

Cut back on expenses. Yes, it may be painful to forego that double latte and deli sandwich at lunchtime. But if you're struggling to pay the mortgage, it may make sense to redouble your efforts at reducing expenses.

Take a second job. Perhaps only one spouse is bringing home a paycheck. In the short term, a second income may provide enough cash to forestall foreclosure or keep the creditors at bay.

Contribute less. It's always wise to contribute up to any matching funds your company provides for retirement. For a time, however, you might consider reducing contributions that exceed the matching amount.

Although some companies allow 401(k) loans, that option should be considered a last resort as well. Again, money that's not in the account won't grow. Also, lose your job and you'll have to repay the outstanding loan balance or face withdrawal penalties.

Now is the time to take a deep breath, retreat a little from the hubbub, and calmly take inventory.

If you'd like assistance with financial issues, give us a call.

October 2008

Make your retirement funds last

If you're contemplating retirement, one important question is sure to arise: How much should I withdraw annually from my retirement funds? The answer to this query is more than academic. Draw down too much, and you could deplete your resources early and be forced back to work. Withdraw too little and you may sacrifice needlessly, pinching pennies when you could be enjoying a robust retirement.

Your particular withdrawal rate will depend on a number of variables. You should factor in monthly pension checks; when and how much you'll receive from social security; the size of your accumulated nest egg in 401(k) plans, IRAs and other accounts; the allocation of your investments and expected rates of return; planned expenses during retirement; life expectancy; even contingency savings for unexpected costs. The withdrawal rate is just one piece of a much larger picture.

In general, however, many retirement planners recommend an annual withdrawal rate ranging from a conservative 3% to a more liberal 6%. Some studies have shown that it's best to start with a more conservative withdrawal rate, which can then be adjusted by an annual inflation factor. Again, many factors play into this decision. If you have a generous pension, especially one that's indexed to inflation (an increasingly rare scenario), you may be able to withdraw 5% of your savings every year and still sustain a comfortable lifestyle well into your nineties. In addition, if you've paid off your mortgage and other significant debt by the time you retire, you'll have more flexibility when it comes to withdrawals. On the other hand, if your savings are limited or you'll be relying heavily on social security, you may do well to trim the withdrawal percentage downward.

Here's another possibility: Set up an annuity in lieu of a pension. Generally speaking, immediate annuities can provide fixed lifetime payments in exchange for a lump-sum investment. Some policies are indexed to inflation; some vary with the market. (Remember, however, to exercise caution when considering this type of investment. Scams abound in this area.)

The key is to take a realistic look at your income, expenses, and other factors, then track your cash flow and adjust the withdrawal percentage as needed during retirement.

Seeking professional advice can also help when analyzing retirement assumptions and plans. If you need help, please call.

September 2008

A primer on FDIC insurance: Are your accounts covered?

Bank analysts and pundits often disagree when estimating the number of financial institutions that will fail in the near future. Some expect nearly 200 banks to go belly up in the next two years; others expect less than 50 bank failures by the end of 2010. Most would agree, however, that people who maintain deposits at banking institutions face some level of risk, a risk that can be mitigated by Federal Deposit Insurance Corporation (FDIC) insurance.

Basic coverage
In general, the FDIC provides $100,000 of basic insurance protection for personal bank accounts, including certificates of deposit (CDs). But with a little ingenuity, even larger deposits can be covered.

Get more protection
Let's say you and your spouse want additional FDIC coverage. First, you set up individual accounts ($200,000 total coverage). Then, because the FDIC insures up to $250,000 per person on retirement accounts, you gain another $500,000 in FDIC coverage on your individual retirement accounts (IRAs). Next you establish joint ownership accounts, which provide another $100,000 maximum coverage for each person. Your coverage increases by $200,000. Finally, you set up revocable trust accounts, payable upon death, naming each other as beneficiary. For these accounts, maximum coverage for each spouse is $100,000. Total FDIC insurance protection for all of these accounts: $1.1 million.

CDARS option
On the other hand, you might decide to increase your coverage by opening accounts at various FDIC-insured banks. Lately, this process has received a boost by the advent of a network called the Certificate of Deposit Account Registry Service or CDARS. Using this service, depositors can choose a home bank that splits a large deposit into amounts that are under the FDIC insurance limits. The bank then disperses the deposits to member banks and sets a single interest rate for the entire amount. Although this service has some disadvantages (for example, you might get better CD rates by breaking up the deposit yourself and shopping around), it simplifies the process of obtaining FDIC coverage for large deposits.

It's important to remember that certain types of assets aren't covered by FDIC insurance. These include contents of safety deposit boxes, annuities, life insurance policies, mutual funds, and other types of investments.

To learn if your bank is FDIC-insured, visit the FDIC Web site (www.fdic.gov). By the way, the National Credit Union Association or NCUA provides similar deposit insurance for credit union customers.

August 2008

When should you start drawing social security?

Over the next decade millions of baby boomers will reach age 62, the minimum threshold for receiving social security retirement benefits. If recent history is any indication, most of these people (over 70% by some estimates) will take their benefits as early as possible.

But whether you should take social security retirement benefits at the earliest possible age, or defer them until reaching normal retirement age (or even age 70), depends on several factors. Among these are your overall health and life expectancy, your plans to earn income before reaching normal retirement age, anticipated returns on other investments, even your guesses about the future of social security. Like most retirement planning choices, this decision isn't one-size-fits-all.

For some people, deferring social security benefits isn't an option. If your savings won't cover ongoing expenses, you may need to rely on social security income to make ends meet.

But if your circumstances offer more financial flexibility, you may want to consider deferring social security benefits. For each year you delay taking benefits, the payouts increase, up to age 70. With inflation adjustments, that increase can run 8% or more annually. Also, if you plan to earn significant income between age 62 and your normal retirement age (age 65 to age 67, depending on the year you were born), putting off your social security benefits may make sense. That's because any benefits in excess of specified limits ($13,560 in 2008) will be reduced. You'll lose $1 of benefits for every $2 in earnings above the limits. Fortunately, you won't lose any social security benefits (regardless of earnings) once you reach full retirement age.

On the other hand, let's say you've accumulated $500,000 in your 401(k) account and expect that account to generate an 8% annual return. Under such a scenario, you might be better off leaving your retirement savings alone and taking your social security benefits early to cover living expenses. Or perhaps your family has a history of health problems and you don't realistically expect to live into your 80s. Again, taking social security benefits at age 62 might be a wise choice.

When it comes to retirement planning, there are no guarantees. When deciding whether to defer social security benefits, take a realistic look at your situation, run the numbers, and give it your best shot. If you need help with this important decision, give us a call.

July 2008

Teach your kids about money

Knowing about money — how to earn it, use it, invest it and share it — is a critical life skill. Unfortunately, such skills are often given short shrift in our education system and homes. Recent surveys have highlighted an astonishing level of ignorance in today's teenagers when questions about simple financial concepts are raised. For example, one survey found that only 26% of teens understood credit card interest, and only one in three could read a bank statement or balance a checkbook.

If you don't teach your kids good money habits, who will? The following three "Bs" are a good place to start:

Budgeting. When used properly, a carefully-planned budget is not about oppressive control; it's about freedom. Start your kids early by inculcating a mindset of thinking ahead. For example, you might provide a set amount of money each month for clothing and entertainment; then give them the freedom to decide how that money will be used. One caveat: When it's gone, it's gone. If your son spends his whole bankroll on a video game early in the month, he may end up sitting at home when his friends are enjoying a blockbuster movie. By teaching kids the lesson of careful budgeting before they enter the adult world, they'll avoid myriad financial pitfalls and pressures later.

Balancing. Every high school graduate should know how to read a bank statement and balance a checkbook. The ATM machine isn't a money tree with unlimited fruit. Financial decisions have real life consequences. Banks sometimes make mistakes. The regular practice of reconciling a bank statement can drive these lessons home.

Bestowing. Regular giving teaches kids that "life isn't all about me." Children — and adults, for that matter — are often selfish. By requiring your kids to donate a portion of their income to worthy causes, they'll be given the opportunity to acquire habits of benevolence and to discover the joys of sharing.

Of course, financial lessons need to be age-appropriate. You probably wouldn't ask a five-year-old to balance the family checkbook, but you might help him or her set aside money in a piggy bank. A high school senior, on the other hand, might be tasked with investing a portion of the family income in mutual funds.

If you'd like additional suggestions for teaching your kids about money, give us a call.

June 2008

Are I-Bonds a good deal?

Lately the Federal Reserve has responded to the subprime mortgage fiasco by lowering interest rates, which in turn is causing some economists to fret that inflation will soon heat up. If you're looking for a safe long-term investment that keeps pace with inflation, the U.S. Treasury's inflation-adjusted savings bond — known as the I-Bond — is worth considering. Sharing many characteristics with its sister, the EE Savings Bond, the I-Bond is backed by the U.S. government and can be purchased at your local bank, over the Internet, or through payroll deductions. You won't be charged commissions for buying or redeeming either type of bond, and the interest on these bonds is exempt from state and local income taxes. Federal income tax is deferred until the bonds are redeemed.

Unlike EE Bonds, I-Bonds are sold at face value — $50 will buy you a $50 I-Bond. In addition, the interest rate on an I-Bond has two components: one that's fixed, one that's variable. The fixed rate is set when you purchase the bond. The variable rate, based on the consumer price index, is adjusted every six months to track inflation.

You should also be aware that I-Bonds have some drawbacks. For one thing, you can't redeem an I-Bond until you've owned it for at least a year. As a result, these bonds are less liquid than, say, a money market account. Also, if you redeem an I-Bond within five years, you'll forfeit three months' interest.

For those planning to leave their money invested at least five years, stock mutual funds may provide a better hedge against inflation. Historically speaking, the broad stock market has generated higher returns than either EE Bonds or I-Bonds. Over the long term, you may earn a 4-5% return with an I-Bond versus a 10-12% return on a stock growth fund. Of course, history is not always an accurate predictor of future performance. But for long-term investors, a diversified portfolio of mutual funds may significantly outperform either type of U.S. Treasury bond.

So are I-Bonds a good deal? It depends on your personal risk tolerance, how soon you need to withdraw the money, and whether you're subject to significant state and local taxes.

If you'd like help determining whether I-Bonds make sense for you, give us a call.

May 2008

How much should you contribute to an FSA?

Many Americans spend at least some money covering health insurance co-payments and deductibles. They often incur out-of-pocket costs for dental checkups, physical exams, chiropractor visits, over-the-counter medicines, and contact lens paraphernalia.

Contributing to an employer-sponsored flexible spending account — also known as an FSA or Medical Spending Account — can be a great way to cover such ongoing healthcare costs while lessening the bite of taxes. If you're in the 25% tax bracket, for example, using pretax dollars enables you to slash more than $25 in taxes for each $100 spent on eligible medical expenses. That's because social security and Medicare taxes (and in some locales, state and local taxes) also are reduced by FSA contributions.

Use it or lose it. The kicker with FSA plans is the use-or-lose provision. If you reach the end of the year (or the end of any allowable grace period) and haven't spent all the money contributed to the account, you forfeit the unused balance. In some limited circumstances you can adjust contributions during the year to cover this contingency, but in most cases the contribution amount is fixed when you make your annual election.

Do an expense estimate. So it's especially important to forecast accurately. In general, a tally of last year's medical costs is a good place to start when estimating next year's contributions. Be sure to include all eligible expenses, including payments for deductibles and out-of-pocket charges. If you use financial software, print a report of last year's medical expenses. Dig up doctor bills and credit card statements. Check online at your insurer's Web site.

Next, try to anticipate any unusual or non-routine medical expenses expected in the coming year. Will your child start orthodontic treatment? Will you get that bad knee repaired? Will your spouse visit the dentist for a long-neglected root canal? Crank all anticipated healthcare costs into the forecast and adjust your contribution election accordingly.

Review at year-end. In spite of your best efforts, money may be left in your FSA account at year-end. That's the time to stock up on such reimbursable items as cold medicines and Band-Aids. If unsure whether a particular item is eligible for reimbursement under the FSA plan, check with your human resources department.

Unless you or your dependents incur huge medical expenses, you won't be able to deduct healthcare costs on an itemized federal tax return. FSA accounts provide another way to reduce taxes while covering your family's medical costs. For more information or tax assistance, give us a call.

April 2008

How to keep bank fees low

As mortgage concerns spread throughout the economy, many financial institutions are charging new fees — and increasing the level of existing charges — to lessen their exposure to volatile markets. As a consumer, it's prudent to know about these various fees and how to avoid at least some of them.

ATM fees. Banks make billions each year on automated teller fees, and they can add up quickly for consumers. For example, two "foreign" withdrawals a week (from a bank that's not your own) could cost you over $300 a year in fees. Generally speaking, you won't be charged for withdrawals from your own bank's ATM machine, but if you use another bank's automated teller, expect to be charged as much as three dollars per transaction.

Fortunately, this is an easy fee to avoid. Some financial institutions belong to networks that have agreed to waive ATM fees for their customers. Find out which banks or credit unions are tied to your network and frequent only those ATM machines. Also, instead of making lots of little withdrawals to get your lattes and toothpaste, make less frequent larger withdrawals from your own bank's automated teller. Of course this takes discipline, both up front and after the money's in your wallet. But ask yourself, "Do I really want to pay hundreds of dollars a year in ATM fees just to get my own money?"

Overdraft fees. Banks will charge you if your account doesn't have sufficient funds to cover checks, ATM withdrawals, and electronic payments. These fees can really hurt. For example, a bank might charge $25 for the first bounced check, $30 for the next three incidents, and $35 for checks that bounce thereafter. Some accounts have "courtesy overdraft" or "bounce protection" features, but often these come with a hefty price tag to cover overdrafts.

How can you avoid overdraft fees? Reconcile your bank balance with your check register every month. Record checks and online bill payments at the time of each transaction. Review your account balance during the month, either by phone or online. If you're not the world's greatest bookkeeper, keep extra cash as a cushion in your account as your own "overdraft protection."

Overdraft fees, ATM charges, and other fees can be avoided with a little forethought and discipline. If you'd like additional suggestions, give us a call.

March 2008

Long-term disability insurance: How important is it?

You've probably purchased life insurance or at least considered buying it, especially if you have dependents. But statistically speaking, you're less likely to die during your working years than to suffer some sort of long-term disability. In fact, some studies show that one in five people will be disabled for at least 90 days or longer before they reach age 65.

For most people the ability to earn a living is their greatest asset, and losing that ability can have a devastating impact. In fact, one survey of bankruptcy filers found that one in four attributed their dire circumstances to a disability.

So it makes sense to consider long-term disability insurance. Here are three questions to ask when shopping for this type of policy:

What coverage do I already have? Many companies provide their employees with some type of sick leave benefits, short-term disability coverage, or both. Get a handle on your current coverage so you don't end up paying for more insurance than you need. Also, if you've accumulated several weeks or months of sick leave, a policy with a longer waiting period — and generally cheaper premiums — may make sense.
How strong is the insurer? Only a handful of major insurers provide individual long-term disability policies. To research the financial strength and reputation of any potential insurer, review the firm's rating information at Moody's or another rating agency. You can also find out whether an individual agent or company is properly licensed by contacting your state insurance department.
Is the policy "noncancelable" or "guaranteed renewable"? These terms indicate whether the policy's terms are subject to change. If a policy is "noncancelable," the company can't cancel your policy (except for failure to pay the premiums), and you can renew the policy without an increase in the premiums or a reduction of benefits. On the other hand, a "guaranteed renewable" policy allows the insurer to increase the premiums under certain conditions.

Many other components — waiting periods, inflation provisions, benefit amounts, definitions of "disability," age, health and occupation — factor into the cost and benefits of a particular policy. So understanding the ins and outs of long-term disability insurance isn't always a cake walk. But with a little time and effort you can sort through the jargon and find a policy that makes sense for you.

February 2008

Should you directly deposit your tax refund into an IRA?

It sounds like a great idea: Have the IRS directly deposit your tax refund into one or more individual retirement accounts (IRAs). In fact, the IRS touts this provision of the Pension Protection Act of 2006 as a way to speed up retirement contributions. The whole process is automated and simple.

It's hard to argue with the theory. After all, if your tax refund goes directly to a retirement account, it's not available to spend on that new leather sofa or Hawaiian vacation. (Of course, a big tax refund also may indicate that you're withholding too much from each paycheck and giving the government an interest-free loan. But that's another issue.)

Still, things sometimes go awry. Following are four potential obstacles that can derail your tax refund on its way through the direct deposit process:

Wrong account number. Let's say you transpose a couple of digits on your tax return, and those digits happen to indicate which financial institution or which account will receive your refund. If this wrong account number belongs to another customer, that mistake could take weeks or even months to correct. By the way, don't expect the IRS to come to your rescue. They've made it abundantly clear that correct input of financial information on the tax return is the taxpayer's responsibility — not the government's.

Correction fluid and cross outs. If the IRS gets your tax return and finds that the routing numbers have been manually revised, your direct deposit request will likely be rejected. You may get an old-fashioned refund check in the mail.

Wrong type of account. It's up to you to verify that your financial institution will accept direct deposits into an IRA. Some banks, for example, will reject direct deposits to anything other than a savings account.

Refund adjustments. Sometimes the IRS corrects a taxpayer's math or makes other adjustments that can affect the refund amount. In some cases, these adjustments may result in a direct deposit that exceeds the allowable IRA contribution amount. If so, you could be stuck with a penalty for excess contributions.

Direct deposit of your tax refund can be a hassle-free way to make an annual IRA contribution. But proceed with caution. Double check your return and verify that your bank or credit union will accept direct deposits to an IRA.

January 2008

How to avoid impulse buying

Once in a while, we all make purchases on a whim. When such purchases are the exception rather than the rule, impulse buying rarely develops into a significant problem. However, if you're not careful, unplanned spending can become a compulsive behavior. Many people have learned the hard way that making purchases on a whim — especially if done on a regular basis — can saddle them with huge financial burdens. Fortunately, impulse buying can be restrained by following a few simple rules:

Make a shopping list. Be like Santa. Make a list and check it twice. A list can keep you focused. It can remind you of what you came to buy and steer you away from the other stuff. Be aware that supermarkets have researched the best product placements to tempt shoppers. Ever wonder why the eggs and milk are at the back of the store? So you'll have to traverse the whole store to find them. Doesn't that bread from the in-store bakery smell great when you stop to pick up a few groceries? It's not by accident. Think twice before straying from your list of needed items.

Stay home. It's a fact: you're more likely to make impulse buys while standing in line at a department store than when curled up on the sofa reading a book.

Beware of browsing. That goes for Internet browsing, too. Scanning through electronic gear or footwear or eBay auctions can get your adrenaline pumping and push you toward impulse purchases.

Pay with cash. If you're tempted to buy that lovely new suit or snack or gadget, don't pay with plastic. Take time to dig into your wallet and hand over hard currency. It may slow things down and help you rethink the purchase.

Ask some tough questions. Can I buy it used? Is a salesman pressuring me? Can I fix something I already have? Do I really need it?

Track your expenses. This is a great way to zero in on impulse buying. By documenting your purchases over the course of a month or two, you may discover that a large percentage of your spending is "spur of the moment." That may signal the need to begin rethinking your priorities.

Developing the right spending habits will help you become financially secure. Don't let impulse buying derail your plans.