Money Talk: Gary Williams on Finance

Spend Time Now Planning for Your Financial Future

2009-11-04T15:17:00.001-05:00

Are you "thinking” about retirement?

As early as 1968, the co-authors of the book, Social Security: Perspectives for Reform, observed:

“There is a widespread myopia with respect to retirement needs. Empirical evidence shows that most people fail to save enough to prevent catastrophic drops in post-retirement income. Not only do people fail to plan ahead carefully for retirement, even in the later years of their working life, many remain unaware of impending retirement needs."

Twenty years later in 1988, author Venita Vancaspel discussed financial literacy in the United States in her book, Money Dynamics for the 1990s. She wrote:

"There is an educational void in our nation, and unfortunately we are raising a generation of financial illiterates. Even many college graduates cannot figure simple percentages. They are not teaching the one subject that they will need to live well in our free enterprise system – how to manage money. This vacuum is so great that the average couple cannot begin to confront the financial uncertainties and the multitude of choices they face in our complex society.”

All stages of life require us to make financial decisions and plan for economic security. No other life stage, however, is likely to create "the financial uncertainties and multitude of choices" as does retirement.

In 1998, author Robert Stoneman noted in his book, High Finance, Hard Sell, that millions of Americans were finally starting to understand that they must take more responsibility for their long-term financial security. He wrote that many individuals were turning to financial planning books, magazines, and television programs for money management and investment knowledge.

Stoneman also observed that millions of others were making little headway because of financial illiteracy. One of the biggest challenges facing financial companies was to "persuade consumers to forego things they could have now on behalf of building wealth and security for their future."

Inarguably, many individuals today would be in much stronger financial positions had they focused earlier on building future wealth.

A 1991 study by researcher, consultant, and President of Money Quotient, Carol Anderson, investigated factors that either enhance or hinder resource management and asset accumulation for retirement planning. Resource management in this context means using our personal resources (time, energy, skills, money) to achieve our goals efficiently and purposefully.

A surprising result of the study was that the variable "thinking about retirement" proved to be a stronger predictor of pre-retirement resource management than any other variable tested, including whether one was expecting a pension, the level of family income, and age. In addition, "extent of thinking about retirement" proved to be nearly as powerful a predictor of retirement asset accumulation as did family income and was decidedly more influential than education level, occupation level, proximity to retirement, and pension expectations.

These findings demonstrate that engaging in reflective and productive thinking about our future retirement can influence our financial planning for it and help to counteract potential negative influences such as lower income, lower occupation status, and lower education levels. The study also indicates the importance of how cognitive processes – thinking – can influence financial behaviors, motivate planning activities, and initiate positive change.

What was written more than forty years ago remains true today. It is important to spend time now planning for your future.

Are you “thinking” about retirement?

Gary S. Williams, CFP®, CRPC® is President of Williams Asset Management. Gary is also an Investment Adviser Representative of, and offers securities and advisory services through, Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD and can be reached via phone at (410) 740-0220 or via email at Gary@WilliamsAssetManagement.com. This material was prepared by PEAK.

Responding to the Recession

2009-07-14T09:48:00.006-05:00

Do you barricade yourself in your home when it rains, to emerge only on a beautifully sunny, 70 degree day? Of course not. Think of what you’d miss. Similarly, while everyone wants to invest in a bull market, in a downturn, it’s a different story. Just as you prepare for bad weather by wearing a raincoat or carrying an umbrella, investing wisely for retirement in a recession requires a little more planning.

According to a recent study by the Washington, DC-based Employee Benefit Research Institute (EBRI), Americans are, in fact, planning carefully in the wake of the recession. Although EBRI’s annual Retirement Confidence Survey (RCS) measured a decline in confidence about the security of retirement (a record-low 13% this year say they are very confident of having enough money to live comfortably in retirement), investors are taking action to gain control. For example, 81% say they have reduced their expenses. Others are changing the way they invest their money (43%), working more hours or a second job (38%), saving more money (25%), and seeking advice from a financial professional (25%). Most notably, among all workers, 75%, one of the highest levels ever measured by the RCS, say they and/or their spouse have saved money for retirement.

The RCS also recorded some lifestyle shifts. For example, 28% of workers say the age at which they expect to retire has changed in the past year, with the vast majority (89%) noting their expected retirement age has increased. Additionally, 72% of workers say they plan to work for pay after they retire, an increase from 66% in 2007.

To position your portfolio to survive the recession:

• Review your investment strategy with an emphasis on risk. You know your investment strategy is a function of your time horizon, goals, and tolerance for risk. While your goals and time horizon are fairly straightforward, risk is often difficult to ascertain in theory. In fact, now facing real portfolio declines, many investors feel the need to make some adjustments.

All investors need protection from three basic risks. First, there’s market risk, the possibility that events in financial markets may lead to a decrease in the value of your investment. Investors in bonds are subject to interest rate risk. Interest rates and bond prices generally move in opposite directions: when interest rates go up, bond prices go down, and when interest rates go down, bond prices go up. Finally, in today’s rollercoaster market, it may seem safest to preserve your money with bank certificates of deposit. However, that exposes you to inflation risk. That is, if the rate of inflation outpaces your interest rate, you’ll have diminished purchasing power.

How much risk you decide to take going forward depends on how much volatility you can tolerate. Think of volatility as a change in value of your account. Generally, while stock portfolios experience greater short-term swings in value than do bonds, there is an important tradeoff. Equities reward you with greater potential for long-term gains. Accordingly, a major factor to consider when thinking about your risk tolerance is how long it will be until you expect to tap into your investment account. If you have three decades until retirement, you may be better able to stomach a market downturn. After all, you have plenty of time to recover. Conversely, if you are in or approaching retirement, you have less time to benefit from the market’s eventual upturn and may worry more about a down market.

• Re-commit to saving. History shows that market gains can occur in a few strong, but unpredictable, trading days. Sticking with your retirement savings plan ensures you invest a fixed amount at regular intervals. This “dollar cost averaging” can result in a better average share price than trying to time your purchases because your set contributions buy fewer shares when the market is up and more shares when the markets are down, resulting in an optimal average cost per share over time. Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. Also, check that your assets are spread across stocks, bonds, and short-term investments. The best-performing asset classes vary from year to year and combining investments that respond differently to market conditions helps control risk. Rather than focus on a sector you perceive as safe, continue to make broad-based contributions on a regular basis. You also might consider rolling old retirement plans into an IRA to facilitate monitoring your portfolio.

• Work on making rational decisions. Financial decisions can be difficult even in good times, but the extreme emotions triggered by the recession can impede your ability to think logically. Rather than get upset and react to newspaper headlines or discussions around the water cooler, base your decisions on solid information and careful analysis of your own personal economy. Resist making what you perceive as a quick fix portfolio move, and strive to lengthen your perspective by keeping your long-term goals in mind. When you take the time to run your retirement numbers, you may be surprised. Your diversified portfolio may not have suffered as much as the broader market. What’s more, as with many of the workers responding to the EBRI’s RCS, putting off retirement for a year might not be the worst possible scenario. More importantly, looking at future projections can help you to think more about your current spending, helping you to become a more mindful consumer and make better choices that can further boost your retirement savings.

Although there are certainly some positive signs on the economic horizon, there will be plenty of cloudy days ahead. However, as the economy battles its way out of the recession, anything you can do to feel more in control and focused on your long-term goals will enhance your ability to make sound investment decisions and position your portfolio to benefit from the market’s eventual rebound.

What Are We Learning From These Difficult Times?

2009-06-23T09:25:00.001-05:00

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.

Is Now the Time to Buy Your First Home?

2009-06-09T16:36:00.000-05:00

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.

Is the Ponzi Scheme the Exception or the Rule?

2009-05-13T17:34:00.003-05:00

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?

Planning a Cost-Effective Job Search

2009-04-24T16:33:00.004-05:00

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..

Sending Your Children the Right Money Message

2009-04-10T22:41:00.000-05:00

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.

You’ve Been Downsized. Now What?

2009-03-26T08:53:00.003-05:00

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.

Making Sense of Your Dollars and Cents with Budgeting

2009-02-21T12:51:00.004-05:00

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.

How Will the Change in Political Leadership Impact the Market?

2009-02-16T08:06:00.006-05:00

With the Presidential election over, speculation of how the electoral votes would add up has given way to debates on whether the multiple government-sponsored bailouts will be enough to rescue our faltering economy. The economic crisis will certainly be at the forefront of President Obama’s agenda as he begins his term; and it’s likely the pundits will persist with their predictions on how the new administration and a Democratic-controlled Congress will impact the market.

Conventional wisdom holds that D.C. gridlock – a Democratic President and Republican-controlled Congress or vice versa – is best for markets. The idea there is that neither party has the power to make the sweeping policy changes that can cause significant market gyrations. However, according to data compiled by the research firm Bespoke Investment Group in Harrison, N.Y., in the seven periods when Democrats had complete control of U.S. political power, the S&P 500 rose 14.7% on average while in the eight times a Republican served as President and Democrats controlled Congress, the benchmark index rose 7.4%. So much for conventional wisdom.

Interestingly, with the industry’s constant disclaimer that history cannot predict future performance as a backdrop, there are numerous recent studies that attempt to do just that and predict how the new administration and Congress will fare in dealing with our nation’s newly-declared recession and record budget deficit.

In his opinion piece, “Divided Government Is Best for the Market,” published in the Wall Street Journal on September 12, Donald l. Luskin begins his analysis of whether the economy historically has done better under Democrats or Republicans by stating, “There is no shortage of exaggerated claims on both sides.”

When the chief investment officer at Trend Macrolytics LLC ran the numbers, he found since 1948, the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6% when a Democrat was in the White House and only 11.1% when a Republican was in the White House. In terms of real gross domestic product, he found under Democratic presidents, the average since 1948 has been 4.2%. Under Republican presidents it has been only 2.8%.

However, moving beyond political labels, Luskin notes that not all Democrats act like Democrats, and not all Republicans act like Republicans. He writes, “John F. Kennedy, for example, was an enthusiastic supply-side tax cutter and George H.W. Bush raised taxes. Bill Clinton promoted free trade and Richard Nixon imposed wage and price controls.”

With that in mind, Luskin assigns those four presidents to the opposite party and finds numbers completely reverse themselves. That is, stocks average 14.7% under Republicans and only 10.5% under Democrats going back to 1948. In fact, he points out that just one switch – making Richard Nixon into a Democrat – is enough to reverse the numbers and have stocks averaging 14% under Republicans and only 12.1% under Democrats. Writes Luskin, “This fact discredits this whole study more than it does Republicans or even Richard Nixon himself. Any analysis that can be undone by omitting or changing a single data point isn't very robust.”

Of course, the President alone cannot determine the direction of the stock market or enact new taxes. Congress makes the laws. And, you guessed it, there are plenty of studies that look at market performance based on who’s in control on Capitol Hill. According to Luskin, under Republican Congresses, stocks have averaged a 19% return, while under Democratic Congresses only 11.9%.

Party politics aside, there’s ample analysis on how the market reacts when Americans go to the polls and when a new President takes office. For example, in the last 20 election years, not including 2008, there have been only two years where the S&P 500 Index had a negative return. In 1940, when Roosevelt faced Willkie, the S&P lost 9.8% and in the 2000 contest when Bush ran against Dukakis, the S&P lost 9.1%.

Further, Marshall D. Nickles’ “Presidential Elections and Stock Market Cycles” finds an initial post-inaugural slide is followed by strong performance. Investigating presidential election cycles from 1941 through 2000, he discovered stock market lows occurred surprisingly close to mid-year congressional elections or approximately two years before presidential elections.

Another study, “Mapping the Presidential Election Cycle in U.S. Stock Markets” by Wing-Keung Wong, National University of Singapore, and Michael McAleer, University of Western Australia, shows that in the almost four decades from January 1965 through December 2003, U.S. stock prices closely followed the four-year Presidential election cycle. Specifically, stock prices fell during the first half of a Presidency, reached a trough in the second year, rose during the second half of a Presidency, and reached a peak in the third or fourth year. In fact, the researchers showed this cyclical trend holds true for the greater part of the last ten administrations, from President Lyndon Johnson to President George W. Bush, particularly when the incumbent is a Republican.

Obviously, the large number of studies conducted on presidential cycles and the market’s fate under various parties proves the American public has an appetite for this kind of historical analysis. However, experts in the field of behavioral finance identify the harmful tendency to identify patterns and project them into the future as “oversimplification.” In fact, investors’ desire for control often leads them to identify patterns in purely random events. This ensuing false sense of reality more often than not leads them to embrace the false conclusion that they know which way the market is going. Bottom line? Sure, the studies and statistics are interesting, but the data should not impact your investment decisions.

Source: online.wsj.com

Source: moneyover55.about.com

Source: gbr.pepperdine.edu

Panicky Investors Hurt Themselves in the Long Run

2009-01-22T12:24:00.005-05:00

The sun will rise tomorrow.

A recent article on Bloomberg.com pointed out that hedge funds are aggravating the worst market decline in 50 years as they dump assets to meet investor redemptions and keep lenders at bay. The story quotes Mohamed El-Erian, Co-Chief Executive Officer of Pacific Investments, as telling CNBC that, “Even the really good hedge funds are being forced to sell.”

The good news is... someone is buying.

On the other side of the trade, from all those people liquidating their portfolios, are other investors who are happy to buy. Some are market timers, others see this as a long-term buying opportunity.

George Muzea, author of The Vital Few vs. Trivial Many, looks at the markets from a different perspective than most. Here is how he views the current market environment:

• The Vital Few (smart money): Insiders are not buying as aggressively as they did in the 1974, 1987, and 2002-2003 bottoms. However, there is almost no meaningful selling, always a sign of value.

• The Trivial Many (reverse indicators): The moods of the media, friends, and acquaintances are very bearish. The American Association of Individual Investors is seeing more bears than it has in 20 years. To Muzea, these reverse indicators keep him locked in the full buy mode.

Increased nervousness has caused many investors to contemplate getting out now.

“The way investors do violence to their financial security is to establish an investment position outside of their actual tolerance for risk, believing they can manage the risk by panicking to sell if the market drops lower. As prices drop, poor investors set an ultimatum for the market by saying, ‘If this thing loses one more dime, I'm out,’” says portfolio manager John P. Hussman. “Invariably, the thing will lose that dime and the investor will get out near the bottom, having taken most of the losses, but abandoning any prospect for recovery and subsequent growth”, he adds.

Waiting on a bear market in cash sounds like a great idea ... but, is it? A study by consulting firm SEI in 2002 showed what happened when investors cashed out during a bear market. Those who waited until the market recovered before getting back in, jumped in too late and lost out on double-digit gains. Investors who held on throughout the last 12 bear markets gained on average 32.5% in the following first year and recovered in 1.5 years. Investors who jumped in one week later gained 24.3% and recovered in 2.5 years. Finally, if you jumped in three months too late, the return was 14.8%, and took three years to recover. Even this down market will end – and, probably, when we least expect it.

Perhaps a more constructive way to approach recent concerns is to consider the importance of portfolio rebalancing. Consider a study by JPMorgan Asset Management. Assuming a hypothetical portfolio of 50% stocks/50% bonds, using the Lehman Aggregate Bond Index (Fixed Income) and the S&P 500 (Equities), an allocation on October 9, 2007 to October 23, 2008, has seen the weighting of stocks decline to only 36%, potentially leaving investors dramatically underweighted in stocks. In time, this could hurt investors who don't rebalance, as their portfolio might not be in a position to take advantage of an eventual rebound.

In bad times, demand for risky assets falls. So, the compensation for taking this risk needs to rise to attract investors. Lower share price relative to fundamentals just means expected returns may be higher.

Anxiety over the market downturn is understandable. But, we’ve had crises before. The world moves on and risk appetites have a tendency to reassert themselves.

The sun will rise tomorrow.

(Hedge Funds generally involve substantial risk and limited liquidity. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.)

Dynamics of Energy Usage is Changing

2008-12-04T17:04:00.001-05:00

The world of energy is undergoing dramatic change.

Throughout the 1990s, crude oil prices in the United States averaged $20 a barrel, with highs of $35 during the 1990-91 Persian Gulf War and lows of $11 after the 1998 emerging market crises, according to the Energy Information Administration. Since then, petroleum prices have skyrocketed.

"Oil, the Economy and the Stock Market," a white paper by Joseph H. Davis, Ph.D., and Roger Aliaga-Diaz, Ph.D., of The Vanguard Group, cites past oil price increases caused by oil supply disruptions centered in the Middle East. Notable oil supply shocks include the 1956 Suez Crises, 1973 Arab Israeli War, the beginning of the Iranian Revolution in 1978, onset of the Iran-Iraq War in 1980, and the Persian Gulf War.

Today, some analysts believe the dramatic rise in oil prices from $20 a barrel in 2001 to more than $140 in 2008 (before its recent dramatic drop back below $100) results primarily from the first global demand shock.

Throughout this decade, the global economy has expanded robustly and commodity demand has surged. China and India have more than doubled their combined share of oil consumption since 1990, and many experts anticipate that China's demand for oil will double again in the next two decades.

Economists have long observed that oil price shocks tend to precede U.S. recessions as consumer discretionary spending declines and further investment plans stall.

According to the study, the U.S. economy would have avoided five out of the past six recessions had oil prices remained unchanged.

Many emerging economies employ subsidies that keep domestic fuel prices far below the world price. As a result, these countries consume far more fuel than they would otherwise. By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. "Without this artificial demand stimulus, world oil prices would have been significantly lower," says economist Robert H. Frank at Cornell University’s Johnson School of Management. With a $2 per gallon subsidy in effect, gasoline sold in the world market at $4 would sell for $2. "The problem is that when the price of a good is below its cost, people use it wastefully. The external costs like dirtier air and increased congestion are hard to measure, but are nonetheless substantial," says Frank.

The good news is that the world, including poorer, rapidly developing countries, is taking more of an interest in renewable energy sources. A recent article in the Economist, titled "The Power and the Glory," reported that China has a large wind-generation capacity which is expected to grow by two-thirds this year, and that the country is the world's second largest manufacturer of solar panels. Brazil has the second largest bio-fuel industry, which already provides 40% of the fuel consumed by cars there. South Africa is leading the effort to develop a new class of safe and simple nuclear reactors.

The world of energy is changing.

Credit Rating Agencies Failed Us

2008-11-14T10:18:00.006-05:00

Money Magazine once characterized Fannie Mae as “America's safest stock,” with a bullet-proof business model that was “as clean as you'll get to an invincible earnings machine". In a matter of days, shareholders saw their shares plunge into the penny stock category.

The once highly-respected Lehman Brothers did not survive. The Wall Street Journal estimated that the 24,000 Lehman employees lost $10 billion in personal wealth with the collapse of the company’s shares.

Many in the financial industry believe that where there’s a boom, there will inevitably be a bust. The argument goes that with rapid growth, bad ideas that would ordinarily be dismissed are instead indulged, often propped up by misguided investors spurred by the prospect of quicker and bigger returns. Flawed businesses are sometimes sustained by the market's buoyancy alone.

When confidence begins to erode, the weaker businesses are exposed and crushed in a process that celebrated Austrian economist Joseph Schumpeter calls “creative destruction”. This vision of the free market is somewhat sullied by the fact that significant numbers of “sound” and “sensible” businesses also find themselves besieged for no reason other than bad luck.

Bear Stearns, Lehman, Washington Mutual, and a growing list of companies took too much risk and created their own demise. Each company decides its own business model, and, if high risk is their cup-o'-tea, then good luck to them. If they want to leverage up and roll the dice, great; but why should taxpayers pay the price when these companies go bust?

The larger problem, however, is not with any individual company, but with the credit rating system.

Many people believe a AAA rating has the same low-risk profile as a U.S. Treasury note. Jay Dhru, head of financial institutions rating at Standard & Poor's, was recently and rightfully questioned hard by Dylan Ratigan of CNBC. Ratigan noted, “Securities that you and your institution deemed very credit worthy… as it turns out, you were wrong, Sir. These are not AAA credits or AA credits”. After Dhru attempted to sidestep the question, Ratigan persisted that, “The decision to call the securities that you approved and rated as AAA… now you return to indict the securities you deemed to be credit worthy, at the expense of the entire financial system”.

Investment and commercial banks are sales organizations. Their objectives are to grow. Some do it conservatively, some aggressively. Some take on too much risk, some take on very little. However, the rating agencies – Standard & Poor’s, Moody’s, and Fitch – failed to properly identify, characterize, and categorize these varying risk profiles in the financial space. “If the credit rating agency simply admitted they didn't understand the full risk of all the assets on the books of some companies, and therefore declined to issue a rating, the market would have promptly adjusted the price of the debt and equity of the companies being rated”, says Larry Jeddeloh, Founder of the TIS Group. “It would have forced disclosure and adjustment, which could have avoided some of the severe excesses in the system that we are now seeing violently unwind".

The lynchpins of the system - the fail-safes, the backstops - were the credit rating agencies. They were the ones assuring us of unbiased, accurate reflections of that risk profile. Their ratings have become so engrained in the system that the Securities and Exchange Commission was using them as a Prudent Man standard for investment committees, both public and private.

The financial industry is getting a wake-up call for change.

Investing in a Green Future

2008-09-29T08:09:00.000-05:00

If you’re still managing bills and other financial matters the old-fashioned way, you could be missing an important opportunity to invest in the future of the planet. A thoughtful review of your financial life is likely to yield a wealth of strategies for nurturing a cleaner, healthier environment.

Green finances are good for the soul
Even with the best intentions, most people tend to put off changing the way they do things until tomorrow. But consider the environmental impact of continuing business as usual. The amount of wasted paper generated by bills and bank statements alone is staggering. A recent Javelin Strategy and Research report described the financial paper chain from U.S. households as being long enough to stretch around the globe more than 200 times.

Consider the potential benefit of all those households opting for electronic bill paying and banking. According to a study by Javelin Strategy & Research, “2007 Online Banking and Bill Payment”, all-green financial transactions could:

• Reduce greenhouse gases equivalent to the removal of 355,000 cars from the road
• Save enough energy to supply electricity to all residences in San Francisco for one year
• Eliminate enough solid waste to fill 56,000 garbage trucks

Being green is easier than you think
Given the urgent need for waste reduction, switching to paperless transactions is a pretty simple way to do a lot of good. In most cases, green financial practices provide practical benefits, too. Online financial management not only minimizes desktop clutter but also provides access to tools that promote efficient, organized money management.

• Online banking—Using electronic statements and debit cards can conserve tons of paper and save you loads of time and trouble. You can track your balances in real time on your bank’s website and transfer funds from your desktop. If a debit card is not your style, order checks made from recycled paper. Direct deposit not only saves paper but also cuts down on trips to the bank. It’s easy to set up with your employer, and paychecks generally clear faster.

• Electronic bill payment—You can arrange online payments with your bank or through various service providers. Bills from public utilities and mortgage and credit card companies often note the availability of this option. With bank bill pay, you enter the amounts you owe each month on your financial institution’s website. The bank then transfers funds from your account to your designated payees. The alternative setup works pretty much the same way—except you’ll make payments from the providers’ websites. Many providers also offer automated bill payment. By enabling you to schedule regular monthly payments, this option not only saves time but also helps to ensure against late fees and damaged credit ratings.

• Playing it safe—Tales of phishing scams and Internet security breaches make us all concerned about the safety of online banking and bill payment. But according to the aforementioned Javelin Strategy & Research report, most people overestimate the risk of online fraud. For instance, about 90 percent of cases of identity theft begin offline—with acquaintances or family members who steal victims’ bank statements or a copy of their password. Nevertheless, the public’s perception of increased risk has not gone unnoticed by the financial industry. As a result, most banks and other financial institutions have installed the highest level of data protection allowed by law.

However, even when the odds are in your favor, it’s important to avoid unnecessary risks. Report any unexpected changes in your account immediately. Above all, read your online financial communications carefully. Never respond to e-mails requesting your credit card numbers, computer password, or other sensitive information—regardless of how official the message may look.

Smart green investments might also benefit your financial health
The potential of environmentally responsible policies to build shareholder confidence, reduce energy and liability costs, and capitalize on new markets continues to fuel a greener corporate world. As a result, the number of options for supporting green business practices has grown steadily.

Before modifying your investment strategy, make sure you’ve done your homework.
Start by meeting with your financial advisor. Explain your primary environmental concerns as well as your financial goals. Then, discuss how to achieve the right balance between the two. By bringing together industry knowledge and an understanding of your priorities, an experienced advisor can help ensure that the investments you choose are consistent with all your objectives.

Your advisor can tell you about various investment vehicles designed to exclude companies that harm the environment and help you screen your existing investments. As you evaluate your portfolio, consider the following questions:

• Which companies are making the biggest contribution to the environment? Firms can show their commitment to the environment in a variety of ways:
o Manufacturing eco-friendly products
o Developing alternative energy sources and environmentally sound technologies
o Donating to major environmental initiatives
o Instituting energy conservation, waste reduction, and other green practices in the workplace

• Who needs to clean up their act? Identify major culprits. Send a message with your wallet to businesses that dump toxic chemicals in our waterways, poison the air with carbon emissions, and churn out solid waste like there’s no tomorrow.

• Where can I have the most influence? There may be some companies that could benefit from a little friendly persuasion. By investing in companies that don’t live up to your standards, you gain a say in their policies. You can organize with like-minded shareholders, express your views at annual meetings, and vote in proxies. Or you can choose a socially responsible investment vehicle to perform these functions for you.

Every little bit helps
A little foresight and awareness can go a long way in saving the planet. The following list highlights some additional ways to make your financial life a little bit greener:

• Go digital. Send electronic invoices, customer service inquiries, and other financial communications whenever possible. Saving financial information to PDF files to help eliminate hard copies is another great way to prevent waste.

• Think before you print. If printing a hard copy is absolutely necessary, save it and use the other side for another document.

• Keep it clean and safe. Avoid toxic waste and encourage paper mills to develop more eco-friendly practices by buying chlorine-free paper. Changing from petroleum-based inks to products with a soybean or linseed base decreases pollution.

• Stop the rising tide of preapproved credit offers and other throwaways. Opt out of credit offers online at www.optoutprescreen.com or call 888.5.OPTOUT (567.8688). Say no to junk mail at www.dmachoice.org.

Going green is a process that deserves careful and thoughtful consideration in light of your own personal objectives, and not all of the options outlined here will work for everyone. Be sure to consult your financial advisor—and your own conscience—to decide what makes the most sense for you.

Can’t Make a Budget Work? Try Filling Your Buckets

2008-09-04T20:37:00.002-05:00

Whether you are trying to save money or lose weight, there is no one-size-fits-all solution. However, as with dieting, sometimes the financial strategies that work the best are a little bit offbeat, even fun. Consider, for example, the success of Bank of America’s “Keep the Change” program where your debit card purchases are rounded up to the closest dollar and the difference is transferred from your checking to your savings account. Another savings strategy found to be effective is the “bucket concept.” Rather than adhere to the traditional budgeting chore of writing down your expenses and tracking them each month, the bucket concept requires you to divide your spending into six categories and assign a specific percentage to each bucket.

The bucket approach was first encountered in Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker. In his book, a New York Times bestseller, Eker suggests dividing your income this way:

• 50% for necessities such as your mortgage or rent payment, car payments, groceries, utilities, gas, internet, cell phone, etc.

• 10% for long-term savings to fund vacations, car repairs, house maintenance, clothes, etc.

• 10% for retirement accounts such as your 401(k) plan or IRAs.

• 10% for fun.

• 10% for education, from repaying student loans or funding your continuing personal development to saving for your children’s college education.

• 10% for charity.

When making your allocations to each bucket, consider 100% of your total after-tax income. This means that, in addition to income you earn, you also divide inheritances, bonuses, even your tax refund into six categories. Eker’s key is that this money should never be commingled. That is, you cannot borrow from long-term savings to fund a dinner out or forgo your regular deposit into the education bucket when your charity bucket is empty and you want to contribute $100 to your friend’s bike-a-thon.

The easiest way to fund each bucket would be to open separate checking accounts and have the appropriate percentage of your paycheck deposited into each account. This may not be feasible with your employer and could involve significant banking fees. Of course, you can open a 529 college savings plan and an IRA and have your education and retirement accounts funded directly from your checking account. Also, if you have a 401(k) at work, that account is funded automatically before you receive your check.

Interestingly, however, many people report success with substituting jars for checking accounts, particularly for the fun account where it is easy to spend cash. Perhaps that’s because by actually placing money in a jar it encourages them to think about finance more often than at bill-paying time or during an annual review with a financial advisor. Using a jar also can be especially effective if you are trying to save for a family vacation. For example, as your family sees the savings accumulate, they may be more inclined to make sacrifices to stay within your food budget. Of course, if you’d rather keep your long-term savings in a money market account to earn interest, putting a piece of paper noting the amount you invested in that account could also serve to motivate your family.

In discussing the bucket concept with clients, there are some common reactions. Most notably, many say that they spend far more than 50% of their income on necessities. In fact, given the high cost of living in particular parts of the country, surviving on half of what you make may be an impossible goal. Naturally, you can adjust Eker’s percentages to reflect your own circumstances. For example, if you need 65% for necessities, you might drop education, charity, and long-term savings to 5%. However, you are encouraged to at least reflect on the possibility of living on 50% of your income. Often, simply considering the idea can help you start to prioritize your expenses and to think more proactively about what you are spending your money on each month. In fact, quite a few clients have come to the realization that they were living in a house that was too expensive for them.

Debt is another issue that can throw a wrench into Eker’s ideal percentages. If you have significant consumer debt, you may need to direct more than 50% to your necessities bucket in order to help you dig out of that hole as soon as possible. However, once you are out of debt, funding your long-term savings account can help you stay debt-free. That is, as your long-term savings account builds up over time, you’ll have a cushion so that you won’t have to pull out your plastic to manage an unexpected car or home repair bill. In that sense, your long-term savings can also function as the traditional “emergency account.”

Finally, Eker insists that your fun money be spent on a regular basis. Arguing that most budget plans fail because they create a spending plan that is too tight for comfort, Eker stipulates that fun money cannot accumulate for more than 90 days. Think of spending money on yourself as both a reward for saving in other buckets and as a means of re-energizing yourself to save more.

If you are considering implementing the bucket theory, it is suggested you keep in mind another piece of advice from T. Harv Eker. He believes that what we focus on expands and grows. Accordingly, he suggests that for at least seven days after implementing any financial self-improvement plan, you do absolutely no complaining – not out loud, not in a whisper, not even in a passing thought. The positive energy you create – in combination with the structurally sound bucket approach to budgeting – may be just what you need to move further down the road to financial freedom.

What to Consider When Shopping for an Advisor

2008-08-01T17:45:00.002-05:00

How do you find the right financial advisor for you?

With seemingly endless market volatility, more people are looking for a first or a replacement financial advisor. Here are a few questions you should ask a potential advisor to determine if he or she is the right fit for you.

1. "How much experience do you have?"
Seek help from someone who has at least five years experience in the business, preferably much more.

2. "How many clients do you have?"
You should know if you’d be one of 50 or 500 clients.

3. "What services do you provide?"
Is the advisor’s practice limited to investment management? Or, can he or she provide estate, cash flow planning, retirement, or other important services?

4. "What distinguishes you from other advisors?"
The answer can provide insight into the advisor’s strengths, priorities, and values.

5. "Have you had any complaints lodged or disciplinary action taken against you?"
You should confirm this by checking the web sites of the Financial Industry Regulatory Authority, the Central Registration Depository, the Department of Banking, or the Securities and Exchange Commission.

6. "Can you provide the names of three clients who left you in the last five years?"
Any advisor can find satisfied clients for references. You can learn more from those who left the firm. Every advisor has some turnover. If the clients left because of extenuating circumstances, but were satisfied with the service, you are probably on to a good advisor.

7. "What was your biggest mistake in the last five years?"
Be wary of the advisor who says he or she did not make any. We all make mistakes. Admitting to them is one mark of an honest advisor.

8. "How do you get paid?"
Advisors can get paid through commissions or fees. In the latter case, the advisor charges a percentage of assets under management and/or an hourly or flat fee for time. Be comfortable with the way your advisor is paid.

9. "Do you use proprietary products?"
An advisor who works for a company that offers its own investment products may receive a financial incentive to use them. This may influence his or her choice of investments in which to put your money.

10. "What are your professional credentials?"
Anyone can call him or herself a financial advisor. Look for one who has completed a national education program in financial planning and earned credentials such as CERTIFIED FINANCIAL PLANNER™ professional, Personal Financial Specialist (PFS), Chartered Financial Consultant (ChFC), or Chartered Financial Analyst (CFA). In addition to passing a standardized exam, such individuals are required to maintain their status with continuing education courses.

Bogus designations, especially those geared toward seniors, are a red flag.

11. "How do you educate clients?"
Does the advisor provide educational workshops or conference calls to their clients? What book would he or she recommend for learning about finances?

12. Does the advisor articulate a clear investment and wealth-building philosophy?
You need to match up. By understanding your advisor’s beliefs, you can determine if you are compatible. Also, ask, "How do you determine the level of risk in a portfolio? How often do you rebalance the portfolio and using what criteria?"

These questions are just a guide. Asking them will help improve your chances of finding the right advisor for you.

Don’t Let the Declining U.S. Dollar Ruin Your European Vacation

2008-07-08T10:57:00.001-05:00

It’s not a happy story. Between 2002 and 2007, the dollar fell 33.4% against the euro, an average of 6.7% per year. While the large and increasing deficits in the U.S. trade balance are at the root of the long decline, the instability caused this year by the subprime mortgage crisis has hastened the greenback’s plunge. Since the beginning of the year, the value of the dollar already has eroded 7% against the euro which rose above $1.60 in mid April 2008 for the first time ever. Seemingly, the dollar is losing its appeal across the world. For the first time in more than a decade, in mid-April the dollar bought less than 7 yuan, ending the day close to 6.992 yuan.

Surprisingly, however, according to travel agents and industry analysts, the dollar’s steady decline isn’t keeping American vacationers at home. In fact, there’s been an increase in international travel, even to Europe where a cup of coffee can cost nearly ten dollars, making your copy of Europe on $5 a Day look like a real antique. According to a recent New York Times article, 13.25 million Americans visited Europe in 2007, a 2.7% increase over 2006. Looking ahead, industry analysts expect that number will at least remain flat, and perhaps increase slightly through 2008. Travelers are, however, making some changes in their vacation plans. For instance, the number of American visitors to the less expensive Portugal increased 20% in 2007.

If you planned your dream European vacation trip a year ago and are getting nervous about the trip’s rising cost, there are ways to economize so that the unfavorable exchange rate doesn’t ruin your vacation – or put you in major debt upon your return.

• Consider tour packages. Although you would think that having someone else do the legwork and organize your trip would be more expensive than doing the planning on your own, the reverse is true. In fact, packages can easily trim 25% or more off the cost of hotels and airfares. Cruises also can be a surprisingly affordable alternative.

• Avoid downtown hotels. Sure, it’s great to stay in the center of town, but all that convenience can mean a big price tag. Industry experts say hotels away from the tourist centers are usually 15% to 40% cheaper and, because most major European cites offer excellent, affordable public transportation, you won’t compromise your ability to reach the major tourist attractions. Another tip: Choose hotels that quote and guarantee rates in U.S. dollars so there are no surprises when your credit card statement arrives. Renting an apartment or house often gives you more space for less money and having kitchen facilities means you can cook for yourself rather than blowing your budget in overpriced restaurants.

• Use your boots for walking. You can best experience the real flavor of a city on foot. If you do need to travel beyond a city’s network of trains and local buses, rent a car for only as long as you need it rather than for your entire stay. If you plan extensive travel, a Eurail pass may save you money. Also, remember an overnight train ride can save you the cost of a night’s lodging.

• Score on free and discounted entertainment. Many European museums offer free admission on certain days or nights of the week or at certain times of the month. This is especially true for students. Check ahead and schedule your visit accordingly. Also, most major cities offer special cards that include combination discounts for multiple museums and local attractions.

• Go shopping – at the grocery store. Stock up on bottled water and snacks at grocery stores and carry your supplies with you each day rather than falling prey to the tourist traps. Also, if you make lunch your big meal of the day, you can enjoy expensive dinner dishes for half the price. Avoid restaurants that post tourist-friendly English menus and discover places frequented by the locals.

• Manage your money. Bank ATMs are your best bet for a combination of a fair exchange rate and low surcharges and fees. At a bank ATM, your bank likely will charge a transaction fee of 1% to 2%, but you’ll also get the favorable interbank exchange rate rather than the higher rates you’ll find at foreign exchange bureaus. If you must use a currency exchange counter, stay clear of airport or train station kiosks where you are almost guaranteed to get the worst rate available and highest transaction fees. If you plan on swiping your plastic through Europe, keep in mind that although credit card companies generally utilize favorable exchange rates, they sometimes charge fees for purchases made in foreign currencies, usually 1% to 2%. Before you travel, check with your credit card companies to figure out which card has the lowest fees for foreign purchases.

If you are just beginning to plan a European vacation, visit www.XE.com, a popular currency and foreign exchange site with an easy-to-understand tool for determining value. Additionally, the site offers an online tool that tracks historical rates and a travel expenses calculator to help you plan your budget. If you don’t like the numbers you see on the site, remember there are alternatives, even bargain destinations. For example, in the February 2008 issue of Condé Nast’s Traveler, Debra A. Klein’s “Dollar Power,” lists a number of exotic destinations where the U.S. dollar is holding its own. For example, she notes that many Caribbean islands either have their currency pegged to the greenback or accept U.S. dollars as currency. Some of these islands are Antigua; Grenada; St. Kitts and Nevis; St. Lucia; St. Vincent; and the Grenadines. Also, although the currencies of Argentina, Brazil, and Chile are strengthening significantly against the dollar, she urges vacationers to consider the region’s “emerging destinations.” Writes Klein, “Suriname has untrammeled forests, turtle nesting areas, and an economy with a de facto dollar peg. Even closer to home, Belize and Panama, where the currencies are linked to the U.S. dollar, are among the continent's most affordable destinations. Costa Rica's pristine beaches and verdant rain forests seem all the lovelier now that your dollar buys 33% more this year than it did in 2002.”

A final few words of advice: If you’re preparing for your vacation by learning some of the local language, add “Can I get a better price?” to your lexicon. Lastly, remember that your vacation goal is to enjoy some well-deserved rest and relaxation, not to drive yourself crazy working to get the best price on everything.

Don’t Let Your Emotions Cloud Investment Judgment

2008-06-04T07:42:00.002-05:00

Ah … the good old days when an investor would pay anything for a pre-construction condo in Boca Raton. Why? When finished, the condo would presumably be worth a quarter of a million dollars more and you’d carry it with borrowed money.

Wrong, in most cases. This has been a painful lesson for many people.

One of the more common behavioral mistakes that investors make involves euphoria. Nick Murray, author of Simple Wealth, Inevitable Wealth, says this is more than greed – people get completely blissed out and lose all sense of danger.

A definition of risk is the chance that an investment will lose value. When you reach out for higher and higher returns because someone else is getting them – and you forget that higher returns mean taking more risk – you have entered the euphoria zone. You have been blinded to the fact that risk rises along with price.

According to Murray, panic (another behavioral mistake) follows, and sometimes accompanies, the euphoria stage. The higher the euphoria, the deeper the panic or capitulation. When prices start to fall, you lose composure and believe your investment price will never come back. You have to get out at any price.

If panic overtakes you, you’ll need to make two decisions:

• First, you must decide when to sell.

• Second, you must decide when to get back into the market.

Your odds of being right on both decisions are very low.

We make other behavioral mistakes as well, says Murray. They include:

• Under-diversification – This involves the often costly narrowing of a portfolio to essentially one idea. This can be a sector (example, technology stocks) or a company. If you worked for Bear Stearns and invested the majority of your assets in the company stock, you found out the hard way of under-diversification.

"When you own one idea, all the lights go out and … pretty quickly," says Murray.

• Over-diversification – This is when you dilute your investment value by trying to own everything. The root of this mistake is the inability to make choices. The solution is to focus a portfolio with a finite number of meaningful investments.

• Making portfolio decisions based on your cost basis – This means you let your cost basis dictate an investment decision just to avoid paying capital gains taxes. This is seldom prudent. When you let taxes drive the decision, you are bound to crash.

• Investing for yield instead of total return – This is the great behavioral mistake of the American retiree. Many go into retirement mistaking current yield as the only source of income. They end up buying a lot of bonds and not a lot of equities. The recent volatility in the bond market has surprised many investors.

Today, when we go to the gas pump or grocery store, we know costs are rising. According to Morningstar, the compounded annual return (after taxes and inflation) from 1929 to 2007 for large stocks was 5%; for long-term government bonds, 0.4%; and for 30-day Treasury bills, -0.7%.

The great long-term financial risk isn’t loss of principal, but erosion of purchasing power. Many of us greatly overestimate the long-term risk of owning stocks, and more insidiously, underestimate the long-term risk of not owning stocks.

The New Place to Spend Retirement: At Work

2008-05-14T09:16:00.001-05:00

Despite the enduring image that marketers portray of retirees lounging on the beach, the reality is that a greater number of older workers are in the labor force than ever before.

According to the Employee Benefit Research Institute, 45 percent of people age 55 and older are still in the workforce. Twenty-nine percent of people ages 65–69 are still working as well.

Americans of retirement age opt to stay in the working world for many reasons, including to transition their career to part-time, to make extra money, or to start their own companies. Many of us are also living longer and taking better care of ourselves, and we don’t feel like slowing down. In today’s world, retirement can last 20 years or more, so we want something meaningful to do to fill that time.

Some people, however, may not find working into their retirement years a matter of choice. They may need to keep working to add to their savings, keep their insurance coverage, or attain their full retirement age to receive their full social security benefits.

Employers may also find it necessary to hang on to their older workers. Nearly 80 million baby boomers are facing retirement, yet there are only about 50 million Gen-Xers to fill those places in the workforce. Companies are discovering that they need to keep their experienced workers as long as possible and are more amenable to part-time, consultative, or job-sharing arrangements to retain skilled workers.

Regardless of the reasons you may continue working, there are several financial implications you should consider:

You can make more money. According to the Congressional Budget Office, each year that a person of at least age 62 postpones retirement, he or she reduces the need to increase his or her retirement savings by about 5 percent. It also gives that individual more time to earn interest on assets he or she has already accumulated. And getting health coverage, even if an employer only partially subsidizes it, can save you hundreds of dollars a month.

Your social security benefits may be affected. Depending on your financial situation, you may find it best to wait until you reach your full retirement age to start collecting social security. If you start receiving social security before you reach full retirement age, your total benefits may be drastically reduced: for every $2 you earn over $13,560, you will reduce your social security benefits by $1. This applies to work income, not income from investments, pensions, annuities, capital gains, or interest.

If you’re married, your spouse may want to delay receiving his or her benefits to reduce your total income for tax purposes and to provide a future income stream.

The good news is that once you reach your full retirement age, you can work as much as you want without reducing your social security. Visit www.socialsecurity.gov/retire2/agereduction.htm to find your full retirement age.

Being your own boss may have certain benefits. If you set up your own incorporated business, you may be able to deduct everyday expenses like work-related phone usage, a new computer, office space rentals, and travel expenses. Plus, you can open up a new retirement plan and contribute to it.

Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs), and qualified plans such as Keoghs are designed to benefit small businesses and sole proprietorships. They have the same advantages of tax-deferred growth plans, like 401(k)s and 403(b)s, and contributions are tax-deductible. Your own business could match the contributions you, as an employee, might make.

Working might result in certain penalties or income reduction. Take care that your extra income from working doesn’t bump you into a higher tax bracket. Chances are, you’re probably paying for your retirement from several sources of income, such as a pension, 401(k), IRA, and social security. If you are older than age 70½, you are likely taking the required minimum distribution (RMD) from your retirement plan accounts as well. Add a paycheck to that mix and you might be making more money than you thought. This can also expose more of your social security benefits to income tax.

In addition, if you are or were a state or public employee, check with your retirement board to see whether you are subject to income restrictions or whether working will impact how much pension money you receive.

Does all this mean that working in retirement is pointless? Of course not; it just requires forethought and careful planning on your part—and the guidance of your trusted financial advisor to address your particular questions and concerns.

Pay Yourself First

2008-04-15T12:19:00.002-05:00

You already pay your bills on time. So, why not treat retirement savings as a regular monthly bill rather than seeing it as optional?

We know we should save, but there are competing priorities; so funding the retirement account often comes last. The kids want to go to college, and you would like a new boat. But treating your retirement savings as another bill that you must pay will keep it at the front of your mind. You won’t miss payments if you realize that, just like with the mortgage or electric bill, getting behind has consequences.

This simple sounding solution comes from the sophisticated world of institutional investing. Pension fund managers, for example, have to treat future obligations (payments to pensioners) as liabilities. That forces them to deal now with something that may be years or decades away. Using actuarial tables, they calculate the cost of future obligations to determine what return they require on their investments and whether the pension fund is adequate.

While you may not use actuarial tables, you can manage your retirement account like a pension fund. First, determine the savings you need to support the lifestyle you want during retirement. Keep in mind that you probably want to fund retirement through age 90 or 95.

Next, determine how many years you have to reach your savings goal. If you are 45 and plan to retire at 62, for example, you have 17 years to fund your retirement account. Finally, determine how much you must save each year and make projections about returns on your investments.

If you’re already funding your retirement goal by contributing to a 401(k) or other plan at work, treating that money along with all of your other retirement savings as a liability may provide you with a more realistic picture about how much you need to put away. It may also help you envision the quality of retirement you should expect and spur you to save more.

A simple way to establish a monthly liability for your retirement obligation is to divide your goal into equal installments. So, if you have 17 years to save $500,000, divide that obligation into 204 monthly payments of just over $2,450 per month. Given the expected growth of your investments, you’re likely to “over-fund” your retirement obligation. If you want to calculate your payments more precisely, include estimates for the impact of inflation, investment returns, and taxes.

By treating your retirement account as a liability, you’ll be paying yourself along with your other debts. Of course, making calculations about how much you need to save today to fund a debt in the future, while also making judgments about inflation, taxes, and selecting the right investments, may require professional help. Create a disciplined system for planning your retirement now and paying yourself first so you can enjoy your leisure years later.

How to Donate Money Effectively

2008-03-06T09:15:00.021-05:00

Whether it’s the holidays or an unexpected disaster, Americans are always willing to donate to those less fortunate. It’s the easiest thing in the world for us to open our checkbooks to a worthy cause without a second thought.

Yet your donation, regardless of size, should make the largest impact possible on your cherished causes and issues. When you support a charity’s best interests, you’re not selfish to support your own as well.

Give to efficient operations

In a perfect world, every cent you donate would go to fulfilling the mission you support. But some portion of every dollar goes to staff salaries, rent, fundraising, mailings, and possibly professional telemarketers. These expenses may leave your cause with very little.

Well-run organizations put most of your money toward their services or programs, not their operational overhead. The American Institute for Philanthropy recommends that no more than 40 percent of your charitable donation should go to overhead expenses; other charity watchdogs advise 25 percent. (This may not apply to newer, smaller, or more obscure causes.)

This percentage can be determined by requesting a charity’s IRS Form 990, required for a nonprofit to prove its tax-exempt status. Federal law requires charities to provide the form for the past three years to anyone who asks. Divide line 13 (Program Services) by line 17 (Total Expenses) to calculate the percentage paid to services and programs versus overhead expenses.

You can research charities with The American Institute of Philanthropy’s www.charitywatch.org, the Better Business Bureau Wise Giving Alliance’s Give.org, or Philanthropic Research, Inc’s. www.guidestar.org. All provide information on charities and their efficiencies.

You can also ask for the charity’s annual reports. The report should include the mission statement, board of directors, and the year’s accomplishments and finances. See if the charity’s goals seem reasonable and achievable. If the charity tells you a report isn’t available, is too expensive to mail, or otherwise discourages your interest, don’t contribute.

Avoid the scam artists

Unfortunately, there are people who try to take advantage of others’ generosity. Here are ways to reduce your chances of falling victim:

• If a solicitor mentions previous pledges you don’t remember, check your records first. Don’t fund donations you didn’t make.

• Don’t provide personal financial information in an e-mail, over the phone, or to door-to-door fundraisers. Use a website like www.networkforgood.org to donate safely with your credit card to over one million organizations. Ignore email solicitations from organizations you don’t support.

• Never give cash, or make checks out to Cash, or to an individual. Write checks out to the charity’s exact name, not initials. Some scammers use names that are similar to well-known ones.

• Don’t be swayed by on-the-spot high-pressure tactics or emotional sad stories. Ask for written information, or check the charity out online first.

• While many representatives for charitable causes are genuine, be aware of swindlers who often pretend to represent causes for missing children, soldiers or veterans, firefighters and police, or whatever disaster is in the news.

Know your tax benefits

Your philanthropy may provide possible tax advantages. Tax exempt organizations are not required to pay taxes. Tax-deductible donations are those you can deduct from your taxes if you itemize. The IRS has a listing of organizations to which deductions are tax-deductible per section 501(c)(3) of the Internal Revenue Code.

The IRS now requires actual receipts for all tax-deductible contributions of $250 or more. You should use an independent appraiser when donating property worth more than $5,000. The IRS won’t take your or the charity’s word for it. Consult your tax advisor for more help.

Reduce your solicitations

Many charities rent or trade their donor lists to other organizations to raise much-needed funds. As a result, you might get more requests in the mail the more you donate. The National Do Not Call Registry doesn’t apply to nonprofit organizations.

You can send a letter, along with your donations, asking that the recipient not rent, sell, or trade your personal information, name, or donation history to anyone. Or ask the recipient to limit its solicitations to only a few times a year. Explain that your future support is contingent on its cooperation.

When your charity complies with your request, consider increasing your donations to reward it and to offset any lost revenue from renting your name.

If you are receiving unsolicited address labels, note cards, pens, pads, or other gifts from charities, you are not obligated to make a donation in return. To stop receiving these mailings, return the charity’s envelope with a note requesting that your name be removed from its list. Be aware, however, that the organization might not be able to remove your name if it rented the list from a list provider.

Politely decline in-person solicitations by saying, “I limit my support to charities that I know well and support the causes that are most important to me.” Consider concentrating your support to singular missions, such as curing cancer; or to helping institutions in your hometown.

Become a stakeholder in the cause you support. You deserve to know how your money is used. With a little research, you can feel confident your donations are being used wisely to better the world.

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Gary Williams is a financial adviser and the President of Williams Asset Management practicing at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®—a member firm of FINRA/SIPC and a Registered Investment Adviser. He can be reached at (410) 740-0220 or at Gary@WilliamsAssetManagement.com.

Is Your Credit Score as High as You Think?

2008-01-29T15:37:00.000-05:00

It is common to assume that paying bills on time automatically means having a high credit score. Unfortunately, that’s not always the case. There are many misperceptions about how scores are calculated—and yours could be lower than you might expect.

Credit scores are used by financial institutions to determine whether they should lend money to a potential borrower and, if so, what interest rate should be charged. A higher score means an applicant is statistically less likely to default on the loan so they get a lower interest rate.

Ignoring your credit score could be a costly mistake. As an example, let’s say you bought a $400,000 house with a 30-year fixed-rate mortgage at a 6-percent interest rate. Over the term of the loan, you would pay interest charges of $463,354. If, however, you had a lower score and your bank bumped your interest rate up to 8 percent, you would pay interest charges of $656,619. That’s a hefty difference of $193,265.

There are many credit scoring systems available to lenders, but FICO scores are by far the most commonly used. The system was developed by the Fair Isaac Corporation back in the 1960s. Technically, you have three different FICO scores—one for each of the three major credit reporting agencies.

Knowing how FICO scores are calculated can help you make better decisions about your credit. At a minimum, you should be aware of some of the most common misperceptions:

I always pay my bills on time so I must have a high credit score.
Paying your bills on time is clearly a critical factor, but it only accounts for 35 percent of your overall FICO score. It also looks at four other components: the amount of debt you owe (30 percent), the length of your credit history (15 percent), the number of credit accounts you’ve recently opened (10 percent), and the types of credit you use (10 percent).

Consolidating multiple credit cards will increase my score.
Consolidating credit cards could make it easier to pay down debt, but your FICO score could actually decrease if you consolidate to fewer accounts with balances that are closer to the maximum available credit. FICO considers you a lower risk if you have multiple credit accounts, keep the payments up-to-date, and maintain balances between 25 percent and 35 percent of the available credit.

I don’t have any credit cards or other major debt so I can’t have a low score.
Your FICO score doesn’t take into account your net worth or your income level—it only looks at your past borrowing history. Your FICO score will be lower if you haven’t established a long-term borrowing history with multiple creditors.

Closing a credit card is better for my score than keeping it open.
Closing a credit card will not necessarily hurt your score in the short term, but you will eventually lose the positive effects of the long-term credit history that you’ve established with that lender.

I shouldn’t shop around for a mortgage or other large loan because credit inquiries hurt my score.
A large number of credit inquiries will lower your score, but FICO is smart enough to know when you are rate shopping. Inquiries for similar types of credit are bundled if they’re made within the same 14-day period.

I shouldn’t check my credit report more than once a year because credit inquiries hurt my score.
Checking your own credit report does not affect your score, so feel free to check it as many times as you’d like.

If you want to learn more about how FICO scores are calculated, visit Fair Isaac’s web site at www.myfico.com. They offer a host of informational materials and credit score tips. And while you’re at it, you can also order your three scores for a small fee.

Becoming more knowledgeable about FICO scores could help you to keep those pesky interest rates at a minimum. With just a small investment of time, you will be able to make smarter credit decisions and take proactive steps to increase your score.

Investments Should Be Guided By Reason, Not Emotion

2008-01-09T13:15:00.000-05:00

What makes for a good investor?

Driven by emotions more than logic, we typically buy high and sell low. What may surprise you is how big a penalty you can pay in the long run if fear and greed dictate your investment decisions. People in or near retirement seem particularly prone to such temptations. The financial media had plenty to talk about this spring and summer. How did you react to all the news?

As you ponder your own investor behavior, keep in mind this observation from the Dalbar report: "It is easier to make the right decision when the markets are rising and the fear of loss is on the back burner. The really smart decision, that most investors get wrong, is to invest when the market is down. If you don't know when to get out, it is better to stay in."

Most investors do not clearly understand their own risk tolerance. According to Nick Murray, author of several books including Simple Wealth, Inevitable Wealth, there are three great truths about risk tolerance.

First, far from being fixed, immutable, knowledgeable, and even quantifiable, risk tolerance in the individual investor is as volatile as are all his other emotions, because it is from his emotions, and not his intellect, that his risk tolerance is derived at any given moment.

Second, people change their risk tolerance in reaction to, rather than in anticipation of, market movements. That is, risk tolerance is essentially a lagged response. Thus, changing one's risk tolerance in response to market events, regardless of how one is changing it, must be a losing strategy, and a formula for substandard returns.

Third, the individual investor reacts to market movements by altering his risk tolerance pro-cyclically rather than counter-cyclically. That is, as prices rise, and especially if they rise sharply thus extinguishing value, the investor perceives that risk in those assets/markets is actually declining, when in fact it is rising.

The best approach for most investors is to have a well-diversified portfolio, ignore the noise from the media, continue to educate themselves about their finances, and be patient. By doing so you are on your way to being a good investor.

Does Your Money Buy You Happiness?

2007-12-05T13:42:00.000-05:00

Another Thanksgiving has come and gone. As a financial professional, I always count on two things: the stores open for the after-Thanksgiving sales earlier than they do the previous year, and the TV news always try to predict how retailers will fare during the holiday shopping season. This year is running true to form.

Now, granted, a healthy retail sector is good for the stock market. And it certainly makes my job easier when my clients are satisfied with how the Dow is doing.

But it’s also part of my job to talk with my clients about their goals in life and about their values and feelings about money. It helps me pinpoint their financial destination and how able they are to get there.

I work with many people who are, by most standards, financially successful. They make decent or comfortable salaries. They have lovely homes, stable marriages, and wonderful families. But they can feel stressed or dissatisfied. Some work jobs that give them little personal satisfaction or less family time. They’re concerned they won’t ever have enough for their own or their children’s futures.

When we examine their spending habits, we often make some crucial discoveries. Some spend more money than they should on things they don’t need. When they realize this, we make significant progress toward reducing their concerns.

Now I’m not suggesting that we give away our belongings and live in the mountains. And not all purchases are bad: we all have hobbies and interests that give us sustained and long-lasting pleasure and make us well-rounded and interesting people. But some careful consideration of our spending may pay off in greater levels of personal happiness and financial security.

Think before you buy.
With all the online shopping, shopping malls, shopping channels, and catalog shopping, it’s not surprising that Americans are carrying a record level of credit card debt. We often forget that what we can pay for and what we can afford can be two separate, very different, things.

So I propose a little experiment: for two weeks, pause before you buy anything that’s not related to a true human need like food, health care, or shelter. It can have a great impact on your personal finances.

Some people make a list of what they want and wait a month before they buy it. Or they freeze their credit cards in a bowl of water and buy things only when the ice defrosts. Or they leave the store immediately to think, giving themselves time to let their urge to splurge cool off.

Next time you have an impulse to purchase, ask yourself if the item you crave fulfills a want or a need. If you carry a credit card balance, how many months of additional minimum payments will purchasing this item obligate you to? Does this purchase get you closer to accomplishing the most cherished dreams you have for your life?

Don’t buy more things, buy more experiences.
According to the National Association of Home Builders, the average American home size has increased by 40 percent since 1970. We’ve got more closets, bathrooms, and kitchen cupboards than ever before. But the size of the average American family has decreased.

What happens with all that extra space? We fill it with possessions, many of which we upgrade or trade in far before they outlive their usefulness. If we charge these purchases, we may pay for them long after we’ve gotten rid of them. If we’ve bought too much house, we may be tied to more mortgage, utility, and upkeep payments than necessary. These can add to our stress level and our worries about financial security.

So instead of a flat-screen TV in your mud room, for instance, take a family vacation—you’ll have photographs and memories you’ll treasure far longer.

Better yet, buy your freedom.
Our retirement years are supposed to be our “golden years”—the reward we finally earn after working hard for decades. It’s our time to call the shots and live our life the way we want. But is golden really good enough in this age of platinum and titanium credit cards?

Many of us put our desire for instant gratification ahead of our need to live a financially secure life. We don’t pay enough attention to funding our retirement until it manages to sneak up on us. And then we get worried.

Many of us work to maintain a lifestyle, not a life. When we know the difference between the two, we can make sounder financial choices that reduce worry.

If you do well, spend some money on doing good.
We’re lucky to live in a great country, but there are people across the globe—or even across the street—who are not so blessed. Helping the less fortunate can give our personal wealth and the sacrifices we make for it much greater meaning than buying a new car every three years. And, in many cases, charitable giving can reap tax benefits for you, too.

Be happy with what you have.
Some experts suggest making a list of all of the things that make us truly happy, paying specific attention to those things you can’t buy—like the love of our families and our good health. When we refer to that list regularly, it helps us stay focused on what’s really important.

And maybe a little thanksgiving every day, instead of once a year, can help us eliminate our emptiness and empower us to make smarter financial choices.

Don’t have an IRA? Maybe now’s the time to start saving.

2007-11-26T13:42:00.000-05:00

Can you believe that individual retirement accounts (IRAs) have been helping individuals save for retirement for more than 30 years? These accounts extend the tax advantages of employer-provided retirement plans to many people who either don’t have retirement plans at work or who want to supplement their other plans.

Since their inception, however, IRAs have changed in many ways, including restrictions on who can contribute, as well as the types of accounts you can contribute to. Given this evolution, you may not be familiar with all the options and benefits available to you. To help bring you up to speed, I’ll highlight three primary types of IRAs:

• Nondeductible IRAs
• Deductible IRAs
• Roth IRAs

The one thing that remains consistent, regardless of the type of IRA, is the contribution limit allowed. In 2007, it is $4,000 ($1,000 more if you are age 50 or older); in 2008, the limit increases to $5,000.

Nondeductible IRAs

This IRA is perhaps the simplest to understand—you contribute after-tax income to the IRA, and your assets grow on a tax-deferred basis. When the money is withdrawn, you don’t have to pay taxes on your original contribution, but any earnings will be taxed at your ordinary income tax rate at that time.* Nondeductible IRA owners are required to take minimum distributions starting at age 70½.

Deductible IRAs

This type of account has more variables for consideration than the nondeductible IRA. Individuals meeting IRS deductibility requirements can deduct any IRA contributions from their income for tax purposes. In addition, earnings in the account accumulate on a tax-deferred basis. So, when you meet a qualifying event, your total distribution amount will be fully taxable at whatever your marginal tax rate is at that time.* Deductible IRA owners are required to take minimum distributions starting at age 70½.

Roth IRAs

Roth IRAs, which were introduced in 1998, allow for after-tax contributions, as well as potentially tax-free distributions when you meet a qualifying event. The IRS has set specific eligibility requirements for individuals to contribute, but those who are eligible benefit from tax-free access to their contributions at any time.* Roth IRAs are generally considered the most tax-advantageous of the IRA options, and they can play a significant role in your retirement savings strategy. Roth IRA owners are not required to take distributions.

As the end of 2007 approaches, it may be helpful for you to use IRAs to your maximum advantage. As a starting point, you should first evaluate whether you are eligible for a Roth IRA this year. If you are, I hope you seriously consider making a contribution. If, however, your income level makes you ineligible for a Roth IRA, a traditional IRA may be best for you. Your financial advisor can provide more information and help you evaluate which IRA makes the most sense for your individual needs.

*Withdrawals of taxable amounts are subject to ordinary income tax and, if made before age 59 ½ , may be subject to an additional 10% federal income tax penalty.