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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, May 31, 2006

Market Trends

Being a wise investor takes a little bit of knowledge and some discipline.

In the late 1990s the technology and internet stocks were hot and that was a trend, but all trends must end and the internet bubble burst on March of 2000. From this you can see that certain industry sectors can be hot and cold as well just as capitalization (e.g. small cap and large caps) trend up and down.

One criteria you can examine is P/E ratios. When P/Es are low many, not all, believe this is a prime time to begin investing. For example, large cap stocks right now are at very low PEs and small cap stocks are at a very high level of PEs. Many, not all, are dumping their small-caps and getting into large caps. Now this does not necessarily make it true until the shoe drops and you can see that a trend is occurring, but market timing is impossible. Do some homework on some indexes like the Russell 2000 or the S&P 500 and find out if this is true or just buzz. Now remember a long-term investor needs to be exposed to diversified investments so unless you are a gambler you should not exit a low-trending industry sector of capitalization. But if you believe a trend is happening or about to you might want to weight your portfolio heavier on what you think will trend up and go lighter on what industry sectors, capitalizations, etc. you think might go down--while remaining diversified.

Tuesday, May 30, 2006

Mutual Fund Prospectus

When browsing for mutual funds you should order or print out their prospectus before buying. Legally they must provide this information to you and when you receive it the prospectus will provide you with a wealth of information. Some you may understand and some you may not. If you want more information call the mutual fund's toll-free number to get the help from a customer service assistant. Don't be shy, this is a great way to get some free lessons on mutual funds and how they work as well as that individual fund.

Monday, May 29, 2006

Donating Stock

If you have some winner stocks in your portfolio and you are thinking about selling the stock, but then think of the tax hit you will take and think again about it. By selling your stock you never have to worry about paying taxes on those gains on that stock, plus you can take the deduction on the full value of your stock's shares. Click here for more information on donating stocks.

Home/Renters Insurance

Yes, if you rent an apartment you need insurance because the contents of your apartment will not be insured otherwise. So you need to make sure that you have renter's insurance if you have possessions that have significant worth to you.

Obviously, if you own a home you need to have home owner's insurance and make sure it includes replacement-cost coverage, not default coverage which is called actual cash value. It will cost you approximately 10% more for replacement-cost coverage, but in the end it is worth it.

Credit Card Annual Fees and Rates

If your credit card has a yearly fee ask for it to be waived and if they refuse say that you are prepared to take you business elsewhere (make sure to have that plan because typically you do not want to close credit card accounts because it lowers your credit score).

You can do the same with credit cards interest rates. Look online for average rates and if you are armed with a good credit score in hand and a comparison to national rates you can often get your rate lowered.

Just be prepared and have a plan before calling and asking for a fee to be waived or a lowering of your credit card interest rate. Most people never even ask.

Investment Loss Harvesting for Tax Purposes

Every autumn you need to think about loss harvesting in your non-retirement taxable investment accounts. You can use up to $3,000 per tax year as losses to offset capital gains and this can make a bad invesment into a tax break.

Now if you lost $9,000 on taxable investments in a year you can take up to $3,000 of that and use it over three tax years. Therefore, a really bad investment can help you out for several tax years.

If you still like the investment you lost money in remember to follow the thirty-day wash rule because otherwise use cannot use the tax benefits of that loss.

Rebalancing Your Investment Portfolio

At least once a year you need to rebalance your investment portfolio because certain investments might be doing extremely well or bad and it will through off the weights you have allocated to each category (e.g. international, small-cap, large-cap, mid-cap, bonds, etc). By doing this you are forcing yourself to sell high and buy low at the same time keeping your portfolio with the correct weights.

Flexible Spending Accounts

If your job offers a Flexible Spending Account you should take advantage of it. It lowers your taxable income and is withdrawn directly from your paycheck and you use it to pay for a wide range of medical expenses. You can save around 30% on the amount you take out for the Flexible Spending Account. The limit is $5,000 and sign up is usually the autumn prior to the calendar year the money will be used.

401k Investment Strategies

Rule #1 of investing in a 401k is to invest at least up to the level your company matches because it is free money. So if your company matches dollar for dollar up to a 5% contribution and you contribute that 5% of your salary (e.g. 5% of 100,000=$5,000). In that example you would have an extra $5,000 in your 401k at that company.

Caveats:
  1. Your company might not vest 100% of that matched funds to you right away. They might have a schedule of tenure you must hit before you can be the outright owner of the money the company matched.
  2. Your company might provide stock as a match. Be careful: you must diversify your portfolio or you could be another victim of an Enron situation where many employees had all of their 401k investment in Enron stock and lost their retirement money as the stock price plunged.


After you have hit the company match level and you want to put more towards retirement you should take the excess and open a Roth IRA. Here you will have endless choices of what to invest your money in and it will be after-tax investments with the ability to withdrawal contributions (not profits) tax-free at any time.

Sunday, May 28, 2006

Know Your Credit Score

A sad but true fact of life is that more and more things depend on what your credit score is. From the loan rate you get to whether you get a job or not can depend on this number. Experian, TransUnion and Equifax are the three credit reporting agencies. By law you are now allowed to access your credit report(they charge for you to access your score) from Equifax, TransUnion and Experian. You can go to www.annualcreditreport.com during a calendar year and get each of the reports. So because you can get all three, stagger months between accessing each and get a different company's report each of the three times.

Once you get the report you need to examine it carefully to confirm there are no mistakes on it (mistakes are not unusual). Then you will have to pay to access your score. The scoring system has changed recently, but not all are accepting those changes. Click here to get an idea of what your score means.

Automate Your Financial Life

Call up all the businesses you have monthly bills and have them directly taken from your bank account. It will give you peace of mind and you will never be late on a payment again. Also, call up your mutual fund and have them draw directly from your banl account as well. This way you are dollar-cost averaging as well as never seeing or missing this money then. This keeps your financial life disciplined and less work for you in the long run.

Budgeting

Some words to the wise about where your money goes:

NEEDS should take up about 50% of your budget
  • Mortgage or rent
  • Car/health/renter's/homewoners insurance
  • Groceries
  • Taxes/property taxes/sales tax
  • Student loans (this is one loan you can never get away from)
  • Child-support/alimony
  • Contractual payments
WANTS can take up 30% of your budget
  • Cable/Dish TV
  • Alcohol
  • Dining out
  • Non-essential food
  • Haircuts
  • Magazines/newspapers
  • Vacations
  • Babysitters
  • Recreational fees and gear
  • Presents
  • Entertainment
20% should go to SAVINGS
  • Retirement contributions
  • Other investments
  • Mortgage and car payments over minimum
  • Money markets
  • Payments against credit card debt

Saturday, May 27, 2006

Buy Mutual Funds or Stocks

When you become more comfortable with your abilities as an investor you might want to try to see if you can bypass mutual funds and buy some of the stocks on your own.

Here are some ruiles of thumb in a diversified portfolio:
  1. Large-cap stocks: If you are ready, you should definitely try to buy large-cap stocks on your own. Large cap mutual funds do what many can do on their own. If you use a discount brokerage house you only fees will be to buy and sell these stocks. As we all know mutual funds have a lot of fees compared to this method. Pick at least 12 stocks in the different industry sectors.
  2. Mid-cap stocks: If you are very experienced and love doing your your own trading then try to do the mid-cap portion of your portfolio as well. Invest in at least 3 and go into different industry sectors. Be careful and make sure you are truly comfortable with this.
  3. Small-cap stocks: Small cap investing on your own is too difficult for almost all amateur investors. If you have the guts to do it try a couple companies on your own, but most of the time stick with a good small-cap mutual fund.
  4. International Stocks: It is too difficult to invest in international companies--please rely on professionals here. International stocks are too difficult to track and mutual fund will do the trick for this portion of your portfolio.
  5. High-quality bonds: U.S. Treasuries can be bought online easily through www.treasurydirect.gov. You can do this on your own and it is not terribly difficult.
  6. High-Yield bonds & Short Term bonds: For both of these it is best to rely on a bond fund. Research is difficult and unless you have advice from a professional it is difficult to do well here.

Friday, May 26, 2006

More on Market Timing

If you have been paying attention to the way the stock market has behaved in the past couple weeks you have had a good introductory course on how market timing is near impossible. One day the stock market plummets and the next it rebounds and vice versa. Trying to figure out the perfect time to invest is difficult to say the least. Hopefully, you have watched the market and seen how erratically it can be. By dollar cost averaging you will have peace of mind and not have to stay up at night if you did not get in at the exact right time. Or if you invest in increments that will help your cause as well.

Thursday, May 25, 2006

Growth versus Value

Growth stocks and value stocks differ in many ways and investing in both can be a method of further diversifying your portfolio. Growth companies typically take profits and put them back in the company. They also often have high P/E ratios. They are companies that are making an effort to grow and be more prosporous. Now value stocks are not the opposite of growth, but they are different. They have a lower P/E ratio and often give out dividends to investors. These characteristics also go for mutual funds. And there is even mutual funds that are Blends which "blend" growth and value stocks into their portfolio.

So because these types of investments differ you can diversify your portfolio further. As your portfolio growths you can focus on these different categories of stocks and mutual funds to make your investments have a lower risk and better return.

Saving Money on Energy Costs

Energy costs in the home are one of the most neglected aspects of energy saving that you can do. People usually think of gasoline and driving less. While it is true that that will cut your costs and help the environment you can go even further by doing a check of your home to make it more energy efficient. Click here for some very good information on energy saving tips. By implementing these changes you will save more, energy and help the environment.

Wednesday, May 24, 2006

Retirement Investing versus Outside Retirement Investing

Retirement investing and investing outside of retirement are two different investment approaches. With retirement accounts like your 401ks, Roth IRA, traditional IRAs, Simple IRA, Keogh, etc. you need to look at the big picture and long-term in order to hit your retirement funding goals. Now investing an extra $5,000 you have to make a profit works a little bit different. You have to answer some questions about your goals before making investment decisions. With this money are your goals short-term or long-term? Is this mad money that you can speculate with? Will you need that $5,000 in the future for an upcoming expense? These answers will take you down different paths to investing that money. Open an account at an online discount brokerage firm if you do not already have one. Check their fees that go along with each type of transaction (Remember that if you are going to put this money in mutual funds go directly to that fund to invest so you can save some money). Decide if you want bonds, mutual funds, stocks, etc or a combination thereof. Remember it is always best to be diversified so if this is not mad money please diversify. If it is mad money you still need to be smart—just do not pick an investment because you think it will do well; pick one because you researched it and the signs point to it doing well.

Tuesday, May 23, 2006

Retirement Calculator

We have discussed the Rule of 72 in the past. Take 72 and divide it by the rate of interest of profits a security makes and you will know how long it takes to double. Now when thinking about retirement take calculators like www.bloomberg.com's to figure out your road to retirement. This is only a path to retirement, but you must stick to your plan to make the numbers in the retirement calculator a realtity.

The Benefits of Dollar Cost Averaging

The idea behind dollar cost averaging in investing for your portfolio is to buy using the same dollar amount of a stock or mutual fund (most likely mutual fund) at a regular interval. For example, you begin to invest in a certain mutual fund for your Roth IRA. The minimum initial investment in this mutual fund for a Roth IRA is $250. After reading the prospectus, filling out the necessary paperwork, signing it and enclosing a check for $250 your account is opened by the mutual fund on the 15th of the month. When you filled out your paperwork you instructed the fund to take out $250 from your savings account (see the forms for what bank information the mutual fund will need) on the 15th of each month thereafter. The benefit of investing the same dollar amount at the same time interval is that you will average out the highs and lows in the market and will not be prone to bad market timing.

Monday, May 22, 2006

EFT or Index Fund

EFTs are often less expensive to own than index funds, but the brokerage fees go along with EFTs so they are not always better. Here is how you can compare and decide:

  • If you dollar-cost average or invest in small amounts go with an INDEX FUND because brokerage fees on small amounts will eat up the EFT's savings
  • If you are investing a bonus, windfall or IRA rollover go with an EFT because transaction fees will impact your bottom line less
  • Make systematic withdrawals in retirement go with an INDEX FUND because the ETF transaction fees will eat up your returns
  • If you harvest tax losses go with an EFT because often mutual funds have redemption fees if held under a certain time limit

Diversification in Your Stock Portfolio

Whether you are investing for retirement or strictly to make money you need to be diversified. So if you are going to own individual stocks you need to make sure you have your bases covered in industry sectors.

Basic industries
Energy
Public utilities
Capital goods
Consumer durables
Consumer non-durables
Consumer services
Finance
Health care
Technology
Transportation

To be minimally diversified with stocks you need to have at least 5 stocks and they must represent 5 different industry sectors. By doing this you will not be hurt as much if one sector becomes out of favor.

Sunday, May 21, 2006

Exchange Traded Funds (EFTs)

EFTs are a popular new way to invest in indexes. Unlike Index funds EFTs are not mutual funds and trade just like stocks do except they put all the stocks together that make up a certain index. They do not have the amount of expenses that a mutual fund has. Click here for an article detailing advantages and disadvantages of ETFs v. index funds.

Index Funds

Index funds mimic a certain market average, e.g. the S&P 500 or the NASDAQ. If you cannot find mutual funds that have low expenses, fees and taxes and your main desire is to have less overall expenses index funds are a great option. Almost all index funds will have expense ratios below 0.50% and other might be as low as 0.10%. There are less tax issues as well becuase they are passively managed and rarely have trades. If you want to outperform an index then you will need to look at funds that are actively managed.

Mutual Fund Fees and Taxes

If you own mutual funds as a straight investment (not in a retirement account) you need to watch out for fees and taxes because they can really lower the overall performance of your mutual fund. As discussed before you want to avoid any fund with a load on it. In today's mutual funds there is no reason to pay a fron or back load on any mutual fund because there are thousands of good/great no load mutual funds available.

Next look out for the expense ratio. Rarely should you ever consider a mutual fund with an expense ratio over 1.5%. Depending on the difficulty of the type of investing the mutual fund does the higher that fee will be. Sometimes big mutual funds might be your best bet here because they often will typically have lower expense ratios because they are huge companies and it costs them less to run their mutual fund.
12b-1 fees can exist as well so look at your mutual fund prospectus to find out if they are applicable.
Capital gains occur when the fund manager sells any stock in the portfolio for a gain. This can be offset by any losses during that same year. So look at how actively the fund is traded (turnover).

Using Bonds to Diversify

We have spoke many times of the importance of diversification when investing. Adding bonds to your portfolio can help lower risk without sacrificing return. For example, if you had a portfolio of 50% stocks and 50% cash. By adding bonds to this particular portfolio so you have 35% stocks, 16% cash and 49% bonds over a long time horizon will give you a better risk and return trade off because you will have the same performance with a lower level of risk.

Using Home Equity to Finance a Small Business

Small business owner who take out a home equity loan to get cash are elligible for a tax deduction on the interest of that loan. However, if you have a pass-through entity business (LLC, LLP, S Corporation, sole proprietorship) the interest is fully deductible as a business expense. This works for the owner very well and saves more on taxes than taking the deduction on a Schedule A.

To do this you must deduct the interest on your appropriate tax schedule. Schedule C for sole proprietorships and one-member LLCs, Schedule E for partnerships, S Corporations, and multi-member LLCs and LLPs.

There are many benefits to doing this, but ask a tax planner/accountant for more information so you can successfully prepare this for your 2006 taxes.

Saturday, May 20, 2006

Students Loans

If you have a recent college graduate or have a student loan yourself remember that July 1 (you must have your paperwork in by June 30) is the day rates are re-set and many predict it will be at least 2%. Currently, variable interest rates on the Stafford Loan are 4.7% during the in-school and grace periods and 5.30% during repayment.
If all the loans you have are from a single lender, by law you must apply first with that lender. If not, then if that single lender denies your application to consolidate, you can look around for the best deal. Look up your borrower's profile at the Department of Education's National Student Loan Data System.
By acting before June 30th you could save thousands of dollars in interest.

Investing in a Bear Market

The last few days the stock market has taken a hit, although it did recover a little on Friday. This is happening because people on Wall Street are concerned that the Federal Reserve will continue to hike up the Fed Funds Rate which many believe will grind the U.S. economy to a halt. Now if you were diversifed in your holding before the down trend this week you are probably doing o.k. despite the volitility. As discussed before market timing is difficult and you never know if this is the beginning of a long bear market or not. But you can still invest wisely in a down stock market. You need to do some research and find companies that have had positive earning reports (a financial statement that gives operating results for a specific period) recently and have been hit the hardest by this downtrend in the stock market. If they are a best in brand (best company in their sector) this might be an opportune time to invest because the price currently does not reflect the true value of the stock.

Friday, May 19, 2006

More on the Market Timing

Yesterday was a great example of why market timing can hurt if you do not invest increments. If you would have jumped into the stock market on Wednesday after it went down almost 2%. Thursday it was down approximately 0.7% so by investing in increments you would serve yourself well. Now few people really know what the stock market will do today, but if it goes down again your strategy of investing in increments will work out of great. So it is essential to understand that nobody can time the market--no one is that smart--so do not get too confident in your market timing ability.

Thursday, May 18, 2006

Marketing Timing

As stated before market timing is not a great way to invest typically. However, when there has been some bad days on Wall Street the last several market days it can be a prime time to take advantage. Now is the time to look for companies that are best in brand (they are the best companies in their sector of business, e.g. the best healthcare stock) and undervalued--they have been pulled down with the market in general. If you have been tracking a stock and see it is way down and you do not think it should be now may be the time to invest. Remember to invest in increments and not all at once!

Wednesday, May 17, 2006

Money Problems: Payday Loans, Pawn Shops and Credit Card Cash Advances

Sometimes we have money probels, but you need to avoid some avenues at all cost.

  1. Payday loans
  2. Pawn shops
  3. Credit Card Cash Advances
These are just 3 and they can put you in even worse money problems.
  • Payday loans are companies that loan you money so you have enough money until the payday at your job. Surely it is convenient, but they charge loan shark rates.
  • Pawn shops are seedy, but that is not you biggest problem. You are selling things that might be meaningful to you and hoping that you can buy it back before they sell it.
  • Cash advanced from credit cards can dwarf the amount of money you are paying in interest on things you bought. Cash advance rates add up fast.

Tuesday, May 16, 2006

Buying Mutual Funds

As discussed before there are literally thousands of choices when buying a mutual fund. (Remember that your portfolio needs to be diversified)

So if you think you should buy mutual funds through your broker or on your online brokerage house weigh this information first. Your broker will probably point you towards funds that his firm has a relationship with and probably there will be a front or back load charge on it. Do you want to pay 4-8% if you do not have to? Especially when it might not be in your best interest?

Many also consider their online brokerage house--not a bad idea if you are poorly organized and do not want statements from many different funds. However, purchasing a mutual is not free when doing it on your online brokerage account. Let's say the fee is $20 for a transaction. You invest $1,000--right off the bat you are down 2%. Now you find out it is not a good fund 6 months later because it is down 10%=$882. Instead of losing 10% you now are selling(another $20 transaction fee) and that equals $862 and you are -13.8% instead of -10%. If you are investing thousands and thousands of dollars then these fees are not as prominent. However, if you are a small investor these fees can hurt your portfolio in the long run.

So if you do not mind the extra paperwork, purchase your mutual funds directly through the mutual fund--there are no transaction costs unless you hold it for a short period of time (Redemption fee if owned under 1 month usually).

Monday, May 15, 2006

Monthly Budgeting

Have you been keeping track of where your money is going? If not a couple weeks ago I a=gave explicit examples of how to keep a budget in Excel--please refer to here.

You might think you do not need to budget or that it is too much work, but I think you will be surprised and happy with your results once you do it. If you keep alll your receipts from every financial transaction you do you will notice trewns, pork, and behavior that needs modification. If you buy a coffee each day before work at Starbucks and spend $3.50. Imagine after approximately 250 work days in a year how much that will cost ($875.00). the same goes for eating out each day at work. let's say you spend $9 a day for lunch and there are 250 work days. that is $2,250. Now you might be a very busy person and it is necessary for you to eat out each day at work. That is fine, but maybe then you could go 2 times a week to Starbucks instead of 5--there other 3 days you drink the office coffee--now you spend $350 on coffee. $525 is a carpayment or 2 depending on how nice a car you have. It is something to consider.

Sunday, May 14, 2006

Jim Cramer's Bad Speculator Traits

Jim Cramer's Bad Speculator Traits
  1. They sell when the stock goes down.
  2. They hold on when a stock plumets
  3. They sell too soon
  4. They buy worst of breed stocks
  5. They believe the hype on a stock
  6. They speculate on takeovers
  7. They forget to sell into strength
  8. They aren't patient
  9. They do amateur daytrading
  10. The shy away from stocks they have not heard of


Jim Cramer's Commandments for Mad Money Investing

Jim Cramer's Commandments for Mad Money Investing
  1. Always buy in small increments
  2. Don't be afraid to chase momentum
  3. Don't forget to sell
  • Cramer believes, as many do, that you should always buy in increments because of market timing issues. You can never always be right.
  • Momentum is the key to making mad money. Of course, you would like to get in before the momentum begins, but you can still profit by riding the wave.
  • "Pigs get slaughtered," is one of Cramer's saying. Meaning, do not be greedy. Once you have made a good profit take some money off the table. If you do not you can easily lose that money you just gained.

Saturday, May 13, 2006

Student Loans

If yuou watched 60 Minutes last Sunday you saw an expose on Sallie Mae. Sallie Mae was created as a government sponsered entity in 1972. From 1997-2004 they began privatizing, and this fact makes it an attractive stock to purchase because the loans are still guaranteed by the government even thought they are now private. The piece details some people who have not made their payments and now their college loans to Sallie Mae have doubled in just a few years.

When getting loans for college it is probably best to focus on governmental organizations that are Direct Loans. Going to other companies like Sallie Mae can cause serious financial problems for you if you are unable to pay back the loan immediately. Direct Loans are at better loan rates and somewhat more forgiving.

Mutual Funds

A mutual fund's value to you is a tricky question. You can examine its expense ratio and see how much the mutual fund will cost you per year. Also, you need to benchmark your mutual fund against something like the S&P 500 (benchmarks will differ with the type of mutual fund you own). Index fund that are basically the benchmark can be wise investments because their performance is linked to whatever the benchmark is along with the fact they have low expense ratios. Now there are many mutual funds that trade more actively and make an effort to beat their benchmark. Let's say you own a large-cap mutual fund that is actively traded and the expense ration is 1.00%. Its performance is almost the same as the index fund that has an expense ration of 0.20%. Are those 80 basis points in expenses worth the return you get from the actively traded fund? That is what you have to decide.

Friday, May 12, 2006

Stock Market Timing

If you follow the stock market at all you will have noticed that today and yesterday have been awful days for the market (S&P 500 index). As a note: Pay more attention to the S&P 500 index than the Dow Jones index. The S&P 500 is a broader index than the Dow Jones and is more representative of the market in general than the Dow.

As we have mentioned before it is difficult to impossible to time the market. However, if you strongly believe this is an aberration and that the U.S. economy is healthy as is the stock market then this trough is your opportunity. But beware because when Bears (A down trending market) like this come up many investors panic and dump stocks. Therefore, you must weigh the risks and rewards of investing at times like these.

Thursday, May 11, 2006

Mutual Funds

Finding a mutual fund can seem like a daunting task when you have little knowledge of where to start. This is why many go to a financial advisor in order to get some help many the right decisions. These decisions are important, but you are very capable of doing this yourself and saving a lot of money at the same time.
Think about what type of mutual fund you want to invest. Keep in mind that you need to diversify your investments so not all your eggs are in one basket. Then go to a website like smartmoney.com to the Fund Finder tab. Here you can drill down in 4 categories:
  1. Fund Classicfication
  2. Return Time (The longer the track record of success the better. Avoid very short time frames in your search).
  3. Fund Family (Not important who you buy from--just make sure it is a no-load fund)
  4. Minimal Initial Purchase
Now you will see historical return rates--DO NOT BASE YOUR DECISION SOLELY ON RETURN--and Lipper Leaders. Sift through the funds and look at their risk, expense ratio, if it is no load, rank, etc. You can find out how much it will cost you to invest in this fund compared to others. Is the risk worth the return? Does it have a consistent track record or does it fluctuate. The more you read the more you learn and then you can make a decision you will be confident in.

Wednesday, May 10, 2006

Roth IRAs for Minors?

Traditional IRAs usually are not very useful for a minor to take part in because there is often little tax advantage. However, Roth IRA for a minor can be very useful. There's no minimum age to set up a Roth IRA, and many IRA providers will accept accounts for minors, but some will not. Therefore, if you are interested in starting a Roth IRA for minor find out if the provider you want to use offers this service (go directly to mutual funds because they often allow minors to hold Roth IRAs with them).

Think compounding interest.

The child or the parent can contribute to this Roth IRA for the minor. Remember if it is in the child's Roth IRA account once the minor is no longer a minor he or she can do whatever they choose with that money.

The major impediment to Roth IRAs for children is the earned income requirement.
Your child has to have the kind of income that would call for a tax payment if the amount were large enough.
Example: Your child makes $3,000 at Wal-Mart during the summer. No tax is due on this $3,000 and the sole purpose to file an income tax return is to get a refund of possible withholding. However, the minor can invest in a Roth IRA because the earnings are taxable compensation income.

Consider the pros and cons for starting a Roth IRA for a minor. Teaching a child about finance and saving is always a great idea so they can be financially knowledgeable when they are on their own.

Tuesday, May 09, 2006

Budgeting to Buy a House

When purchasing a home most people focus on the mortgage payment they have to make each month. However, many overlook the cost of property taxes, impact fees, association fees (if you are buying a condo), and closing costs. You need to look into the costs of these things or if they apply to what you are buying. Overlooking these costs in addition to other costs related to buying a home can put you at a major disadvantage at the beginning of your homeowning experience.

Look into these fees and make sure that if you are responsible for paying them that you have the money to pay them.

Monday, May 08, 2006

Buying Gold

Buying gold historically is not the best of ideas, however, many in the years since 9/11 have cleaned up on gold. Betting on gold is betting on instability. The more unstable the world is the more money people will put into gold. Gold is a very difficult commodity to predict and making money on it is not easy. But if you are interested below are some important links.

Click here and for more information on buying gold
Click here for historical gold prices

Sunday, May 07, 2006

Suze Orman on Financial Issues

If you want to learn important financial information Suze Orman is a great resource. She has written several books, does seminars, appears on Oprah, and has her own financial show on CNBC on Saturday evenings. Her no nonsense point of view about relationships and money is valuable beyond measurement. She lays it on line on what you should do and what you should never do. She is on your side when it comes to finance and you can trust her advice and use it to make your life more financially safe and sound.

Saturday, May 06, 2006

Withdrawal Cash from your Bank Account

If you are sick and tired of paying fees to withdraw cash from an ATM there are ways around it.

  1. When you buy groceries at a supermarket get cash back--it's free and you can get up to $100 sometimes.
  2. Only withdrawal cash from you bank's ATM
  3. Find a bank that allows free ATM withdrawals from any ATM

Friday, May 05, 2006

Buying a Home

Interest rates are rising and the home market seems to be slowing down after several years of growth. While it is true you should see you home as an investment you should not get too caught up with marketing timing on whether or when to buy a home. As with stocks it is difficult to impossible to time the market for when it will be best to buy or sell. Just focus on yourself and whether you are ready to take on the responsibility of a mortgage and home financially and mentally. If you can definitely afford a home then you should buy one. The value of it could go way up or way down--there is no way to predict. But you have to look at it as your home first and an investment second.
If you buy a place that you like and that you can see yourself staying a quite a while the market could go up or down or both many times before you even consider selling it.
  • It would be great to wait for the possible home market bubble and purchase then, but what if it does not happen or at least not in the area you want to live? You sat on the sidelines when you could have gotten a better deal.
  • Lower prices might also bring on higher interest rates so you might get a better price on a home, but you possibly could be paying the same amount of mortagage on it because rates are higher
Just some food for thought on house buying and selling.

Thursday, May 04, 2006

401k Tips When Switching Jobs

There are a few options of what to do with your 401k when leaving a job.

1. Roll-over your 401k into an IRA
  • If you want to consolidate accounts and possibly save money on fees
  • It must be rolled over into an IRA (not Roth--but later can be converted to Roth is your adjusted gross income is less than $100,000)
2. Remain with the 401k at your work
  • If your old employer has a good 401k plan with good, low-cost investment choices
  • If your new employer does not have a 401k plan or has a worse plan than the job you are leaving
  • Confirm that you still have the same 401k previledges as when you were employed with your old employer
    • If the value of your 401k is under $5,000 you can be taken out of the 401k--if so then follow option 1 or 3
3. Roll-over to my new employer's 401k
  • If your new employer has a great 401k plan with good services
    • You will probably pay less in fees with this 401k than rolling it an IRA

More Mortgage Loans

Per yesterday's conversation on mortgage some untraditional mortgage loan options do not always end up well. They serve a purpose, but usually you have to sell your property within 5 years. After 5-10 years things can change dramatically.

For example, an Interest Only loan option can hurt you financially because with this option you are paying no principle on the loan--just interest. So after five years you will begin to have to pay back your loan, but now only have 25 years to do it. A piggy back loan can hurt you financially as well because the second loan is often connected to the prime rate. So if the prime rate rises so does the interest on your second mortgage. Sometimes your second mortgage can be set up so you pay interest only. This can be disasterous when the period of interest only is over. A balloon payment comes due and all of the sudden you owe a lot of money.

So watch out for mortgage brokers and lenders.

Wednesday, May 03, 2006

Mortgage Loans

Be aware that mortgage brokers are not looking out for your best interests. The simply broker a deal between you and a lender and they want you to sign on so they can get their cut. This along with low-interest rates combined with a pool of buyers that do not have 20% to put down as a down payment can equal trouble.

People see these low interest rates and want to jump on the housebuying wagon even though they do not have the 20% typically needed to put down. Brokers will offer piggy back loans or even no money down loans. These loans do not always have happy endings . . .

Tuesday, May 02, 2006

Saving Money to Buy a Home

If you are considering buying a home or you are currently in the market for one it is important to have money to put down as a down payment. While the fad today is to not put down 20% as a down payment for a home, this is not recommended (we will explore this topic in a future post).

Whatever amount you have saved up to put as a down payment you NEED to protect.
  • Do not invest money for a home in the stock market
  • Only keep your money in a safe account with guaranteed interest
    • Ingdirect.com is one example of an account that brings in 4% interest
You plan on purchasing a home with your $25,000 in savings as a down payment. Your $25,000 is in stocks, mutual funds, options or whatever investment that contains risk there is a large probability that these investments could decrease. Look at 9/11, the market downturn in March of 2000, and several other examples. Your $25,000 could become $15,000 very quickly.

Rule of thumb: If you plan to buy a home within 5 years do not invest that money in investments that contain risk.

Monday, May 01, 2006

Financial Advice

When deciding to invest in some sort of security, remember: Buyer Beware. If someone is selling a hot tip on a stock or trying to get your portfolio under their command always think about the other person's agenda. It sounds simple, but when investors have little or no knowledge about something they will more often be persuaded into investing in something. The consumer lacks knowledge and the seller has all the knowledge and the seller throws out some impressive statistics about a stock, but you may not know exactly what those stats mean.

You can get that feeling going to an expert in any field. Let's say you need a mechanic and you go to one and they tell you the fuel line is messed up. Well you have no idea what the fuel pump looks like, does or how much it will cost to fix. You get a funny feeling, but you have no way to confirm that the mechanic is telling you the truth. Lawyers are similar. Very few people have legal knowledge to know what to do in a specific legal situation. But you have to put a lot of trust in your lawyer that they are looking out for what is best for you. In any field there will be you crooks and angels.

The difference with investing is that you can teach yourself the basics and that will help you in the long run so you do need little to no investing advice. If you get a funny feeling, do not go forward with an investment. Do not do it because you are afraid to raise questions. It is your money and investment advisors are often looking out for themselves, not you.