Financial Tip of the Month Archives

December 2010

Are TIPS right for your portfolio?

With interest rates at historic lows and some financial prognosticators expecting a robust recovery in the years ahead, Treasury inflation-protected securities or TIPS are again in the spotlight. First introduced by the United States Treasury in January 1997, TIPS are thought by many investors to be the ultimate hedge against inflation.

Like more familiar EE savings bonds and Treasury bills, TIPS bonds are government securities. TIPS are offered in 5-year, 10-year, and 20-year maturities and you can buy newly issued TIPS at auctions held during certain months of the year. You don't have to stand in line to make a purchase; the government website, TreasuryDirect.gov, lets you submit bids directly from your home computer.

The minimum purchase price for a TIPS bond is $1,000. Like most bonds, TIPS have a stated maturity, a fixed interest rate (also called the coupon rate), and a principal value. TIPS are a hedge against inflation because the principal is adjusted monthly based on changes in the Consumer Price Index or CPI, which is a standard measure of inflation. If you hold the bond until maturity, the government guarantees that you'll receive the greater of the original principal value or the inflation-adjusted principal. In addition, every six months investors are paid interest at the coupon rate, which is applied to the adjusted principal. So the interest payment varies even though the interest rate remains constant. If consumer prices generally decline (also known as deflation), TIPS are guaranteed to pay at least the original principal value at maturity. So your entire investment isn't at risk.

But TIPS also carry certain disadvantages. For example, you have to pay federal income taxes on increases in the principal value. For that reason, many people defer taxes by holding TIPS in tax-advantaged retirement accounts, such as pension funds or Individual Retirement Accounts. In addition, the CPI—the inflation measure used to adjust the principal value of TIPS—could someday be revised downward by Congress. Such a revision would cause the value of TIPS to decline as well. Moreover, low-risk TIPS don't enjoy significant "upside potential." If the stock market skyrockets or real estate returns to its halcyon days, you could miss out on substantial returns if your portfolio is heavily invested in these government securities.

November 2010

What you should know about debt collectors

With the economy still climbing out of recession and unemployment hovering near 9%, a lot of folks are behind on their payments. They owe money to banks for auto loans, hospitals for medical bills, and credit card issuers for everything from electronics to clothing to home appliances.

This mountain of unpaid debt has provided a wonderful business opportunity for debt collectors. Typically, credit card issuers will attempt to collect late payments for about six months. After that, they may outsource their collection activities to an agency or law firm that specializes in tracking down past-due accounts. If those parties are unsuccessful, the card issuer may write off the debt and sell it to a third party known as a "scavenger debt collector."

These scavenger collectors typically pay 3¢ to 10¢ for each dollar of debt. Say, for example, you owe $1,000 to a credit card company. A scavenger agency might buy that debt for $60, then try to collect the entire outstanding balance. If successful, the return for these firms can be phenomenal: $1,000 (often plus interest and fees) for a $60 investment. Of course, most old debts are difficult or impossible to collect. That's why such companies can purchase the debt so cheaply.

If debt collectors are pressuring you, know your rights. The Fair Debt Collection Practices Act (FDCPA) offers specific protections to consumers. For example, you have the right to ask a collector for written proof of the debt he's trying to collect. You're also allowed to dispute a debt you don't think you owe, as long as you put your dispute in writing within 30 days of being contacted.

The FDCPA also places certain restrictions on the practices of debt collectors. They can't contact you before 8 a.m. or after 9 p.m. (unless you agree), they can't call you at work if they know your employer disapproves, and they can't falsely imply that they're attorneys or government representatives. Debt collectors are also barred from using profane language or harassing you by repeated telephone calls. They can't threaten you with consequences that aren't legal, falsely imply that you've committed a crime, misrepresent the amount of your debt, or state that you'll be arrested if you don't pay.

For more information about your consumer rights and debt collection laws, contact www.ftc.gov or your state's attorney general.

October 2010

Learn to cope with financial stress

These are stressful times. Economic uncertainty has touched everything from corporate earnings to pension plans to the livelihoods of American workers. People are worried about the stability of their retirement plans, company layoffs, and dwindling home values. In one study, eight out of ten people cited the economy as a significant source of turmoil in their personal lives. Another survey found that a majority of Americans are dealing with high or moderate levels of financial stress.

Because financial stress is a normal part of life for most people, learning to cope with money worries is important — vital, in fact — for maintaining positive relationships, job productivity, and personal health. Fortunately, proven strategies for coping with stress (and financial stress in particular) can provide relief for a wide variety of people. If you're dealing with excessive anxiety about your finances, consider implementing the following three policies:

Don't sweat things you can't control. If you've been laid off from your job, for example, don't spend time mulling over the idiosyncrasies of your old boss, the shortcomings of the guy who took your job, or anything else that's beyond your ability to change. Putting aside those emotions may be difficult, but looking ahead can relieve stress now. You might need to expand your job search, network with long-forgotten colleagues, even retool for a new career. Don't waste your energy by dwelling on the past.

Take charge. When dealing with personal finances, uncertainty can generate stress. Preparing a written budget can bring your money worries into focus and provide a starting point for action. You may find that cutting out a few unnecessary luxuries can provide breathing room. Getting the debt monkey off your back may take time, but watching your credit card balances decline for a few months can provide relief and hope for the future.

Broaden your perspective. Remember that life is a lot more than money. If you're burdened with financial worries, take time to consider the many blessings you do enjoy: health, family, nature, whatever gives you pleasure and a sense of well-being apart from your checkbook. Relax and smell the daisies.

Sometimes talking to a trusted advisor also helps. If you'd like additional suggestions, give us a call.

September 2010

How to improve your credit score

The days of easy credit, offered to anyone who can breathe, are history. In this sluggish economy, lenders want to know whether borrowers are likely to stay current on their loans, mortgages, and credit card accounts. Banks and other lending institutions are looking more closely at credit scores, the numbers that (in theory at least) predict the likelihood that a borrower will default on his or her outstanding debts. As a result, knowing your score and ensuring that it's climbing toward the upper percentiles should be a part of your regular financial planning.

The most commonly used credit score is the FICO, developed by Fair Isaac Corporation. FICO scores range from a low of 300 to a high of 850 and may be obtained (for a fee) at myfico.com. The score is considered a predictor: the higher the score, the more creditworthy the consumer. Not so long ago, a score that just nudged the 700 mark would bring lenders to the table with their lowest interest rates. Over the last few years, however, higher scores are often required to get premium rates.

About 35% of the FICO score is derived from your payment history, and another 15% comes from the length of that history. Ten percent of the score is based on the types of credit you use—credit cards, retail accounts, and other types of loans. Another 30% takes into account the amounts you owe as a fraction of your available credit. These numbers and others are fed into the FICO calculator to determine your overall score.

To raise that score, focus on the numbers that matter most:

Avoid late payments. If you must juggle payments because of cash flow problems, try to limit the number of past-due accounts. A history of late payments on several accounts will hurt your score more than delinquencies on a single account.

Mix it up. Spread your debt over several types of accounts: installment loans, credit cards, and accounts with retail merchants.

Curb spending. Keep your outstanding balances to less than 50% of your available credit.

Check your credit report regularly. By law, you're entitled to a free annual credit report from the three main credit-reporting agencies. Check the report for errors, and follow up to ensure that problems get fixed. One vendor's erroneous reporting can tank your score.

Good credit is a valuable commodity. Guard it carefully.

August 2010

Is shopping at warehouse stores a money-saver?

Does shopping at the big warehouse stores really save you money? It depends. As with many financial questions, separating fact from fiction can present a challenge.

Let's say, for example, you buy a gallon of maple syrup at a warehouse store. That's a larger quantity than you would buy at your local grocery store, but the per-unit price is considerably cheaper. Have you saved money?

Maybe. To make an informed decision, you need to answer some questions: Will you consume more syrup (and eat more pancakes) because it's available? Is your family so tired of pancakes that you'll end up throwing away some of the syrup? Could you have gotten a better deal by waiting for a sale at your local grocery store? How much did you spend in membership fees to belong to the warehouse store? How much gas did you consume driving the extra distance to the warehouse store?

If you're considering a membership at a warehouse store (or thinking about renewing your membership), here are a few tips to keep in mind.

Buying in bulk is not always cheaper. A smart shopper will compare prices. If you shop for sales and use coupons, you may find that your local grocery store can offer competitive prices.

Impulse buying can lead to overspending. Sure, that designer blouse is marked down from its retail price. But do you really need a new blouse? The big stores know how to increase the likelihood that you'll buy on impulse. Offering free food samples is a great example of this. Take a few bites, chat with the server, and chances are greater that you'll drop that item in your cart.

Where will you store all that stuff? Do you have adequate freezer and cupboard space for the goods you just bought? Have you really saved money if you end up throwing away freezer-burned chicken that's been crammed into your overstuffed freezer for months?

Overall, it's important to evaluate your needs and the actual prices of goods. Some items are indeed cheaper at warehouse stores. If you can recover your membership fee, use all the products you buy, and avoid overspending on stuff you wouldn't otherwise purchase, you can save, especially if you're selective. But there's no shortcut to doing the math and exercising discipline.

July 2010

Is it smart to use retirement savings to pay off a mortgage?

In these days of high unemployment and declining home values, people are searching for ways to regain control over their financial lives. For many, that includes paying off debts as quickly as possible. After all, if you no longer have a mortgage, the banker can't foreclose on your house. If your credit card balances are zero, the collection agency will stop calling. If you've retired your auto loan, the repo guy won't be knocking on your front door.

But sometimes paying off debts — especially a mortgage — shouldn't be your first priority. For example, it's wise to establish an emergency fund to keep from going further into debt when you encounter the inevitable bumps on life's journey. Also, if your employer matches contributions to your retirement account, it makes sense to contribute up to the matching amount before paying off debts. That's because an employer match represents a very high return on your investment. And the longer your money is invested, the longer it has to grow. With a relatively conservative return of 6%, your money will double in about 12 years and double again in 24 years.

By withdrawing retirement funds to pay off a low-interest mortgage, you lose the opportunity to earn a return on those withdrawals. Let's say you pull $100,000 from your retirement account to pay off a 5% fixed-rate mortgage. If you plan to retire in 24 years and the return on your investments averages 6%, that $100,000, if left in the account, could have grown to $400,000 by your retirement date. Withdraw the money now and that earning power is lost forever. You're giving up a return of 6% to pay off a debt that costs less than 5% (when tax-deductible interest is factored into the equation). In addition, withdrawals from tax-advantaged retirement accounts can generate enormous tax consequences. If you're under age 59½, expect to pay a 10% penalty (in addition to general income taxes) on that $100,000. That means you'll need to withdraw substantially more than $100,000 to pay off your mortgage today.

Generally speaking, it's prudent to establish an emergency fund, contribute to retirement accounts (at least up to the matching percentage offered by your employer), and pay off high-interest credit cards and loans — before you consider raiding a 401(k) account to pay off the mortgage.

June 2010

Questions to ask before retiring

If you're within a stone's throw of retirement — for most folks, that's somewhere between the ages of 55 and 65 — you've probably spent at least a little time dreaming about life after work. But before you turn off the computer and turn in your retirement paperwork, consider three important questions.

What will you do in retirement? If you love golf, and dream of getting up late and hitting the greens every afternoon, retirement may be just the ticket. But your hobby may not hold the same appeal after a few years. That's why it's important to take stock of your interests, hobbies, and activities before retiring. Consider "field testing" activities you intend to pursue in retirement, such as joining a band, volunteering for a nonprofit organization, or taking classes at a community college. Doing "retirement activities" before you retire can be an eye-opening experience, and may help to separate daydreams from reality.

Will you work? Studies show that the number of older Americans either holding jobs or looking for work has been rising for at least 15 years. Of course, some folks seek employment out of necessity: bills need to get paid. But for many people, work also provides needed social interaction and a sense of satisfaction. Consequently, some may decide to work at least part-time during retirement — whether or not they need the money. Another idea that's gaining popularity is called "serial employment." With this strategy, you spend part of your "retirement" years employed in a series of full-time jobs interspersed with periods of travel and leisure. Such a plan can generate a healthy supplemental income for you and benefits for talent-starved employers.

Have you saved enough? This, as they say, is the million-dollar question. But how much money you'll need to comfortably retire depends on many factors, including the status of your mortgage and other loans, your general health, expected rates of return on your investments, the size of your current nest egg, life expectancy, plans during retirement (including travel), pensions and other sources of income, the cost of health care and insurance, and myriad other considerations. One size doesn't fit all. So it's important to confer with a trusted advisor who'll help you take a hard look at the numbers — before you wave goodbye to your employer.

For guidance in your retirement planning, give us a call.

May 2010

Who should pay for your child's college education?

Should you pay for your child's college education? Or should your child find the financing? It depends on who you ask.

Parents should pay.

Arguments in favor of shelling out your hard-earned cash for a son's or daughter's higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, "Do you really want to saddle your kid with that kind of debt so early in life?"

They add that if your child ends up working to pay for college, that's less time available for study and making friends. And, of course, friendships built in college ("social networking" in today's parlance) can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal income taxes when it's time for college.

The child should take the responsibility.

Others argue that covering the cost of your child's college education should not be a priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They may also point to tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.

Folks on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a person's own retirement should take precedence over saving for a child's education. "You can't take out a loan for retirement," they argue.

Making the decision.

Of course, your family's dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you'd like help looking at the pros and cons of this important issue, give us a call.

April 2010

Should you move your 401(k) to an IRA at retirement?

If you're approaching retirement, you may be wondering where to park the money that's sitting in your employer's 401(k) plan. Should you transfer the balance to an Individual Retirement Account (IRA) as soon as you retire? Should you take a lump-sum payment and reinvest the money elsewhere? Should you leave the entire balance in your employer's plan? As with most financial decisions, this one is not one-size-fits-all. Before taking action, it's wise to take a close look at your particular needs and circumstances, as well as the advantages and disadvantages of each investment option. Consider the following:

Investment options in a 401(k) plan may be limited. Cafeteria-style 401(k) plans generally offer fewer investment options than IRAs and this, in turn, may impact long-term planning. For example, an IRA may provide the option of purchasing individual bonds instead of bond funds. With an individual bond, you may be able to get a fixed interest rate for more predictable income. On the other hand, if you don't have the time or inclination to research investment options, you may want to leave your nest egg in a solid 401(k) plan. Employers often reduce the number of mutual funds in a 401(k) plan to a few high quality, well managed funds with low fees. In addition, limited funds mean less recordkeeping. For some folks, that's a real advantage.

Some investment options may not be available in an IRA. In general, IRAs provide more investment alternatives than company retirement plans. But some options — stock ownership plans, for example — may not be available outside your employer's plan.

IRA fees may be higher. Large companies are often able to negotiate discounted fees for their 401(k) participants. Leaving your money in an employer's plan may cut down on investment costs and put more of your money to work.

Consider your retirement age. With an IRA, you'll incur a 10% penalty if you make withdrawals before turning age 59½. Retirees can begin taking penalty-free withdrawals from a 401(k) plan at age 55. So if you're planning to retire between those ages, you might want to leave your money in the employer plan.

Beware the transfer. If you decide to move your money to an IRA, it's generally best to have the money transferred directly to a new tax-deferred account. Unless the funds are quickly reinvested in a qualified retirement account, you could face significant tax consequences.

For guidance in making your retirement financial decisions, give us a call.

March 2010

You might need a credit counselor if...

For many Americans, accumulating mountains of debt is routine, habitual, common. Their parents did it; their friends do it; their neighbors who drive flashy cars seem to get away with it. If not a birthright, it's certainly considered a viable option. But some folks who insist on living beyond their means are courting financial disaster. You may have a problem with debt if...

...your income's dwindling but your credit card balances keep growing. Lost your job but can't seem to reign in those charge cards? Don't be surprised when the bill collectors come calling.

...you pay only minimum balances. Still paying off last year's Valentine's Day dinner? Hope it was worth it.

...you practice the credit card shuffle. You take out a cash advance on one credit card to pay off another, then apply for another card when the first comes due. Practiced regularly, shuffling credit cards is a losing game. At some point you need enough income to cover your expenses. Eventually, the house of credit comes tumbling down.

...you're working overtime to cover expenses. Say you work for an airplane manufacturer that's building a new line of jets. To increase production, the company asks you to work longer hours. Bigger paychecks become routine and the cash starts flowing. So you take out installment loans to buy a new car or boat or house on the beach. But what happens when the production line slows down and the overtime pay dries up? The car payments, boat payments, and second home payments keep chugging along. And suddenly you're struggling to make the payments.

...you routinely charge everyday expenses. Do you use credit cards to pay for groceries, gas, and fast food? Unless you're disciplined and pay off the charges every month, your credit card balances can grow exponentially.

...the utility company calls. When the local water company threatens to discontinue service because you're behind on the payments, it may be time to seek financial help.

...you're refused credit. These days, even people with good credit may find it hard to obtain loans. But if your credit score is in the don't-call-us-we'll-call-you category, you may have a debt problem.

The best time to seek professional advice is well before your financial boat capsizes. If you'd like help, give us a call.

February 2010

Build a case to cut your property taxes

Unless you've been living in a cave for the last year or so, you won't be surprised to learn that home values in many parts of the country have plummeted. California, Florida, Arizona, and Nevada have been hit especially hard, but theirs are not the only markets suffering huge declines. According to some studies, 44 million homes throughout the country will lose over $200 billion in value in the next few years.

While that's hardly good news for the roughly two-thirds of American families who own homes, there may be a silver lining to this scenario. If you're paying property taxes based on inflated market values (assessed at the peak of the housing market), the taxable value of your home may be due for a downward adjustment. Unfortunately, many local governments throughout the country are also struggling to meet budget shortfalls, so they may raise tax rates at the same time assessed values are moving lower.

Nevertheless, if you live in a declining housing market, you may be able to build a solid case for a reduced property tax assessment. Here are four suggestions.

Get a copy of your tax assessment. Often these can be obtained via the Internet or directly from your county assessor's office.

Review the assessment for inaccuracies. Mistakes happen. Does the assessment give your home's square footage as 3,700 when it should be 2,200? Does it list three bathrooms when you only have two? Many factors can impact your assessed value, so look for discrepancies. Also, be sure to document any of your own square footage measurements. Take photos. Dig out appraisal documents if you've taken out a home equity line of credit or refinanced your home in recent years.

Research comparable homes. Walk your neighborhood streets and jot down addresses of homes about the same size and age as your house. Then check out their assessed values. Are your neighbors paying lower property taxes than you are? If so, bring that fact to the attention of your tax assessor.

Build a solid case. Ranting and raving about high taxes won't help. In discussions with the assessor's office, be polite and fill out all necessary forms. Lay out your photographs, comparables, measurements, and other data in an organized and logical manner.

And if you don't get your taxes lowered the first time around, ask how to file an appeal.

January 2010

How to organize your finances

In our busy lives, it's sometimes tough to corral our financial records. Bills, paycheck stubs, tax returns, and bank statements can disappear into dusty attic corners and bulging desk drawers. Important insurance policies can hide out beneath bins of holiday ornaments and electrical supplies. Mortgage documents can sneak into old books or ensconce themselves in nooks and crannies throughout the house.

The start of a new year is a great time to coax those papers out of hiding. Here are four suggestions for getting organized.

Find a system that works for you. Many people use a computer program such as Intuit's Quicken or Microsoft's Money to track everyday spending and bank accounts. Others use pencil, paper, and a shoebox. Some people use hanging file folders, labeled for various expenses and accounts; others scan documents into a computer; others use storage bins. The key is to use whatever system makes sense to you and helps you maintain your finances with a reasonable amount of effort.
Dedicate a space and a time. To ensure that bills are paid on time, bank statements are reconciled, and important documents are properly filed, set aside a specific location in your home for financial tasks. It may be a place where you keep a computer or filing cabinets or shoeboxes. Once that area's set aside, pick a time each week (or each day, if you're really zealous) to pay bills, enter financial information into check registers, and organize documents.
Keep the important stuff in a safe. Don't leave your only copies of wills, tax returns, stock certificates, or emergency contacts in a pile on the desk. Such documents should be tucked away in a safe deposit box or home safe. Ask your attorney or financial advisor to store the signed copy of your will in a secure location.
Don't keep documents forever. Many papers (such as bank statements and regular household bills) can be shredded soon after receipt. Other documents, such as those supporting the cost of investments and real estate, should be retained longer for tax purposes. A good general rule for tax returns (and documents that support the returns) is seven years. When it's time to discard those old pieces of paper, fire up the shredder.

If you'd like additional guidance in organizing your finances, give us a call.