How to choose a financial planner

There's retirement to plan for and college tuition for the kids. Insurance. Estate planning. And, oh, don't forget a wedding for your daughter. If all this sounds familiar, it may be time for you to start shopping around for a financial planner.

Certain experts, such as stock brokers or tax preparers, are there to help you deal with specific aspects of your financial life. But if you don't have an overall plan, you may well be spinning your wheels trying to get ahead. That's where financial planners come in. One who's trained and astute will typically draw up a written plan that focuses on such things as your retirement and insurance needs, the investments you need to make to reach your goals, college-funding strategies, plans to tackle debt - and finally - ways to correct any mistakes you have made in haphazardly trying to plan on your own.



Before you begin shopping for a planner, one word of caution: Unlike brain surgeons, hairdressers, and plumbers, a financial planner doesn't have to crack a book, take an exam or otherwise demonstrate competence before hanging out a shingle. In other words, anyone can claim the title - and thousands of poorly trained people do. That means finding the right planner for you and your family will take more work than researching the best new flat-screen TV. And so it should. After all, it's your financial future that's at stake.

Here's how to get started:

The old-boy network

One easy way to begin looking for a financial planner is to ask for recommendations. If you have a lawyer or an accountant you trust, ask him for the names of planners whose work he's seen and admired. Professionals like that are in the best position to judge a planner's abilities.

But don't stop with the referral. You should also look closely at credentials. A certified financial planner (CFP) or a Personal Financial Specialist (PFS) must pass a rigorous set of exams and have certain experience in the financial services field. This alphabet soup is no guarantee of excellence, but the initials do show that a planner is serious about his or her work.

You get what you pay for

Many financial planners make some or all of their money in commissions by selling investments and insurance, but this system sets up an immediate conflict between the planners' interests and your own. Why? Because the products that pay the highest commissions, like whole life insurance and high-commission mutual funds, generally aren't the ones that pay off best for the clients. In general, we think the best advice is to steer clear of commission-only planners. You also should be wary of fee-based planners, who earn commissions and who also receive fees for their advice.

That leaves fee-only financial planners. They don't sell financial products, such as insurance or stocks, so their advice is not likely to be biased or influenced by their desire to earn a commission. They charge just for their advice. Fee-only planners may charge a flat fee, a percentage of your investments - usually 1 percent - under their management or hourly rates starting at about $120 an hour. Still, you can generally expect to pay $1,500 to $5,000 in the first year, when you will receive a written financial plan, plus $750 to $2,500 for ongoing advice in subsequent years.

Where to get help

If people you trust can't recommend planners in your area, or if you want to broaden the field from which you choose, you can get lists of local planners from the following trade organizations. Check out each group's website.

* National Association of Personal Financial Advisors, www.napfa.org.
* Financial Planning Association, www.fpanet.org.
* American Institute of Certified Public Accountants, www.aicpa.org.

Trust but verify

After putting together a list of at least three candidates, arrange face-to-face interviews. These consultations are usually free. Among the questions you'll want to ask are:

* Do you specialize? Many planners try to be jacks-of-all-trades and take any client who can pay. Some, however, work primarily with a certain type of client, such as small business owners or widows. Others tend to focus on one area of financial planning, such as retirement issues or college funding. You'll want to make sure the planner has experience working with people whose financial lives are similar to yours.
* How are you compensated? Any reputable planner won't flinch when you ask this question. It's imperative to find out ahead of time both how you'll be charged and how much.
* May I see your ADV form? This is a report the planner files with regulators. Part I of an ADV (the name stands for adviser) will tip you off to legal or regulatory problems in the planner's past. Part II outlines his or her experience, investment strategies and potential conflicts of interest. Planners are legally required to show you Part II if you ask. They can refuse to show you Part I, but that's a good reason for you to refuse to give them your business.
* May I have the names of three clients similar to me? You'll want to talk to these clients about their experience with the planner. It's also a good idea to ask to see at least one recent written plan; the planner can block out the name of the client to protect his or her privacy.

Finally, be alert for canned sales presentations, which are not uncommon in the field of financial advice. And give the highest marks to an adviser who listens closely to you and asks insightful questions. Notes Stuart Kessler, past chairman of the American Institute of Certified Public Accountants, "Someone who isn't able to listen carefully won't understand what you are looking for."

The Top Twelve Investing Mistakes

Mistake # 1. Buy and hold mutual funds
This strategy lost money over the last 10 years. ETFs, Modern Portfolio Theory and semi-annual rebalancing worked beautifully. You were able to capture gains of NASDAQ 2000, real estate 2005, clean energy 2007, DOW 2007 and more!

Mistake # 2. Commission Based Brokers
They are paid to sell you things and most don’t have the ability to offer you ETFs and no incentive to offer you Modern Portfolio Theory. Commission-free brokers are paid for "assets under management," meaning they want to keep you happy.



Mistake # 3. Trading on Analyst Recommendations
Following analyst recommendations is a losing proposition. Researchers at the University of California and Stanford found that, in the year 2000, the stocks most highly rated by analysts lost 31 percent for the year. Even more incredible is this finding from the study: The stocks least favored by the major analysts soared 49 percent. This study examined 40,000 stock recommendations from 213 brokerages. Analysts are not all crooks, but they are definitely not fortune-tellers. This is mostly just a case of supply and demand, not dumb, corrupt analysts (though there are a few of those).

Mistake # 4. Bankruptcy Buying
Think buying Delta at $1.54 a share when you’re positive that they will come out of bankruptcy is a brilliant idea? Guess again. Reorganization plans commonly call for the cancellation of the existing common stock, with holders receiving nothing. Nada. (Translation: your stock becomes toilet paper.) Lawsuits are a difficult and costly way to try to recover losses.

Mistake # 5. Pet Rocks
It’s very tempting to buy stock after shareholders have earned seven thousand times their investment, or real estate after the industry has posted intergalactic gains, but that is called chasing money. There were people, lots of them, who bought real estate at peak prices in 2005. Too bad losing weight isn’t as easy as losing money.

Mistake # 6. Hot Tips
Hot tips are often merely "Pump and Dump" or Ponzi schemes. Shysters and scam artists prey on you through this mechanism – from Madoff to the penny stock ads that you receive in your email.

Mistake # 7. Sure Shots
If someone promises to double your money in a set period of time, or to give you annual returns that are double or more of what the average person can achieve, assume that you’re dealing with a novice or a scam artist, especially if they want you to write a check before you do any due diligence into their real rate of return and a background check. This would have saved you from Bernard Madoff. Even though he had a good pedigree (like a handful of high-profile scum bags before him), he was notorious for providing no backup documentation of how he achieved his astronomical gains. Beware anytime someone wants you to hand over money before you have a chance to read or research anything.

Mistake # 8. Buying on Headlines
Headlines are written by editors to catch your eye. If you don’t read the fine print, you could be missing the most important information. Before United Airlines declared bankruptcy, investors gobbled up UAL shares on the headline that United had received $1 billion in promised concessions from its unions. The investors assumed that this was great news and that the labor concessions were all that United needed to soar the skies once again and be profitable (with the help of some federal loans). A key consideration was hidden on the inside pages of the article, however: that the Federal Loan Guarantee required. $1.5 billion in union labor concessions. In fact, receiving only $1 billion in concessions – when the loan was going to fall through unless $1.5 billion was delivered -- was very bad news, not the good news that the headline trumpeted.

The Loan Guarantee application was rejected, and United Airlines was forced into Chapter 11 only a few weeks after that headline appeared in what many people consider the country’s most reliable news source, the New York Times. The headlines of less respected news sources can be even further from the complete story. The New York Times had actually printed the complete story, but too many didn’t take time to read it.

Mistake # 9. Press Releases
Press releases are written by professional writers, who are employed by the company they are writing about. A company can talk about an increase in revenue without ever mentioning that increased revenues don’t mean the company is profitable or that, due to cash constraints, the company’s fiscal health is on the ropes. If you read anything that is from PRNewsWire or BusinessWire—services that distribute press releases written by corporate PR people—ask yourself, "What aren’t they telling me?" Press releases can have valuable data and information, but they are designed to give you a snapshot of something newsworthy, not to draw out the full picture.

Mistake # 10. Placing all your chips on one sector
Diversify with Exchange Traded Funds so that you can see and capture your gains, with your semi-annual nest egg rebalancing! The former Blue Chip Index has become the Bailout Index, so it is more important that ever that you know what you hold in your ETFs. Mutual funds are too big and too diversified, which makes it impossible to know what you own and to take profits when one segment of the stock market – industry or size or style – has a rapid run-up in gains.

Mistake # 11. Keeping too much stock in your employer’s company
Rule of thumb, according to ERISA guidelines: no more than 10 percent of stock in your own company.

There’s one exception to this rule: if you’re the owner of the company, you may need a dominating percentage of the stock for voting/power reasons. In the early days of Apple Computer, Steve Jobs was booted out of the company he had co-founded.

Mistake # 12. Handing your investments over to a loved one, relative or friend
I’ve spoken with women executives who have commanded billion dollar corporations, and others who have multi-million dollar salaries, who turned over their personal investment portfolios to a husband, in order to make him feel like "more manly." With men, it’s more likely to be the guy at the country club who convinces his poker partners to come in on a sure shot investment of his. Interview your Certified Financial life partner as if your life depends upon it, because your lifestyle does!

Written by Natalie Pace of NataliePace.com

You can read my review of her new book "Put Your Money Where Your Heart Is"

Getting finances in order

Organized records can ease a family's burden following one's demise

Losing a loved one is hard enough. But grief is often compounded when one's financial records are in disarray.

Keeping organized records is a gift to your family and to yourself. It helps ensure that your wishes are followed, that your assets are accounted for, and that your money is available to meet your family's needs in a timely fashion.

The following is expert advice on what you need to keep on file, how long to keep it and who should get copies.



Fire proof your papers

Consider buying a fire-retardant box or safe to file important financial documents and insurance policies that you keep at home.

Tax records: These include any forms and statements that show income or verify deductions (W-2s, 1099s, canceled checks, receipts, etc.), as well as copies of your return. Keep them for a minimum of three years. That's typically the amount of time the IRS has to audit a return, and sometimes three years of tax records are required for an estate audit, said estate planning attorney Roger Levine of Levine, Furman & Smeltzer in East Brunswick, N.J.

To be safe, however, experts recommend you keep them for six years, since that's the time the IRS has to audit a return if you underreport your gross income by more than 25 percent, said Cindy Hockenberry of the National Association of Tax Practitioners.

Homeowner records: The deed and title to your house, your closing and mortgage statements, and any receipts documenting how much you spent on home improvements should be kept indefinitely. These will help you - or your heirs - track the house's value (and appreciation) when it's sold.

Investment records: Retirement and brokerage account statements, especially those indicating purchases, distributions and stock splits, should be kept indefinitely, since they create a paper trail of your investments, and they can be used to determine the cost basis when you sell your stocks or funds. They also help your heirs trace the origins of an investment if you bequeath it to them after you die.

Insurance records: You should keep records of your insurance policies - life, health, disability, auto, homeowner, liability, etc. - for at least as long as the policy lasts, and possibly longer if you've arranged for tail coverage, which covers you for a certain period after policy expiration.

Other relevant documents: Your birth certificate, marriage certificate, divorce decrees, and military records should be kept indefinitely.

Life- and estate-planning documents: You should always make sure you have on file an up-to-date copy of your will, your living will, your healthcare proxy, and your power of attorney documents.

Copying important documents

When copying an original will, never remove the staples. If the original will appears to be tampered with, its validity may be questioned in probate court.

You should keep the original of your will. Or, if you prefer, you can give it to your lawyer for safekeeping so long as you keep a copy in your files and indicate on that copy where the original can be found. You needn't give a copy of your will to your executor unless you wish, although you should let him or her know where it is, Levine said. And you shouldn't give a copy to your heirs. It's a private document, and you may wish to choose other heirs at a later date.

If you've set up a revocable trust in which you're the trustee, give a copy of the trust to your successor trustee or make sure he or she knows where it is.

Give a copy of your health-care proxy and your living will to your general doctor and to the person you named as your medical agent. You might also consider giving a copy to a close friend or trusted neighbor, if you don't live near your family or medical agent, Levine suggested.

If you've assigned power of attorney to someone, that person should know where the document can be located in the event that it's required.

Make a locator list

One of the most useful things you can do for your family is create a list of where all your accounts, policies, and other valuable documents are located.

For each item, include relevant information such as the type of account or policy, the company, bank or area where it's housed, the account or policy number, and the name, address and phone number of the agent, broker or lawyer you've dealt with. Be sure to give a copy of the list to someone you trust, or let that person know where the list can be found in case of emergency.

Obviously, your locator list will need to be updated periodically. "But even if the list becomes out of date, it's a starting point," Levine said.

Health Savings Accounts explained

One thing is certain with healthcare: premiums continue to climb higher.

As a result, more employees may find that health-savings accounts (HSA) have been added to their benefits packets this year, in some cases replacing HMO and PPO offerings.

HSAs are tax-free accounts tied to an insurance policy with a high deductible of $1,250 for an individual and $2,500 for a family. After the deductible is reached, policy holders receive comprehensive coverage.



To ease the burden of those out-of-pocket costs, participants can contribute, pre-tax, up to $2,650 for an individual and $5,250 for a family into an HSA. Withdrawals from HSAs are tax-free as long as they are used for medical purposes.

Unspent HSA money automatically rolls year to year and those funds can either earn interest or be invested into participating mutual funds for greater returns - potentially building a tax-free nest egg for healthcare costs.

Consider it the 401(k) plan for healthcare

Victoria Craig Bunce, director of research and policy at the Council for Affordable Health Insurance, said employers can save between 25 percent and 30 percent on health premiums by switching to an HSA. Those savings usually translate into lower premiums for employees - savings that employees can use to maximize their health savings accounts.

A study by Mellon Human Resources and Investor Solutions in May indicated that 7 percent of the over 360 employers surveyed already offer HSA plans to employees and 32 percent plan to offer them in 2006.

While it sounds like a win-win for both employers and employees, it's still a hard sell for some companies. With some current healthcare deductibles as low as $150, employees may get put off by HSA's much higher ones. And there's something disconcerting about paying the entire cost of a doctor's visit up-front, rather than the standard $15 or $20 co-pay.

David Bauer, past chairman of the Independent Insurance Agents and Brokers of New York, said in New York, many carriers have filed HSA offerings but despite interest from employers, clients are still cautious about signing up for these products.

"With these high deductibles, employers are skeptical about HSA renewal the following year," he said.

He added that the perception that HSAs are for the "healthy and wealthy," rather than the average wage earner, is also proving to be a hurdle for early adoption.

Wave of the future

But advocates insist that HSAs, which only became available in January 2004, are the wave of the future.

"It's common that people are afraid of change," said Dr. Stephen Neeleman, chief executive of HSA provider HealthEquity, and co-author of The Complete HSA Guidebook. "In 1981, when people began opting for 401(k) plans from traditional pension plans, we saw slower adoption."

Neeleman added that of the 800 businesses HealthEquity services, over 90 percent of employers also contribute a portion of their cost savings towards partially funding high deductibles - making HSAs an increasingly attractive option.

Consumers may also want to consider the extra control they have over the type of healthcare they receive through an HSA, said Tom Richards, senior vice president of products at CIGNA.

HSA participants are no longer bound by referrals to receive medical care and, in some cases, physicians are willing to negotiate lower prices for up-front payment because it saves them the trouble of dealing with insurance companies.

Richards added that HSAs are also appealing because of their portability - if an employee leaves his company, he can transfer the funds to his new company's HSA. Considering the benefits, CIGNA expects overall consumer driven plans to account for 3 percent to 5 percent of its market next year, he said.

Not for everyone

HSAs, however, aren't for everyone. It's generally a good idea to sit with a financial planner to see if the savings really do add up. Keep in mind that while savings are accumulating in the first year, if there is a sudden expensive health emergency, you may not necessarily have the funds to cover it in your HSA. That mean you're responsible for those out-of-pockets costs.

But analysts expect HSAs to become an increasingly common choice for employers.

Peter Delano, senior analyst at research and consulting firm Tower Group said that HSA assets will reach between $10 billion to $26 billion by the end of 2010. Just don't expect traditional healthcare plans to fall by the wayside, he said.

Budgeting for a Stable Future

The level of personal savings has dropped to a concerning degree, even though it is understood that it is vital to save to be able to guarantee future comfort and security. You should teach yourself how to stay on track with your monthly expenses using a budget that will also allow you to build up surplus cash as a savings buffer.

Before you begin!

* Talk to members of your family in order to ascertain cost saving strategies and ways that you can work together to achieve this.

* Work out the amount you were able to save the previous year. How much of your income did you set aside for the future?

* Plan to use any windfalls you may obtain this year (eg a bonus or tax refund) to reduce debt and chase financial goals.



Put savings first with a budget

Where does the money disappear to? Many people in America are finding it increasingly difficult to manage their spending. Personal savings rates have fallen in recent years and continue to stay low by historical standards as many people continue to spend more than they can afford.

Now might be considered an ideal time to formulate a budget, particularly if you are one of those Americans who just cannot save. A good budget will help you to track where all of your money goes and will hopefully allow you to put some aside for the really important goals such as college or retirement.

Getting started.

Setting up a good budget means some effort, but any benefits you reap will more than offset the time and effort invested. The design or structure of the budget is up to you. Perhaps you will decide on using financial planning software (eg Microsoft Money or Quicken) or you may prefer the old trusty "pen and paper" style.

The primary aspect of any budget is income, that is, how much money you receive each month. In this you may consider your salary or wage, legal settlements, fees, and dividends from investments. When you have worked out your monthly income your budget will help you to ensure that you are not spending more than what is coming in. This in turn will assist you in ridding yourself of debt and increasing your savings.

After this is worked out, you will need to investigate how your money is spent. You can begin this process by keeping a record of your spending for a month, collecting bills and receipts. Don't neglect all the "little" expenses such as visits to the corner store for drinks and newspapers.

Compile a list of all your expenses, placing them into categories. Suggested categories are "fixed committed expenses" (payments on things such as the mortgage, other loans and insurance that do not change from month to month); "other committed expenses" (necessities such as food, clothing and utilities) and "discretionary expenses" (things you would like but aren't essential).

Less spending = more savings

When you are familiar with your spending patterns you will be able to analyze the expenses. The "fixed" expenses are most probably likely to remain the same unless you plan to move or sell the car. If these are greater than your monthly income, though, you won't be able to save as you have too high a debt burden.

You may be able to reduce your spending in the "other committed expenses" category, but it would be best to think of ways to reduce spending in the "discretionary" category first as this is generally easier to achieve. Reduce the number of meals that you eat out or visit less expensive restaurants and cancel magazine subscriptions that you no longer read. Create your own entertainment: it is possible to rent two DVDs for the same amount as one adult movie ticket. If you purchase some microwave popcorn, you will have a cheap night's entertainment at home.

Digging deeper

When you have decreased the amount you are spending on "discretionary" items, take another look at the "other committed" items. Is it possible to create more economical meals? Can you buy in bulk and store it? Use public transport?

You should take a very close look at credit card debt. If this is high, you must investigate ways to reduce it. You may be able to negotiate a reduction in interest rates with the company or search for one with a lower rate. Take care that you do not fall into the trap of low introductory rates that soar sky high after six months.

Another consideration is a home equity loan or a consolidation loan. The former may offer a tax incentive. Check that you will be able to meet the payments - if you miss a payment on a home equity loan, the bank is able to foreclose within 90 days.

If after all this effort you find that you are unable to save because of the debt load you are carrying or if the monthly payments and necessary bills are becoming increasingly more difficult to meet, you probably need some help. A nonprofit group known as National Federation for Credit Counseling (call 1-800-388-2227, or visit nfcc.org) can assist you in establishing a budget and negotiating payment schedules with lenders for a small fee. When you are able to pay off the credit cards, that money can be transformed into savings.

The goal: more savings

When you have worked out the areas in which you can economize, you will be able to create an "expected" column in your budget. Any savings and commitments to your children's educational expenses should be in the "fixed committed expenses" column. The reason for this is that it will encourage you to pay yourself first, which is a great way to learn how to save. By resisting the temptation to spend this, you are building towards your goals. Some banks or credit unions have payroll savings plans or a Chase reward card that offers credit card rewards and other things that can help you to save more. It is also advisable to investigate any employer-sponsored retirement plans at your workplace. These can offer tax benefits as well as saving for the future.

How Do I Pick the Right ETF ?

Given the bewildering number of ETF choices that investors now have to contend with, it would be appropriate to consider the following factors when selecting an ETF:

1. Level of Assets: To be considered a viable investment choice, an ETF should have a minimum level of assets, a common threshold being at least $10 million. An ETF with assets below this threshold is likely to have a limited degree of investor interest. As with a stock, limited investor interest translates into poor liquidity and wide spreads.

2. Trading Activity: An investor needs to check if the ETF that is being considered trades in sufficient volume on a daily basis. Trading volume in the most popular ETFs runs into millions of shares daily; on the other hand, some ETFs barely trade at all. Trading volume is an excellent indicator of liquidity, regardless of the asset class. Generally speaking, the higher the trading volume for an ETF, the more liquid it is likely to be and the tighter the bid-ask spread. These are especially important considerations when it is time to exit the ETF.

3. Underlying Index or Asset: Consider the underlying index or asset class on which the ETF is based. From the point of view of diversification, it may be preferable to invest in an ETF that is based on a broad, widely followed index, rather than an obscure index that has a narrow industry or geographic focus.

4. Tracking Error: While most ETFs track their underlying indexes closely, some do not track them as closely as they should. All else being equal, an ETF with minimal tracking error is preferable to one with a greater degree of error.

5. Market Position: "First-mover advantage" is important in the ETF world, because the first ETF issuer for a particular sector has a decent probability of garnering the lion's share of assets before others jump on the bandwagon. It is therefore prudent to avoid ETFs that are mere imitations of an original idea because they may not differentiate themselves from their rivals and attract investors' assets.




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Five Online Resources for Forex Beginners

(Guest post by Heather Johnson)

Have you considered getting into the foreign exchange market? Also known as Forex, this is a fast market that operates 24 hours a day, five days a week. If you have previous experience with trading on the stock market, Forex is quite different. However, it can be a great way to make some money and Forex is gaining popularity with investors all over the world.

If you would like some tips and tutorials for getting started with the Forex market, consult the following online resources for help.

1. School of Pipsology – This site will literally school you, as it is organized into lessons according to grades. Start out in kindergarten and, as you learn more about the market, eventually graduate from the School of Pipsology.

2. Cyber Trading University – This site, also constructed in the guise of an online Forex school, offers free tutorials for beginners. These include video tutorials, which can be viewed at no extra charge.

3. Forex Training – Not only does this site offer comprehensive lessons in Forex trading, it also provides a free practice account. Using a practice account with virtual money allows you to trade with real-time quotes and get used to the process before investing real money.

4. Forex Facts – If you are in need of an all-inclusive FAQ list for Forex trading, you will find it here. From charting to market analysis, this teaches you everything you need to know about Forex philosophy and strategy.

5. Investopedia – Always a reliable source for investment advice, Investopedia has a section devoted entirely to the Forex market. The whole site can be of great use to Forex traders, however.

People from all walks of life are trading on the Forex market. Thanks to the advent of the Internet, online trading has never been easier and it affords "regular Joes" the chance to try out the system. Whether you are interested in trading as a hobby or as a serious investor, learn the ins and outs of Forex with the five resources above.

Image Credit: OnlineForexTradingBlog

About the Author

This article is contributed by Heather Johnson, a freelance writer as well as a regular commentator on the topic of credit card review. Heather invites your questions, comments and freelancing job inquiries at heatherjohnson2323 at gmail dot com.

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Real Ways to Save money !!

I was reading a post on CNN money by Walter Updegrave where he was answering a question by a reader about the simple ways of saving money. Although Walter's answer was good , I found more practical tips for saving money in the comments left by various readers.

Here are a few of my favorites:

• I had a friend however whose husband would spend whatever balance was in the checking account. So one week she would pay the bill to “BellSouth” for the actual phone bill and a couple weeks later she would put a payment to “southern Bell” for the same phone bill. It basically deducted the bill twice from the account. She could go back and add up all the Southern Bells and see what her savings was and it provided emergency funds for her when needed. No not an ideal system but it worked for her.
  Posted By K Hofmann, Gastonia, NC
  

• My wife and I set up several savings accounts at ING (no fees, good rates) and a set amount goes into each account every pay period. We use these accounts as savings and “escrow” accounts, we save all year long for car repairs & registrations, car insurance, home heating oil, our property tax bills, vacations, etc. My other suggestion is to split pay raises into 3 parts, increase regular savings, retirement savings and to fatten the budget (more breathing room each month).
  Posted By dugdg1, Manch-Vegas, NH
  

• I think that the best “savings strategy” for most people in the United States is a healthy dose of perspective once in a while. Do some reading about how the majority of people in the world live. When you get the urge to whine about how life is not worth living without all the latest electronic gadgets, think about the women in Malawi whose children are dead of AIDS, and who are raising their grandchildren on rotten bug-infested grain, because they have no other food to give them. When you feel personally offended by rising gas prices, think about the sweatshop workers in Bangladesh who walk for two hours to get to work, and feel it’s the best opportunity they’ve ever had. Realize that you have all of what you need and most of what you want, make do with a little less, and go make a donation to Oxfam already.
  Posted By Johanna, College Park, MD

• My paycheck gets deposited to an online savings account (ING) on a bimonthly basis. When I started, the assumption was to save atleast 10% of my annual salary, 10% for retirement, and the rest for normal expenses, debt, etc.
  This strategy has worked very well for me so far and since I started, I am saving about 20% of my pre-tax income and an additional 10% (pre-tax) for retirement.
  The benefit here is that I don’t even see the money in my checking account so I am not tempted to spend it and it earns a fairly good interest rate. Additionally, when I get a raise, my expenses don’t go up automatically and the extra money is automatically saved.
  Posted By Asad, Houston, TX

• I am lucky that my work offers direct deposit up to 7 accounts. On top of that I am on a bi-weekly pay schedule so all my budgeting is done on a monthly basis allowing me 2 extra pay checks a year to either pay off debt or stock away in savings. The way I have it set up is that I have a small amount of money each paycheck going into a “spending account” which we use for “wants” and another into a high yield money market account through Vanguard. Both of these are done automatically so I do not have to worry about it.
  Posted By KMoran, Dublin, CA

• I have a savings account in another bank that is separate from my checking and savings. I have automatic deposits sent to it each month. There is no debit card on the account so I have to drive there to withdrawl any money.
  It makes you think twice before withdrawls. last year when my car starter died, the $500.00 bill was paid for with cash. I am now saving to pay cash for my next car.
  Posted By DJ South Bend, Ind.

• For expensive items like a car or the cottage we’ve been thinking about, I setup an phony account in my financial software and automatically transfer the amount from our checking account each month. The money never really leaves checking but I don’t see it in my software. We build up the downpayment in this way and also see if we can truly afford what we want. It’s far better to test your ability to make those payments (while building up that downpayment) than to jump in and realize you couldn’t afford it!!
  Posted By Brian, Kalamazoo, MI

• One method I use is pocket change. I never spend my “change”. The coins that come back from everything. It goes home and in the evening it goes in a jug. Every few months I take it in and deposit in my savings account.
  I am told that your change equates to 5 to 7% of your expenditures. Not a lot, but more than most and its isn’t terribly painful. I know it is a surprize how much that deposit is.
  For me it supplements the direct deposit to savings that automatically comes out of my pay check, but it is a start for those who don’t have anything else.
  Posted By V Woolley, Bakersfield, CA

You can read the the entire conversation and Walter's "Past due: Your savings"

Related Posts

• How can I Save Money ?
• Checking, Savings, and Money Market Accounts...whats the difference ?
• 22 ways to build an emergency fund
• Saving for Kids College Education
• Easy Ways to Save Money

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How to write a Personal Check

Though it’s not the most difficult thing in the world, safely writing a check is something that everyone needs to know before it is all said and done.

Use Ink, Never Lead

Always use a pen to write a check to prevent any kind of tampering with the check. Never use a pencil when you are check writing because someone could fill in the blanks with the amount they would like to receive and easily erase your pencil marks. To avoid dishing out blank checks to people, be sure to use some kind of ink. Although a pen is acceptable according to most people, it is wise to use a permanent marker if possible. This is significant due to those occurrences in which people have committed “check washing”, which is a process in which criminals use chemicals to remove checks’ ink. A permanent marker prevents this possibility.



Dating and Identifying Tips

When you first look at the check, it might seem complicated. All of those blanks are easy to fill out once you have all of the information, though. The first step is to fill out the current date on the check. Make sure to correctly identify the date, as post-dating a check is actually illegal. Once you’ve done that, you should write the name of the person who will be receiving the check on the “pay to the order of” line. Be sure to include their complete name.

Filling in the Amount

The most important article of information on the check, of course, is the dollar value that you are assigning to it. It is required to write the amount in two places. Put this information in the dollar amount line first. The line is titled Dollars and is located below the Pay to the order of line. When you write out the amount, write it out in full, including any cents. To prevent someone from changing your numbers, you must fill out this area of the check. Afterward, you will need to print the numbers in the box to the right.

Signing the Check

Signing the check may be the last but not the least part of check writing. Be absolutely certain to sign the check with your own unique, standard signature, very stylistically similar to the one printed on your driver’s license. You could face the hassle of questions and accusations about fraud if you don’t sign the check with your standard signature. Deviations can cause the bank to red flag your check. Given how much check fraud and forgery is going on these days, banks are vigilant against suspicious-looking signatures that do not match up against your normal signature. The info section is somehow optional. Many people elect to make a quick note of what the check was for, just to keep their own bookkeeping records straight. Speaking broadly, you will be better off providing as much information as possible.

Overall, writing a check is not a particularly difficult task, although there are a few things to keep in mind. It isn’t something to be flippant about, however. Make sure that you’ve filled out each part correctly so that the likelihood of your check being altered is at a minimum. This will prevent future problems and save you from a huge mess of troubles.

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I need Life Insurance! Ok, but what kind ?

What is Life Insurance ?
Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.

As with most insurance policies, life insurance is a contract between the insurer and the policy owner (policyholder) whereby a benefit is paid to the designated Beneficiary (or Beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people named in the policy.
Insured events that may be covered include:

• death
• accidental death
• Sickness

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events.

Below are the types most common types of Life insurance sold these days. The last one is my favorite and thats the one I have in place.



Whole Life Insurance
Whole life insurance provides permanent protection for your dependents while building a cash value account. With this type of insurance, the insurance company manages the policies various accounts.
What it does
It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax-deferred cash accumulation. It provides a fixed premium which can't increase during your lifetime as long as you continue to pay the planned amount. It allows the insurance company to exclusively manage the cash value account in your policy. It provides you the option to receive dividends from your policy or apply them to reduce payments. It offers you the right to withdraw from the policy during your lifetime.
What it doesn't do
It doesn't offer the account flexibility to invest in separate accounts such as money market, stock, and bond funds. It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts. It doesn't offer premium flexibility. It doesn't offer face amount flexibility.

Variable Life Insurance
Variable life insurance provides permanent protection for you and is the type of life insurance with account flexibility for the more risk-oriented policy holder.
What it does
It pays a death benefit to the beneficiary you name and offers you low-risk, tax-free cash accumulation. It allows the death benefit to vary in relation to the fund returns of the cash value account. It allows you to borrow from the policy during your lifetime.
What it doesn't do
It offers no guarantee to the amount of cash value during your lifetime. It doesn't offer you premium flexibility. It doesn't offer you face amount flexibility.

Universal Life Insurance
Universal life insurance provides permanent protection for your dependents and is more flexible than whole or variable life.
What it does
It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax deferred accumulation. It allows you to earn market rates of interest on your cash value account. It offers the right to borrow or withdraw from the policy during your lifetime. It allows you premium flexibility. It offers face amount flexibility.
What it doesn't do
It doesn't offer you the account flexibility to invest in separate accounts such as money market, stock, and bond funds. It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts.

*Term Life Insurance

Term life insurance is the simplest and least expensive type of policy. It's pure insurance with no cash value account. A term life policy has only one function: to pay a specific lump sum to whoever you've designated, upon a specific event - - your death. The death benefit and the policy limit are the same - - a $200,000 policy pays a $200,000 death benefit. The policy protects your family by providing money they can invest to replace your salary, as well as to cover final expenses incurred by your death.

There is no doubt in my mind that in this economic era, Term Life Insurance is the best option for me and my family. Just as they say that "You should not mix business with Pleasure", I say, "You should not mix Insurance and Investments". Thats what other financial gurus like Dave Ramsey and Suze Orman also say.

What do you say ?


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Need Health Insurance ? Get Free Quotes Online
Save Money on Homeowner's Insurance
Save Money on Auto Insurance


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How can I Save Money ?

It's challenging in today's world to save money, especially during the holiday season. Spending money on gifts and traveling to visit family can really put a dent in your wallet. Knowing when to set aside money for yourself can seem like a tall order during these festive times. In reality, it is not as hard as it seems. Just follow these easy steps:

1. Set a Goal – Whatever your reason for saving, you should always set a goal. For an "in-case-of-emergency" fund, you should work toward three to six months of reserves. A goal also serves as your savings inspiration. It is easier to save when you have an objective.

2. Pay Yourself First – Each pay period, set aside $20 to $50 to your savings account (Check out this new saving account from IceSave). An easy way to do this is with Direct Deposit. Ask your employer to deposit a percentage of your pay to a savings account and the rest in your Checking so you gain the extra benefits it entails. You won't miss what you've saved because it is taken directly out of your paycheck before you can spend it.



3. Systematic Savings – Besides using Direct Deposit, you can also set up weekly, biweekly, monthly, twice-monthly, quarterly, semi-annually, and annual automatic transfers to your savings account. Letting the bank make these transfers decreases the temptation to spend and puts your savings on "auto-pilot."

4.Open an interest-bearing savings account. It’s a lot easier to keep track of your savings if you have them separate from your spending money. You can also usually get better interest on savings accounts than on checking accounts (if you get interest on your checking account at all). Consider higher-interest options such as CDs or money-market accounts for longer savings goals. You can also open an online savings account with one of the companies that offer them. Look around for the best savings interest rate and try to find one that adjusts its rate as the federal interest rate changes. You can then set up an automatic transfer from your checking account to your high interest savings account. Many employers allow you to deduct savings from your paycheck. The money is directly deposited in your savings account so you never even see it on your paycheck. You can also have investments for retirement taken directly out of your pay, and the taxes may be deferred with this option. If you typically keep a large balance in your checking account, consider moving most of that money into a linked savings account. Keep the money in savings until it is time to pay bills, then transfer enough from savings into checking to cover your bills. Make sure you check with your bank to see what the minimum balance requirements are for your checking account so you don't get hit with additional fees.

Related Posts:
Do you want to be a Quiet Millionaire ?
Checking, Savings, and Money Market Accounts...wha...
22 ways to build an emergency fund
Save Money by Spending Wisely !

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22 ways to build an emergency fund

One of the most important things to have is an emergency fund.
If, for any reason, your income stops, your emergency fund should be able to carry you for at least 6-8 months.

Courtesy of Bankrate.com, below is a list of very good tips to build and maintain an emergency fund.

1. Start saving something today. It doesn't have to be a large sum. Even on a tight budget, a small amount adds up over time. Depending on the size of your family, skipping a meal out each week could result in a savings deposit of $160 per month.

2. Treat saving as a bill. Consider having the amount transferred automatically from your checking account or paycheck. Pay your account every month or every two weeks.

3. Open a Christmas savings club. You may be able to set up an automatic deposit to come directly from your paycheck. You don't think about spending the money you never see. When holidays arrive, you'll have the funds to enjoy.

4. Get an envelope, cookie jar, coffee can or whatever you like and set aside the same amount every week. The trick: Don't count it, don't spend it!

5. Empty your pockets -- or your purse -- at the end of the night. Put all the change into a jar. Not only will you feel lighter, but your spare change adds up a lot faster than you think.

6. When you leave the house in the morning, don't carry anything smaller than a $5 bill. When you get change, don't spend the singles. At the end of the day, put any dollar bills in your jar.

7. You go to lunch and tip the waitress 15 percent to 20 percent (ten if you're a cheapskate). Put an equal amount aside for yourself, and your "tips" will add up quickly.

8. Get "cash back" from your debit card at the checkout counter by rounding up to an even amount. Slip the small amount -- $1, $2, $5 -- into your savings jar. You'll forget about a buck here and there.

9. Just paid off a big debt such as a car loan or child's tuition? Keep making the payments -- this time to yourself.

10. If you recently switched phone companies or discovered a flat-rate plan that's saving you money every month, put that cash aside in your savings jar.

11. Electric or water bill lighter than you expected this month? Save the difference.

12. Use those shopping membership cards that print your "savings" at the bottom of your receipt to help you save. Give the savings back to yourself by slipping that money in your savings jar.

13. Getting a tax refund next year? Either put the check directly in your savings account or cash it and stash it.

14. If you have the discipline to use a credit card and pay off the bill every month, use one that promises a cash reward and bank the money.

15. Give up cigarettes -- or even cut your habit by half -- and put that money in the savings drawer. If you drop a pack-a-day habit by half, you could easily bank well over $100 in a couple of months.

16. Put a jar on top of the washer and put in a quarter -- or two -- every time you throw a load in the washer or dryer. Get your finances in order while you clean.

17. When you return your movies on time, pay yourself the late fee. If you rent a movie or two every week, you'll be surprised how quickly that $1.50 to $4 can add up.

18. Trying to lose weight this season? Each time you go without dessert -- or that mid-afternoon candy bar break -- put the cost of your forgone goody into your savings jar.

19. Pop a quarter in a jar by the phone every time you dial a long-distance number. Bonus money: Shop your calling plan and find a better deal. Put the savings into the phone jar each month, too.

20. Try investing your savings in a certificate of deposit or an interest-bearing money market and watch it grow!

21. Buy U.S. savings bonds. Bonds yield more interest than the money earns in the jar.

22. Involve the whole family in saving. Plan a treat for everyone when you reach the savings goal. Make it something everyone will look forward to, but inexpensive, such as a day at the zoo, museum or beach.

If you're looking for good bank deals for your emergency funds, you should focus your search primarily on a good internet bank as they usually have the highest rates. They can offer better rates than the typical bank because they have very little overhead costs. If you're internet savy internet banks are usually the way to go.

Saving for Kids College Education

My daughter will be turning 2 in January. So for my wife and I, its time for us to start planning for her college. Should we go for a College 529 plan, an Education IRA or a Regular Investment account ? What should we do?

So I started researching the various college savings options available. I decided to go to the Vanguard website because Vanguard is the most conservative mutual fund company I know of, because as far as saving for college is concerned I dont want to invest too aggressively. So here is what I found.

529 College savings Plan

529 plans enable you to invest for higher education free of federal and, sometimes, state income taxes. States or schools can sponsor a 529 plan. Most are open to residents of all states. Some plans allow you to invest between $200,000 and $300,000 on behalf of one child, so a 529 plan may be your best bet for fully funding a college education.

Advantage
Enjoy investing flexibility, high contribution limits, and tax advantages to save for college and graduate school.

Disadvantage
The money can ONLY be used for college.
And If your kid doesn't go to college, you may name another eligible family member as beneficiary on the account and use the 529 assets to pay for that person’s education. If no eligible family members can be named beneficiary, then you might have to close the account, paying federal and possibly state income taxes and a 10% federal penalty tax on earnings not used for qualified higher-education expenses.


Education Savings Account

Advantage
you can invest for any level of a child’s education—primary school, high school, college, or beyond. And you can start investing for that child from birth. The money is taxed at the child's tax rate, which is typically lower than the parents' rate.
Although contributions aren't tax-deductible, your earnings grow tax-free and withdrawals are free from federal income taxes when used for qualified education expenses.

Disadvantage
You can only contribute $2000 a year.


UGMA/UTMA accounts

Advantage
A tax-advantaged way to save for a child's future, for higher education or any other purpose that benefits the child.
The accounts dont have any contribution limits, though contributions above a certain amount will trigger the federal gift tax.

Disadvantage
When the child turn 18, he/she gains control of the money and they can do anything with the money.


Regular Investment Account

Advantage
You retain complete control of the account. Select from from a broad lineup of stock, bond, balanced, and short-term investments.

Disadvantage
You do not receive the tax advantages of accounts specifically created for college investing.


So what did we decide ?
As of now, our finances are in order with no credit card debt an we regularly keep a close watch on our savings and spending. Therefore, we went for a regular investment account. We chose the Vanguard STAR fund that is a conservative balanced mutual fund that has consistently given a return of at least 10%.

So do you think we made the right decision ?

Related Links
*Compare College Savings Options
*Keeping Cash Under My Mattress..makes sense ?

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What is ACH ?

Every time you pay a bill online, you transfer money into your online savings account or your employer direct deposits your paycheck, do you know what kind of a transaction is really taking place in the back end ?
Its called an ACH transaction.

Let me explain.

ACH stands for Automated Clearing House.

The ACH Network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system governed by the NACHA OPERATING RULES which provide for the interbank clearing of electronic payments for participating depository financial institutions. The Federal Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries.

ACH payments include:

* Direct Deposit of payroll, Social Security and other government benefits, and tax refunds;
* Direct Payment of consumer bills such as mortgages, loans, utility bills and insurance premiums;
* Business-to-business payments;
* E-checks;
* E-commerce payments;
* Federal, state and local tax payments.

More recently, the ACH network is being used to convert check payments into ACH debit transfers. By providing the appropriate disclosures, businesses can use account information on checks to initiate ACH debit transfers and reduce payment processing costs.

The Standard Entry Class (SEC) code is a three letter code that identifies the nature of the ACH entry. Here are some common SEC codes:

ARC
Accounts Receivable Entries. Checks received by a merchant through mail or drop box and presented as an ACH entry.

BOC
Back Office Conversion. Checks that are converted from paper to an electronic debit at a centralized location.

CCD
Corporate Cash Disbursement. Primarily used for business to business transactions.

DNE
Death Notification Entry. Issued by the Federal Government.

POP
Point-of-Purchase. A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check.

PPD
Prearranged Payment and Deposits. Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments.

RCK
Represented Check Entries. A physical check that was presented but returned because of insufficient funds may be represented as an ACH entry.

TEL
Telephone Initiated-Entry. Verbal authorization by telephone to issue an ACH entry such as checks by phone.

WEB
Web Initiated-Entry. Electronic authorization through the Internet to create an ACH entry such as PayPal.

XCK
Destroyed Check Entry. A physical check that was destroyed because of a disaster can be presented as an ACH entry.

ACH payments have been around for some time now, but people are just getting used to them, especially with the ARC, POP, and RCK, where the original instrument was a physical check.



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Easy Ways to Save Money

Here are a few simple ways to start saving money. I follow, or have followed, or will soon follow all these ways.

Start small
Most financial experts feel that we need to save at least 5 percent, and preferably 10 percent, of our income and place it into an interest-bearing, liquid savings account. However, don’t give up if you’re not able to put aside 5 or 10 percent. Establishing a saving habit and saving consistently will eventually add up; even as little as $5 per pay period will accumulate. Once saving becomes a habit, set as your savings goal a maintained savings account of at least three to six months’ income. This will prevent borrowing when unexpected expenses arise or in case of a period of illness or unemployment.

Put money into a retirement account
If it is available, sign up with your workplace’s 401(k), 403(b), or similar retirement plan in which your company will contribute matching funds to the plan in your name. The most common match is 50 cents on the dollar. If this is the case for you, you will get an immediate 50 percent return on your contributions.

Monitor ATM withdrawals
Decide how much money you will take out each week or each month and make it last; discipline yourself to stick to your decision. Try to decrease the amount withdrawn every month. If you discover that you have money left over, deposit it into your savings account.

Pay off charges and loans
With the desire, discipline, and time, anyone can pay off his or her charges and loans and stay out of debt. There are four basic steps to eliminate charge and loan debt: (1) Transfer ownership of every possession to God; (2) Allow no more debt (no bank or family loans and cut up the credit cards); (3) Develop a realistic balanced budget that will allow every creditor to receive as much as possible; and (4) Start retiring the debt. Begin by first paying extra on the debts with the highest interest rates. If interest rates are comparable on all of the debts, first pay extra on the one with the smallest balance. After this first one has been paid, apply the regular payment as well as the extra money that was going to it toward the next highest balance. After the second is paid off, apply what was being paid on the first and second to the third highest, and so forth.

Pay extra on home mortgage
You will add equity to your home, reduce the amount of interest paid over the term of the loan, and reduce the length of the loan if you pay extra monthly on your home mortgage. If you consistently pay $100 extra each month on a $150,000 loan at 6 percent, you will save almost $73,000 in interest and shave more than 7 years off the original loan. If you can’t commit to an additional $100 each month, just round your payment up to the nearest hundred.

Pay off car loan
Interest on your car loan is not tax deductible and the rate is generally higher than on your home mortgage. Pay it off as soon as possible by rounding up your monthly payment to the nearest hundred and then add $50 (or as much as you can afford) to that amount.

Open an IRA
If your funds are limited, open an IRA only after you have maxed out with your company’s retirement plan. If you do not have a company retirement plan, open an IRA immediately.

Evaluate life insurance
If you’ve had the same term life insurance policy for five years or more, you can possibly cut your premiums by changing policies. If you apply for a new policy and get a new medical exam, chances are the insurer may feel that you are a better risk than fixed insurance health assumptions indicate, which means that you will qualify for a lower premium rate.

Be accountable for your money
Know where your money is going by establishing a budget and sticking to it. If the expense is not budgeted, the money should not be spent. Keep a small notebook with you to record miscellaneous budgeted expenses.

Save big on your Mortgage

I read an article today by David Bach @ Yahoo Finance where he explains that the best way to save on a mortgage is to make biweekly payments. But for me and my wife, who are always finding ways to save more money, wherever we can, the last part of the article sounded much better. We don't want to be limited to just paying of 10% every year.

Going Biweekly

When you set up a biweekly mortgage payment plan, instead of making your monthly mortgage payment the way you normally do you split it down the middle and pay half every two weeks.
The result is that you end up making one extra full payment every year. (Twenty-six half payments is the equivalent of 13 full payments.) The best part is that the extra payment is made gradually over the course of the year, so you don't feel the pinch. And since most people are paid every two weeks, a biweekly payment plan turns out to be a phenomenal budgeting tool.
Anyone can do this. You don't need a special mortgage, and you can set it up anytime.

Pay More, Save More

Say your mortgage payment is $2,000 a month. With a biweekly plan, instead of sending a $2,000 check to your mortgage lender each month, you would send them $1,000 every two weeks.

By doing this, the miracle of compound interest reduces your debt. You actually end up paying off your mortgage early -- somewhere between 5 and 10 years early, depending on the duration of your loan and your interest rate.

On average, a U.S. homeowner with a $300,000 mortgage can save upwards of $100,000 over the life of his or her mortgage just by following this simple program. And if that's not enough incentive, think about being debt-free and potentially ready to retire years sooner than you'd planned.

Let's compare the difference between a monthly and a biweekly payment plan for a $300,000, 30-year mortgage with an interest rate of 7 percent. The monthly payoff schedule winds up incurring a total of $418,026.69 with interest charges over the life of the loan.

The biweekly schedule, on the other hand, runs up just $311,876.19 with interest. So switching to the biweekly plan will save you more than $106,000. Your mortgage may be smaller or larger, so run the numbers for your mortgage to see how much you can save.

Automate It

The great thing about switching to a biweekly payment plan is that it allows you to save money over the long run without refinancing or otherwise changing your mortgage. All it takes is one call.

Most mortgage lenders offer programs designed to totally automate your biweekly mortgage plan. At Wells Fargo, for example, it's called the Accelerated Ownership Plan. Citibank calls it the BiWeekly Advantage Plan. To enroll, all you need to do is phone your lender or go online. Many banks even offer this service for free to customers who do their banking with them.

Banks that don't offer this service will usually refer you to an outside company that runs the program for them. These companies generally charge a setup fee between $200 and $400. In addition, there's a transfer charge of $2.50 to $6.95 each time your money is moved from your checking account to your mortgage account.

To be sure you're dealing with a reputable firm, I recommend using one that's referred to you by your mortgage company. One of the biggest such firms is a company called Paymap Inc. It currently provides this service through its Equity Accelerator program, which is powered by Western Union. To find out more, visit their web site or call (800) 209-9700.

(By the way, I'm not affiliated with Paymap or Western Union in any way, and I don't make money by recommending them. Whenever I mention a specific service or product in my column, it's simply to offer a resource for readers -- not to get a commission.)

What to Ask Before Signing Up

When dealing with a service company, be sure to ask the following critical questions:

• When exactly do they fund the extra payments toward your mortgage?

The answer should be "immediately." You're making extra payments to pay down your mortgage faster. That won't happen if the service company is holding onto your payments for any reason.

• What happens if you refinance?

Determine whether the service is transferable to a new mortgage company, or if you'll have to go through the setup process again -- including paying another fee.

• How much will it cost to use the program?

Get a clear understanding of how the costs involved compare to the savings you'll realize, so you can make an informed decision (see the next section).

Cost vs. Savings

Let's do the math. If you're paying $2.50 per transfer every two weeks, that comes to roughly $65 a year. Over 22 years, it totals just over $1,430, not including the setup fee. Figure that the transfer fee will probably go up a little over time, and there's no question that a biweekly mortgage system will cost you a few thousand dollars.

So why do it? The answer is that the few thousand dollars you're spending will save you tens of thousands of dollars, if not more.

In the example above, you would've saved more than $106,000 over the life of the mortgage. Assuming that you signed up with the most expensive program out there to handle your biweekly payments, and spent $5,000 over 22 years, you're still ahead over $100,000.

Going It Alone

Are there other, no-cost mortgage prepayment options? Sure. You could pay an additional 10 percent of your mortgage each month and have it applied directly toward the principal. Or you could make one extra payment at the end of the year and again have it go toward your principal.

But note that word "could" -- some things are much easier said than done. Just as most people won't save if they don't make it automatic, most of us won't make extra mortgage payments unless it's automated.

If you decide to do it yourself, my suggestion is that you pay an extra 10 percent a month and send it as a separate payment -- automatically, of course. Make a point of telling your lender to apply any extra payments toward your principal, and then check your monthly statements to make sure they've applied it correctly.

Investing in a Tradtional IRA

Recently, there was a lot of talk going on in my office regarding IRAs and 401K. So I am going to try to unravel the mysteries behind these investment vehicles in a few posts. Today, I'm starting with Traditional IRA.

A traditional IRA is an individual retirement account (IRA). The IRA is held at a custodian such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds).

Income limits

If a taxpayer's household is covered by one or more employer-sponsored retirement plans, then the deductibility of traditional IRA contributions are phased out as specified income levels are reached.

* Married Filing Jointly or Qualified Widow and Modified Adjusted Gross Income is between $75,000 and $85,000 (this is scheduled to rise to $80,000 to $100,000 in 2007)

* Married Filing Separately (and you lived with your spouse at any time during the year) and modified AGI is between $0 and $10,000

* Single, Head of Household or Married Filing Separately (and you did not live with your spouse) and modified AGI is between $50,000 and $60,000

The lower number represents the point at which the taxpayer is still allowed to deduct the entire maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to deduct at all. The deduction is reduced proportionally for taxpayers in the range. Note that people who are married and lived together, but who file separately, are only allowed to deduct a relatively small amount.

Traditional IRA contributions are limited as follows:


Tax Implications

Contributed money is at first post tax money.
However, contributions are tax deductible which reduce your tax basis for that tax year.
Then, distributions are taxed at the normal income for distributions.

Advantages

* The main advantage of a Traditional IRA is that contributions are often tax-deductible. If a taxpayer contributes $4,000 to a traditional IRA and is in the twenty-five percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year. Because qualified distributions are taxed as ordinary income (the taxpayer's highest rate), the long-term benefits of the traditional IRA are only comparable to those of a Roth IRA (whose qualified distributions are tax free) if the current year tax benefit ($1,000 above) is reinvested.

* Also, if a taxpayer expects to be in a lower tax bracket in retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.

* Another advantage of a Traditional IRA is that the taxpayer gets the tax benefit immediately.

Other important Facts

• Any Individual can set up a Traditonal IRA
• No matching contributions available
• Distributions can begin at age 59 1/2 or owner becomes disabled
• 10% penalty plus taxes for distributions before age 59 1/2 with exceptions
• Can withdraw up to $10k for a first time home purchase down payment with stipulations
• Can withdraw for qualified education expenses of owner, children, and grandchildren
• Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability
• Capital gains, dividends, and interest within account incur no tax liability

How much should your Monthly Mortgage Payment be ?

An article on Yahoo has this interesting piece of information about how much should you spend monthly on your mortgage.

Mortgage lenders have tightened standards recently. But consumers still have the potential to get approved for a bigger home loan than they can afford.

A general rule of thumb is that no more than 28% of gross monthly income should go toward house-related debt (including taxes and insurance). Besides first mortgages, this includes home-equity loans, which allow people to take out a lump-sum loan against the house, and home-equity lines of credit, which allow people to borrow against the house over time, taking out money when needed.

A person who makes $5,000 a month before taxes, for example, wouldn't want the monthly bill for house debt to exceed $1,400.

Note that the 28% guideline has a caveat: Monthly debt payments for everything -- house, credit cards, car loans, student loans, etc. -- shouldn't be above 36% of gross monthly income. So if you spend 28% of your monthly pay on house debt, you have only 8% left for the remainder of your debt payments. In the example of someone who earns $5,000 a month, 8% would come to $400. Many car payments are more than that.

And those percentages -- frequently called debt-to-income ratios -- are maximums, not recommendations for healthy living. People who spend 36% of their pay on debt are "teetering on the edge of being financially unstable," says June Walbert, a financial planner with San Antonio-based USAA, a financial-services company that largely focuses on military families.

She counsels clients to limit total debt payments to 20% of pretax income, so they have a buffer for surprise expenses.

One way to keep from getting in too deep is to run a worst-case scenario before taking out any money. Home-equity lines of credit, for instance, often come with variable interest rates, but banks are required to disclose a rate cap in the loan documents. Calculate what the payment would be if you borrowed up to the limit at the highest interest rate.

Understand how bonds work ?

Walter Updegrave from CNNMoney explains bonds in a simple to understand fashion.

Question:
I'm 71 years old and retired. I know I should have some of my portfolio in bonds, but I'm not very savvy about bonds. Is now a good time to buy into bonds and, if so, what type should I buy? - Norman, Atlanta, Georgia

Answer:
Okay, Norman, I'm going to give you the world's fastest primer on bonds. Ready, here it is: You know how a seesaw works, right? One side goes up, the other down. Well, the seesaw concept is the single most important thing you need to know about bonds.

On one side of the bond seesaw are interest rates. On the other are bond prices. When interest rates go up, bond prices go down. When interest rates go down, bond prices go up.

And the farther toward the end of the seesaw you are - that is, the longer the maturity date before the bond's principal is repaid - the more the price of the bond moves up or down when interest rates change. That's it. End of primer. That is the most important thing you need to understand.

Oh sure, there are other features of bonds that are good to know about, such as credit quality. The more you stick to bonds with higher ratings from firms like Standard & Poor's and Moody's Investors Service, the less "credit risk" you'll bear - which means the lower the odds the bond issuer will default on repayment of principal and interest. (You can learn more about credit quality and other aspects of bonds, by going to our Money 101 Lesson on bonds.)

But as long as you invest in a diversified portfolio of bonds - which in the case of most individuals like yourself means buying bond mutual funds - the main danger you face in owning bonds is interest-rate risk, or the possibility that the value of your bonds will fall when interest rates rise.

So how do you manage that risk? Well, you could try to time your moves in and out of bonds, jumping in when it appears interest rates are likely to fall and bailing out when rates seem likely to rise.

But unless you're clairvoyant, I don't think you're likely to pull off such a feat. Indeed, reading the future direction of interest rates is tough even for accomplished pros, witness the fact that the Pimco Total Return fund, which is run by Bill Gross, one of the savviest bond gurus around, is now languishing at the bottom of the performance charts for the past year.

Instead of engaging in a vain attempt to guess where rates are headed, I recommend that investors adopt a simpler approach - namely, just go with bond funds with short- to intermediate-term average maturities.

Basically, that means funds with portfolios of bonds that mature on average within roughly two to eight years. There are no guarantees, of course, but history shows that intermediate-term bonds typically give you 80 percent or so of the gains of longer-term bonds with about half the ups and downs in price.

While you're at it, opt for bond funds with low annual operating costs (or expense ratios, in fund parlance). Returns on bonds tend to be lower than those of stocks over the long-term, so high annual costs can really eat into your gains.

If you're investing money outside of tax-advantaged accounts like a 401(k) or IRA, you may also want to consider buying municipal bonds. Their yields aren't as high as the payouts on taxable bonds, but, depending on your tax bracket, those lower yields may actually turn out to be higher on an after-tax basis. (To compare taxable and tax-free yields, click here.)

You can easily screen for short- and intermediate-term funds with low costs by going to our Mutual Fund screener. Or, if you want suggestions for specific bond funds, you can check out our Money 70 list of recommended funds. I'm a particular fan of the bond index funds on the list since they offer a nice combination of broad diversification and ultra-low expenses.

I'll leave you with one last tidbit about bonds that might come in handy. If you want to know how much the value of a bond or bond fund will go up or down if interest rates rise or fall, you can find the answer in a statistic called duration.

It's too complicated to get into what it actually represents and how it's calculated, but basically it's a measure of a bond or bond fund's sensitivity to changes in interest rates. What's neat about this stat is that once you know it, you have a pretty good idea of how a bond or bond fund will fare when rates change.

So, for example, if a bond fund has an average duration of, say, five years and interest rates rise by one percentage point, the value of the bond fund will fall roughly 5 percent.

If rates rise by two percentage points, the fund will drop about 10 percent in value. The opposite occurs if rates drop. You can find the duration for a bond fund by plugging its ticker symbol into the Quotes box at the top of Morningstar's home page and after the Snapshot page comes up, click on the Portfolio tab on the left. (If you don't know the ticker symbol, go to Ticker Lookup page. If you want, you can even screen for bond funds by duration by going to Morningstar's Fund Screener.

So that's pretty much the skinny on bonds. If you stick to a well-diversified fund that sticks to the short- to intermediate-term range, has low expenses and you don't try to get fancy by timing your moves in and out of bonds based on guesses about the future direction of interest rates, you should do just fine.

US Treasury Savings Bonds

Here is the scoop on savings bonds in a nice question-answer format.

What type of savings bonds are available?

* Series EE. Paper Series EE bonds can be purchased at half face value. For example, you pay $25 for a $50 bond. Bonds bought online must be purchased at face value. You can buy up to $30,000 ($60,000 face value) in EE bonds. They come in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. If you redeem bonds less than five years after purchase, you forfeit the three most recent months' of interest. There is no penalty after five years.
* Series I. These inflation-indexed bonds can be bought only at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. The maximum purchase is $30,000. Like EE bonds you forfeit the three most recent months' of interest if you redeem I bonds less than five years after purchase.
* Series HH. The Treasury stopped issuing HH bonds on September 1, 2004. Prior to that date, the only way to invest in HH bonds was by trading in your EE bonds.

How are the interest rates determined?

As of May 1, 2005, newly issued Series EE bonds will have a fixed interest rate, based on 10-year Treasury note yields. The rate currently is 3.5%. These fixed rates will be announced every May and November and the rate that is in effect on the day you buy your bonds will stick with them for at least the first 20 years.
The Treasury will still guarantee that the value of an EE bond held for 20 years will at least double its purchase price. If a fixed-rate EE bond's stated rate won't get the job done, the government will make a one-time adjustment so that the average annual return over two decades will be the 3.5% needed to double your money.
You can check the latest rates on the Treasury's savings bond Web site.
If you happened to buy that bond in April 2005 before the fixed rate took effect, the rate on your bonds would change in October (and be based on the rate announced in May).
I bonds earn interest based on a combination of a guaranteed fixed rate and the rate of inflation. The current fixed rate for I bonds purchased between May 2005 and October 2005 is 1.2% and will stay with the bonds for their entire 30-year lifespan. The inflation-adjusted portion of the yield, now 3.58%, and the fixed rate are set every six months.
HH bonds, currently paying 1.5%, do not increase in value. Instead, investors are paid interest every six months and get face value for the bonds when they redeem them. The interest rate is set when you buy HH bonds and then again ten years after the issue date. They stop earning interest after 20 years.

Who can buy savings bonds?

Residents of the United States and its territories (as well as U.S. citizens living abroad) can buy savings bonds. Canadian and Mexican residents who work in the United States, have social security numbers and who can participate in the Payroll Savings Plan through work also can buy savings bonds.

How do bonds compare with other investments?

They're very safe (and conservative), and compared with a number of other safe investments, the yield isn't too bad. As of May 1, Series EE bonds earn 3.5%. That's about the same as a one-year certificate of deposit, beats money-market deposit accounts and certainly is more than the typical savings or interest checking account.
The current combined rate for I bonds is a respectable 4.8%. This beats many other conservative investments.
Savings bonds are also free of state and local income taxes, so that adds to your yield, too. Check out the effect on the tax advantages calculator.
But keep in mind that you can't redeem savings bonds for the first year. And if you redeem them in less than five years, you lose the most recent three months' interest.

Do savings bonds earn interest forever?

No. But "people are under the misconception that savings bonds earn interest as long as they hold them," says Dan Pederson of the Savings Bond Informer, a bond consulting service.
Americans sitting on bonds that have stopped earning interest are making an interest-free loan to the U.S. government to the tune of $9 billion.
If you've got savings bonds and aren't sure whether they still are earning interest, the Bureau of Public Debt's Treasury Hunt database can help you find out.
EE bonds earn interest for 30 years. Bonds issued after May 2003 are guaranteed to double in value within 20 years, which is referred to as the original maturity date. The new fixed rate for bonds issued after May 1, 2005, applies to those first 20 years then is extended for the next ten years unless the Treasury Department announces a different rate.
I bonds earn interest for 30 years. The interest accumulates monthly and is compounded every six months.
HH bonds stop earning interest at 20 years. The interest rate is set when you buy them then again at ten years after the issue date.

Bonds no longer earning interest as of April 2005

E
May 1941 through April 1965 and December 1965 through April 1975

H
June 1952 through April 1975

HH
January 1980 through April 1985

Savings Notes
May 1967 through October 1970

A, B, C, D, F, G, J, and K
All issues

How can I find out what my bonds are worth?

You can use the savings bond calculator on the Bureau of Public Debt's Web site.
You can also keep track of and value each bond with the free, easy-to-use, Windows-based Savings Bond Wizard program.
If you don't want to manage your savings bonds yourself, you can get help. For example, U.S. Savings Bond Consultant (www.savingsbonds.com) offers online bond-management tool called Savings Bond Guru.

Does it matter when I cash in a bond?

Yes. Interest is added to savings bonds at specific intervals. If you redeem your bond before the interest is posted, you lose it. For example, if interest is posted in, say, April and October, redeeming bonds in September instead of October would cost you six months' worth of interest. To see when interest is added to your bonds, use these tables.

Should I cash in my oldest bonds first?

Not necessarily. When figuring out what bonds to cash when, you can't go just by date. Older bonds are not by definition worse than newer bonds. Some of them still earn a 4% guaranteed minimum rate.
In addition, series E bonds issued before December 1965 have a 40-year maturity period, but starting in December 1965 E bonds began to be issued with 30-year maturities. (All series EE bonds and I bonds mature in 30 years.) A lot of bonds holders lose sight of that (and the government doesn't send statements) so they accidentally cash in bonds that are still earning interest and hold on to ones that aren't.
When you want to redeem bonds, start with any that have stopped earning interest.

Will I have any tax liability if I use my social security number when I buy a bond as a gift?

No, you shouldn't. The social security number on the bond is used for tracking lost bonds, for instance, and other record keeping. The person who cashes the bond -- normally the owner or a co-owner -- should get the 1099 form reporting the interest for tax purposes.
However, banks have been known to make mistakes, says Pederson. Just to be sure, try to use the social security number of the recipient.

What do I do if I've lost some savings bonds?

Complete Form PD F 1048.. Pederson suggests that everyone file this as a matter of routine to make sure there are no bonds belonging to you that you don't know about, such as gifts that were never delivered.
The key to getting the best search is putting as much information as you can on the form, including as many forms of your name as you can, your old addresses, whether the bonds were bought through payroll deduction and at what company and so on. A search generally takes three to six weeks. The Bureau of Public Debt's Treasury Hunt feature on its Web site may also help you find bonds that were never delivered (but not lost bonds).

Can I buy savings bonds online?

You can buy them at any Federal Reserve bank or branch, your bank and, often, through a payroll deduction plan. You can even buy them online through Treasury Direct with an automatic withdrawal from your checking or savings account.

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