What Are We Learning From These Difficult Times? The markets suffered tremendous losses in 2008. Hardly any asset class was spared. Even well-designed asset allocation plans, meant to reduce volatility, have not weathered this storm.

Still, we have reason for cautious optimism. While I believe we have a very difficult recovery and restructuring ahead of us, I also think we will be much more stable in the future.

Investing is hard work. It requires a tolerance for discomfort when things seem to be not working, and it requires an ability to avoid overconfidence when things are going well. Risk tolerance means different things to different people. Your definition of acceptable risk from three years ago could be significantly different now.

I believe each of us will be better served by looking carefully at our goals, our circumstances, and our resources, and, as logically as we can, developing or confirming investment and spending strategies that will increase the likelihood of reaching our goals.

The first step is to maintain sufficient cash or cash equivalents to cover your short-term needs. Short-term means anything for which you require funds in the next three years.

One of the more important things you can do for your financial security is to keep your spending within the limits of what your resources can support. Live within your means. Taking on debt makes you vulnerable. Are there any spending categories you can reduce and shift the money into more meaningful expenditures? Long-term damage to retirement plans often results from overspending.

The combination of low interest rates and declining account values might require you to take a closer look at your expenses. If you are retired, a general rule of thumb is that you can withdraw 4% of the value of your account each year. If you are spending more than that, even the good cycles may not sustain your account throughout retirement.

Many people are holding a high percentage of their assets in cash. Just as people were scared to miss out on the frenzied bull market of a few years ago – afraid to be left behind – many will be afraid to get back into the markets near the bottom. That is precisely the time to reinvest. None of us can know, until after the fact, when the market has hit rock bottom. We do know historically that when the market has been oversold by a fearful populace, the long-term result may be excellent.

John Hussman, president of Hussman Investment Trust, says that if the S&P 500 were to decline to between 500 and 550, it would match the worst historical troughs for market valuations. These levels are emphatically not forecasts – they represent extreme outcomes. Unfortunately, they also cannot be ruled out in the context of a de-leveraging cycle plagued by utterly misguided policy responses.

But understanding the upside is essential. At those levels, S&P 500 stocks would be priced to deliver total returns over the following decade in the likely range of 14% to 17% annually, according to Hussman. Lower valuations imply higher long-term returns. Do you think anyone in the midst of the Great Depression would have forecast an increase of almost 150% over the following 10 years and almost 1,300% over the following 20?

My own sense of the world tells me that we tend to lose sight of the important things in life. Compared with ages past, we live a remarkably comfortable existence. In our individual lives, we are often wise enough to see trauma or misfortune as a catalyst to positive change, as motivation to move out of a comfortable rut and take chances that will lead to something better.

Our society will emerge from this trauma with more wisdom about saving and investing, and spending and consuming, and about what is really important. We will no longer take so many things in our economic world for granted.

We are learning a lot from these difficult times.  9:25 AM •  0 Comments •

Is Now the Time to Buy Your First Home? For years rapidly rising prices kept many potential first-time home buyers on the sidelines, stuck in the rental market. However, with home values continuing to plummet and interest rates hovering at historic lows, that may be about to change. Yet, while the recession and job uncertainty may cause median home prices to fall even further, general economic uncertainty also prompts the question: Is now a good time to buy a home?

Apparently, many people think so as the housing market is already warming ahead of the usual seasonal uptick of the spring market. According to the National Association of Realtors, February existing home sales rose by 5.1% to an annual rate of 4.72 million, up from 4.49 million units in January. That was the largest sales jump since July 2003. However, the Realtors group points out that about 45% of sales nationwide are foreclosures or other distressed properties that are selling for about 20% less than other homes.

While fire sale prices may be attracting new homebuyers, it’s also worth noting the impact of the $8,000 tax credit for new homebuyers included in the economic stimulus package. While proponents of home ownership traditionally stress the positive tax implications such as deductions for mortgage interest deductions for real estate taxes, this new $8,000 tax credit is available to first-time homebuyers who purchase their home on or after January 1, 2009, but before December 1, 2009, and who close on the sale during this period. A first-time homebuyer is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. All U.S. citizens who file taxes are eligible to participate in the program and the credit does not have to be repaid unless the homeowner sells the home within three years of the purchase.

Homebuyers who file as single or head-of-household taxpayers can claim the full $8,000 credit if their modified adjusted gross income (MAGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000. Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit, and married couples who earn between $150,000 and $170,000 are also eligible to receive a partial first-time home buyer tax credit. The credit is not available for single taxpayers whose MAGI is greater than $95,000 and married couples whose MAGI exceeds $170,000.

Bargain basement prices and tax credits are attractive carrots to dangle in front of renters, but before you start on the home house circuit, it’s wise to consider how the recession may have changed the playing field. Big picture, just as “flipping,” where a buyer would purchase a home, invest a little sweat equity, and sell at a tidy profit just months later, has gone out of vogue, so too, has the home financing market transformed. That is, if you are in the market for a mortgage, you’d better have a secure job and be ready to meet lenders' much stricter income and credit requirements. You may also have to come up with a higher down payment than was required just a few years ago. In general, in contrast with the housing boom when lenders were all too ready to allow buyers to take risky loans and max out their home equity lines, staying within budget is the mantra of today’s homebuyers.

If you venture into the real estate market, keep these three pointers in mind:

• Determine what you can afford. Typically, you should spend no more than 28% of your gross monthly income on mortgage payments, real estate taxes, and home insurance. Online calculators at RealEstateJournal.com or Bankrate.com make these calculations a snap. Once you know your budget, get preapproved for a loan. Also, be sure to factor in extra cash for moving expenses; closing costs, which typically run between 2% and 3% of the home’s price; and ongoing home maintenance, especially if issues arise in your home inspection. In today’s uncertain economy, you also need to asses your job security. If you lost your job, could you make mortgage payments for six months while you looked for new employment?

• Know your market. The real estate market is different depending on where you live in the country, so pay close attention to what is happening in your own backyard. Now, more than ever, location is crucial. You can conduct your preliminary research online at websites like Zillow.com, Trulia.com, and GreatSchools.net.

• Be Patient. If you are looking for a bargain you might consider buying a short-sale property where a homeowner's lender agrees to accept less than is owed on the mortgage. Be aware, however, that these negotiations often progress at a snail’s pace if lenders are considering multiple offers. Most importantly, first-time home buyers don't generally purchase the house of their dreams. However, in today’s down market, experts suggest you should buy a home only if you intend to live there for seven to ten years. In fact, even commercials on television combine optimistic assessments such as “Now is a good time to consider buying a home” with sobering disclaimers like “On average, a residential home appreciates in value over 10 years.”

If your finances are solid and you can afford a home you could live in for seven to ten years, the time may be right to jump into the real estate market. However, although your home is the biggest investment you likely will ever make, your decision involves much more than finances. That is, whatever’s going on in the market is secondary to what’s going on in your own life. The fact is, new jobs, a marriage, or the impending arrival of a child are often deciding factors when it comes to deciding when to purchase your first home.  4:36 PM •  0 Comments •

Is the Ponzi Scheme the Exception or the Rule? Ponzi schemes fraudulently pay returns from money collected from investors rather than from investment profit.

These schemes usually offer abnormally high short-term returns to entice new investors. Such high returns require an ever-increasing flow of money from investors to sustain the scheme.

Because the payments exceed earnings, if any, the scheme is destined to collapse. Usually, legal authorities interrupt the scheme before then because they suspect a Ponzi or because the promoter is selling unregistered securities. As more investors become involved, the greater the likelihood that authorities will notice.

Today a growing number of commentators believe the U.S. Treasury is unintentionally setting our economy on such a path. Are they right or just expressing the latest panic we’ve seen in an increasingly bizarre series of economic twists and turns? Is blind faith leading the U.S. Treasury astray?

In 2008, Bernard L. Madoff Investment Securities LLC collapsed with losses of between $34 billion and $50 billion; depressing evidence that the Ponzi scheme lives.

In 2009, fears are increasing that such a scheme, albeit inadvertent, may manifest itself anew. The Federal Reserve already has announced it is considering issuing its own debt for the first time. The reasoning is sound enough, as the move would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

But the fact that the Fed is even considering such a dramatic, and some would say desperate, action highlights the gravity of the ongoing financial crisis.

The key motivator is undoubtedly the Fed's balance sheet, which has exploded from less than $900 billion to more than $2 trillion since August. And the more the Fed backstops ailing companies and financial institutions, the greater this debt will become. That is already creating additional problems.

Until now, officials were able to fund programs by drawing against Treasury bonds, but today there are concerns that this stockpile is falling dangerously low – approximately $476 billion.

The Fed also has tried to kick-start the economy by pouring self-created funds (bank reserves) into the system. The results have been depressingly minimal and have caused concern among some economists that removing this cash from the system at a later date could prove impossible. If they can't, the system runs the risk of inflation. The additional cash also makes managing interest rates more difficult.

More worrisome is the question of legality.

Vincent Reinhart, economist at the American Enterprise Institute and a former senior Fed staffer, has already gone on record saying, “I had always worked under the assumption that the Federal Reserve couldn't issue debt.”

Desperate times demand desperate measures. But will the risk of fueling future monetary hyperinflation in this way prove to be too desperate?  5:34 PM •  0 Comments •

Planning a Cost-Effective Job Search Whether you’ve already cleaned out your desk or are expecting your department to be next at work for cuts, in this economy, it definitely makes sense to plan a job search before you actually have to do one. Call it a response plan.

Here are some basic steps in getting that process started:

Start or build your emergency fund: Unemployment insurance won’t even come close to meeting your cash needs when you’re out of a job. Start slashing your spending and funnel that extra cash into an emergency fund that won’t be touched for anything but essentials – housing payments, food and insurance expenses. Get a head start on building an amount equal to 3-6 months of those expenses as soon as you can, first by cutting your basic spending and then possibly by paying the minimums on debt purchases until you get that fund in good shape. If you’ve still got your job after you hit your emergency fund target, then keep your tight spending in force and go back to attacking any debt that you have more forcefully.

Get advice on finances, taxes and possible legal issues: There’s nothing better than going into an exit interview with a plan to put yourself in the best situation possible when you lose your job. You might start by talking with a CERTIFIED FINANCIAL PLANNER™ professional and a tax expert about any spending, saving or tax specifics you should focus on now as a way to blunt the damage from lost income later. And depending on the situation and your room to negotiate, it might not be a bad idea to invest in the services of a workplace attorney to make sure you know what to ask for in an exit package. Always ask if you can build unused vacation and sick days into a package and see what you can do about extending health benefits before you start having to pick up the cost via COBRA. COBRA refers to the Consolidated Omnibus Budget Reconciliation Act, which gives workers and their families who lose their health benefits the right to choose to continue them under their group plan for a limited time.

Research health coverage beforehand: The recently passed federal stimulus package provides 65 percent subsidy for COBRA premiums for up to 9 months, which is good news because COBRA can be very expensive. In any event, it makes sense to research individual, high-deductible coverage that might be an affordable alternative to staying on your employer’s health plan while you’re looking for your next job. Many quality carriers offer enrollment online, but ask around and see if friends or associates know good agents who can find coverage that fits you so you’ll be prepared if you need it.

Get personal disability coverage now: Disability coverage offered through your workplace may barely cover you if you are disabled while working, but once your job is gone, there goes your coverage. It’s always a good idea for individuals to have some personal disability coverage of your own, and you should buy it while you’re employed because you need to prove income before you can get the maximum coverage based on your current income.

Understand your unemployment benefits: Generally, it’s a good idea to file immediately for unemployment benefits, even if you’re getting severance. Check on these provisions as soon as you can. Also remember that the federal stimulus plan applies here as well. Benefits will increase by $25 per week for some 20 million jobless workers, while the first $2,400 they receive in benefits will be exempt from federal taxes. Also, if you get a job before your severance or unemployment runs out, use those funds to top off your emergency fund and then attack debt so you’re in a good position to weather any future storms.

Take advantage of any free job advice and assistance you can: If your employer is providing office space, resume-writing assistance or any other benefits to help you transition to your next job, by all means, take advantage of them. It’s particularly smart to get advice with resume writing because as industries change, the type of experience that hiring executives want to see on resumes changes as well.

Network: Make sure you’ve identified key professional groups both locally or nationally that will allow you to meet colleagues and hiring executives in your industry or the industry you hope to work in next. And plan to do little things that keep you in touch with potential employers – make sure your cell phone, e-mail and voicemail are always working, and make sure you have resumes, cover letters and an interview outfit always at the ready in case you have a sudden opportunity to interview..  4:33 PM •  0 Comments •

Sending Your Children the Right Money Message In difficult times, what message are you sending to your children?

Even though some parents can still afford luxuries, no one wants to send the wrong signals to their children and friends in a struggling economy. Many people are not making ostentatious purchases, such as a high priced luxury vehicle. Instead they are driving their car another year, and not taking the expensive vacation.

What information do you give your children about your finances?

Being a parent is all about walking the fine lines, and there is no finer line than the one between informing and scaring your children.

In these troubling times, sparing your kids the “money talk” is no longer an option.

We do, however, have to watch what we say and how we act. “It is important that you be calm and reassuring,” says Jon Gallo, co-author of The Financially Intelligent Parent.

“Whether you lost your job or half of their college fund, younger kids take what their parents say quite literally. If you say, ‘We don't have any money,’ or ‘We are going to be broke next week,’ unless it happens to be true, the kids are going to think it is true,” Gallo adds.

Also, listen to your kids. Ask them what they think and what is concerning them. Then, accept their feelings and empathize with them.

Next, ask them to help out. Gallo recommends enlisting your kids as part of the solution. Ask them for ideas on how you might be able to save money. Consider having a regular “family money night.” Instead of feeling deprived, getting the kids involved gives them the feeling they are helping with the solution and that they are participants.

Lastly, try to keep the situation in perspective. “If you are making less money, you are not necessarily losing your home. If you are losing your home, you don't have cancer. The world is not ending,” says Gallo. “No matter how bad it gets, there are other people in worse shape than you are… try to help them. There are always people out there who need help, and the greatest way to make yourself feel good is to help other people,” he adds.

Gallo strongly recommends the website VolunteerMatch.org, which posts opportunities for hands-on involvement. You can input your zip code and sort opportunities by categories such as children, teens, seniors, or community.

It is a great way to build family unity and help other people.

And, that is a great message to send to your children.  10:41 PM •  0 Comments •

You’ve Been Downsized. Now What? As unemployment figures have risen during the recent downturn, you may have started to worry about the worst-case scenario: “What would I do if I lost my job?” Fortunately, there are positive actions you can take, regardless of your employment situation now. While you may not be able to dictate whether or not you maintain your job, you can control what you do about the challenges that downsizing presents.

Know your benefits
Familiarize yourself with the benefits offered by your company and your state agency. Does your employer offer an outplacement agency for employees who have been laid off? Do you qualify for pension or severance benefits? What is your income eligibility for unemployment?

Unemployment benefits are especially important to understand and to take advantage of if you are laid off. You may think you can manage without them—and maybe you can—but remember that you have worked to put money into the system and it is there to help you. It’s also best to get the ball rolling early, as the unemployment process can be lengthy.

Make risk management a priority
Manage risks associated with your health and the legacy you will leave behind for your family. If you won’t receive a severance option with salary continuation, and you do not have outside health insurance, you will need to obtain coverage.

Fortunately, there is a program set up to help individuals who have experienced a job loss. COBRA provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates. There are guidelines regarding who may receive COBRA benefits and for how long; visit the U.S. Department of Labor website (www.dol.gov) for details. If you do not qualify, or if your coverage period runs out, you may need to purchase individual health insurance.

If your only source of insurance is through your employer—which will lapse with unemployment—you should consider your insurance needs and options. Many people may have only purchased term policies because they had life insurance through their employer. You may need a life insurance policy.

If you have existing outside policies, it’s important that you do all you can to keep them in force. Don’t let short-term setbacks eliminate the premium you’ve invested to safeguard your loved ones.

Track your dollars and cents
For many, budget is a dirty word—but it doesn’t have to be. Done correctly, a budget does account for every dollar and cent you spend; but instead of considering this a tedious task, consider the real difference it can make in your financial health. In good times or bad, a budget can help you gain a true picture of your spending and where you may be able to save more to keep your other goals on track.

One of the greatest insights a budget can provide is an understanding of essential (housing, electricity, heat) and nonessential (daily latte, dining out four times a week, paying overdue charges on credit cards) expenses.

Assess your net worth
Many of us have an idea of what we own—investment accounts, real estate, and so on—but it’s always a great idea to document your net worth to help maintain a true picture of your finances. Moreover, a net worth statement considers your liabilities and your assets to give you a better idea of liquid assets versus money that may not be easily accessible.

Keep your credit in good order
To ensure that your credit is in check, one critical number you must be conscious of is your credit score. Lending institutions, insurance agencies, and prospective employers use your credit score to evaluate your responsibility and creditworthiness. This score dictates the rates you get on loans, the premiums you pay on policies, and sometimes whether or not you attain the job you want.

You can acquire a free annual copy of your credit report from the following agencies:

• www.annualcreditreport.com
• www.Equifax.com
• www.Experian.com
• www.Transunion.com

You should correct any discrepancies on your credit report immediately to avoid costly changes to your credit score. The agencies offer procedures for you to do this.

Your score, however, doesn’t come free; you can pay to receive your score from any of the agencies. If your score needs to be improved, it’s even more critical now to ensure that you pay your bills on time and limit the amount of open credit you have. If your credit score is in good shape, be sure to keep it that way. Typically, an annual review of your report suffices to make sure nothing suspicious has cropped up.

Control your retirement accounts
If, after reviewing your finances and discussing them with a professional, your only option is to access your retirement account funds, you should know the implications. Generally, premature distributions (prior to age 59½) from a retirement account are subject to regular income tax and a 10-percent federal penalty. Some states also have an additional state penalty. You should consult with a professional regarding the full tax implications.

When you leave your company, you are likely also leaving behind a company-sponsored retirement plan. Many people do not think to move these funds (or to roll them over) to an IRA upon departure—and that’s a mistake. You lose control over your investments when you leave them behind in an old plan. There are some restrictions on what can be rolled over and into what vehicle. A financial professional can help you work through this process.

If you have a pension plan from your former employer, there are laws protecting you from losing your benefits, even in the event of a job loss; companies offering pensions must meet certain requirements and are held accountable by the Employee Retirement Income Security Act. If you are concerned about some element of your pension, contact a financial professional to discuss what protections are in place and how they may apply.

Seek professional guidance
You may be able to manage many of the above actions yourself, but there are some that require the assistance of a professional, such as:

• Rolling over your 401(k)
• Assessing and meeting your insurance needs
• Mapping out a financial strategy that considers your temporary setback

Indeed, your time is more appropriately spent navigating through the sudden change you’ve experienced, rather than mulling over the complex details of different benefits, tax consequences, and investment options.

Which leads us to the number one priority when you’ve been downsized: safeguarding your well-being and that of your family. Be sure the financial professional you choose to work with shares the same priority.  8:53 AM •  0 Comments •

Making Sense of Your Dollars and Cents with Budgeting Confusing spreadsheets and penny-pinching are just a few things that come to mind when we hear the word budget. Indeed, budgeting can be a tedious task that we tend to do only when absolutely necessary. Yet the value it can provide in helping us continue to meet our financial goals cannot be discounted. And while budgeting is a detailed task, it doesn’t have to be a painful one.

Why should I budget?
The economic downturn has forced many individuals, regardless of their net worth, to pay greater attention to their bottom line. Maybe you’ve experienced a life change and you’ve had to tighten your purse strings, or you need to save for a specific goal, or you simply want to know where your money goes each month—a budget can shed light on your financial situation.

How to create a budget:
If you work with a financial professional, you may already have access to a budget template. If not, you can easily track your budget in the way that works best for you. The following guidelines will help you get started:

1. Determine how you will track your expenses. You can use a software program, a worksheet, a spreadsheet, or even a notebook. How you format your budget will vary depending on how detailed you choose to be, but the following example may be a good start. Being consistent in your recordkeeping can save you time later when you go back to analyze your expenses.

Date/ Expense Name/ Expense Amount/ Essential? (Y/N)
2/1/2009 Coffee and muffin $3.19
2/1/2009 Meter $1
2/1/2009 Lunch out $12.50
2/1/2009 Groceries $48.12
2/2/2009 Car payment $419.35
2/2/2009 Insurance premium $287.32
2/2/2009 Move tickets and treat $20.25

2. Understand essential vs. nonessential spending. The example above allows you to indicate whether an expense is essential or nonessential, which makes it easier to analyze your spending. An essential expense is something that is a must-have, as opposed to a good-to-have. Examples are things like:

• Mortgage or lease payments
• Car payments
• Insurance premiums
• Utilities
• Groceries

Nonessentials include:
• Meals out at restaurants
• Entertainment expenses
• A new designer handbag
• Golf clubs

Whether an expense is essential or nonessential often depends on the individual. If you live in an urban area, for example, where you can access all you need via public transportation or on foot, a car payment may not be essential.

And when it comes to the nonessential items, this doesn’t mean that you cannot spend money on entertainment or things you love; the goal is to help you take an objective view of which expenses are necessary and which ones could be considered luxuries. This will come in handy when you start to look for areas where you can potentially save money and allocate funds toward other goals.

3. Plan to track your expenses for two to four weeks. To gain a true picture of your spending and all of your fixed expenses, it makes sense to track your spending for a full month. Another, shorter method is to simply log all of your fixed expenses for the month and then keep a two-week inventory of other variable items. The choice is yours.

4. Everything counts. Don’t forget about the quarters you put in the parking meter, or the soda you got from the vending machine. For your budget to be truly effective, you need to log even small incidental purchases. Also, if you know of quarterly expenses that you won’t capture in your regular tracking period, be sure to account for them on a prorated basis. So, if your satellite radio subscription is $45 every three months, allot $15 to this charge in your monthly budget.

5. Analyze. Once you’ve logged your expenses for the period, categorize items as essential and nonessential. Still coming up short for a specific goal? See if you can cut down on some of those items you deem essentials. Is your morning store-bought coffee on your personal essentials list? Consider making coffee at home for a fraction of the cost. Same goes for dining out—can you eat one, two, or three more meals at home each month to shave spending?

6. Don’t cut items that impact your future. It can be tough to do the right thing when trying to decide between splurging on that dream vacation or continuing to contribute to a retirement account or maintaining adequate insurance coverage. You may tell yourself that you’ll make a larger contribution down the road when you have more money (which is harder than it sounds), but consider the impact on your future and the future of your loved ones. Maybe it makes more sense to continue saving and to cut out the nonessential expense, rather than sacrifice your long-term financial health.

Benefits of budgeting
• Stress relief. Knowing exactly what you spend—and that you have enough to meet your essential expenses—is liberating. You’re less likely to toss and turn at night when you know your finances are in order.

• More cash to put toward other goals. By analyzing your spending habits, you may very well find additional cash to put toward other goals. It could be a vacation, a new wardrobe, or even more money for your investment accounts.

• More financially savvy kids. If you have children, one of the greatest gifts you can give them is a sense of financial responsibility. Many parents may dread having to refuse a child’s request for a new pair of sneakers or an iPhone, but showing them that you track spending so you can ensure that all of their needs are addressed through a solid plan—before you make any unnecessary purchases—will teach a life lesson.

It’s hard to say what personal and financial benefits you’ll derive from budgeting, but it is definitely worth an attempt to find out. If your budget reveals that you need extra assistance in saving toward goals, or inspires you to consider your overall financial plan, you should contact a financial professional to assist you.  12:51 PM •  0 Comments •