Framework agreement on middle class tax cuts and unemployment insurance - Investment News

Here is a nice overview of yesterday's tax compromise:

Framework agreement on middle class tax cuts and unemployment insurance - Investment News

You can copy and paste this in your browser.

Be Prosperous!

Peggy

Fiduciary Standard Update

Copy and paste this link for information about the SEC's study of the fiduciary standard:
http://www.investmentnews.com/article/20101006/FREE/101009911

Be prosperous!
Peggy

Long Term Care

I recommend that you decide now how you will pay for your care when you are older/in poor health. The expenses can be overwhelming. (I know this from a situation that I am currently experiencing.) The risk of long-term care insurance is that you never use it. Further, sometimes you don't qualify. However, if you do, those estimates that they give you about the cost of the policy versus the cost of the care are likely true. It truly is a situation where you spend a little to save a lot. In full disclosure, I do sell long-term care insurance; however, that is not the reason for my post. I don't care where you buy the policy. I'm just watching a life savings evaporate before my eyes, and there is nothing I can do about it.

Just something to think about......

Be Prosperous!
Peggy

GO OU!

Today's blog has nothing to do with the stock market, the economic data, or the jobless numbers that came in today better than expected. (Okay, just a little bit about money issues. If we can continue to see jobless numbers improve, we will see an increase in consumer sentiment, which should lead to additional hiring.)

Instead, I want to offer good luck to my Alma Mater, The University of Oklahoma, as we begin our football season tomorrow! Boomer Sooner. (Please don't choke on the important games this year!)

Be Prosperous and Win!!

Peggy

Tax planning for 2010

If you anticipate owing taxes in 2010, you can eliminate IRS penalties by having the amount of tax that you owe taken out of your next several paychecks. The IRS counts the money as though it were evenly paid in during the year. This way, even if you forgot (or avoided) Q1 or Q2 estimated tax payments, you can still keep the tax man happy without having to give him ALL of your December check. Talk to your HR department on how to change the amount of tax withheld in your check.

Be Prosperous!

Peggy

All Financial Advisers Should Act as Fiduciaries 2

This is just a reminder to review my post from August 19 on the need to contact the SEC to share your opinion about financial advisers holding a fiduciary standard. Please take the time to go to the SEC site! The comment period ends August 30, and those who believe the standard shouldn't apply are fighting hard!

Be Prosperous!

Peggy

All Financial Advisers Should Act as Fiduciaries

As you know, I am a huge fan of the section of the financial reform bill that calls for studying the effects of two standards of care for financial clients: fiduciary status and suitability. I believe ALL financial advisers should act as fiduciaries, placing their clients best interests ahead of the adviser's best interests. The brokerage community is levelling an attack at the single standard policy, and the SEC is going to conduct a study on whether or not the two standards should be replaced with the single fiduciary standard.

If you agree with me, please retype the SEC link I have provided, and share your opinions. If you want to include a letter, I have written a "boiler plate" letter that you can cut and paste, personalize, and attach on the SEC's website. Just sign your own name, or feel free to make any changes to the letter.

www.sec.gov/cgi-bin/ruling-comments?ruling=4-606&rule_path=/comments/4-606&file_num=4-606&action=Show_Form&title=Study%20Regarding%20Obligations%20of%20Brokers%2C%20Dealers%2C%20and%20Investment%20Advisers"

Here is a sample letter for you:


RE: File No: 4-606
Dear Ms. Murphy:
I am a client of a financial adviser who holds a fiduciary standard. I believe that all who hold themselves to be part of the financial services industry should act as a fiduciary. It is unfair to consumers that the quality of advice they receive from a financial professional is dependent on the professional’s registration or title. It’s no wonder consumers are confused, and do not know whether their financial professional is looking out for their best interests.
I recognize and understand that the advice that my financial professional gives me is in my best interest because their loyalty is to me first; they advise me with utmost good faith; they manage any conflicts of interest that may harm me and disclose those conflicts to me; they are paid for the advice they give me and the investments they select for me; and they are required to choose from the best investments available, keeping my interests first. The fee or commission model does not impact whether or not a financial adviser can act as a fiduciary, as products in either compensation model can hold a fiduciary standard.
As a fiduciary, my adviser can choose to operate in a business model that is best for me. The key is fully disclosing, and avoiding and fairly managing conflicts of interest. Providing financial advice with fiduciary accountability does not reduce services to middle Americans. It insures that the services consumers receive will be in their best interests -- not in the best interests of the financial intermediary or his or her company.
I urge you to recommend to Congress that it is necessary and appropriate in the public interest and for the protection of consumers to extend the fiduciary standard to broker-dealers, who provide personalized investment advice, and to initiate a rulemaking to achieve this long overdue consumer reform.
Sincerely,
**Your name here**

Recommended Reading

I'm about half finished with Financial Serial Killers by Ajamie and Kelly (2010). Not only does it provide interesting information about scandals you would expect (like Madoff), but it shows other financial practices where brokers and financial consultants weren't acting in the best interest of their clients.

Those of you who are my clients or read my publications regularly know my concern that financial advisors ALWAYS act as fiduciaries to their clients. I hope the SEC study leads to this change of law, and if it doesn't, I hope it sheds enough light on the issue to bring about consumer-driven change.

The book is an easy read and good for individual investors/clients/anyone considering working with a financial professional. Check it out!

Be Prosperous!
Peggy

Staying Cool When Technologically Impaired

Okay, that didn't work. Here is a copy of the url for the article in the Chronicle. Please cut and paste it in your browser.

http://www.theccchronicle.com/category/helpful-advice/

"Staying Cool"

Here is a link to the article on dealing with volatile markets that I just published in "The Cleveland County Chronicle."

Funny Video

Check out this YouTube video on how the stock market won't go to zero! Created by a CFP(r) practitioner, it's got some great advice.

http://www.youtube.com/watch?v=C3GtxtWSZxE

Be prosperous!

Peggy

Greece is the Word

First, I want to apologize for my complete failure at providing 365 posts this year! The good news is I finished the second half of my capstone, and barring any need for revisions, am also finished with my Masters in Financial Analysis degree! Hooray!!!

Second, I want to take a couple of columns and discuss what's been going on in the markets of late. I think we have had a lot of simultaneous events that have spooked people (but the end of the story is I think things will be all right). Now, I don't usually prognosticate market movements in writing, so PLEASE be aware that this is just my opinion, and I'm probably wrong. This isn't investment advice, so you can't get mad if this doesn't work. : )

First, the sovereign debt crisis in southern and southeast Europe (specifically Greece, Spain, Portugal, etc.) has caused great panic that entire systems are about to fail again. It's sort of like worrying that one of our states might go bankrupt, and then what would happen? Basically, Greece announced that owed too much money and didn't know how to pay it back. Over the next six weeks, other European countries (mostly Germany) loaned money, and Greece went on an austerity program that led to rioting in the streets but more stability in the financial markets.


Nevertheless, as this story broke in early May, the markets began to roil and even today, some commentators are quick to say we are about to return to 2008's decline. I would like to give you one sign that suggests to me that we are not. LIBOR is the rate at which banks loan money to each other, typically overnight. Usually, it is an incredibly low rate of interest because banks trust each other. However, in 2008 LIBOR rates went through the roof. Banks didn't trust each other enough to want to lend each other money, even for a day. I believe that if the debt crisis in Europe was really the beginning of a massive credit crisis, we would see LIBOR rates spiking again. Instead, LIBOR declined during the month of June.

Certainly, we're not out of the woods yet, but I don't think it's time to panic either.

Be Prosperous!
Peggy

Back from Indianapolis

I'm back from a quick weekend trip to Indianapolis, where I taught a one-day Investment Planning review for CFP candidates. Indianapolis is a great town, but I learned that when visiting in the future, I should rent a car. The taxi service reminds me of Oklahoma City! Nevertheless, I found the students bright, articulate, and fun--even on a Saturday. They will be an asset to the financial planning profession.
Be Prosperous!
Peggy

Whassup with the Market?

I usually don't talk at great length about current stock market conditions, as I am not in the business of writing a "stock picking" blog. However, the current conditions suggest a few observations might be in order:
1. Why is this happening? I believe that the US market decline is absolutely a result of the European debt crisis with Greece and other nations.
2. What do currencies have to do with it? Currency movements have a funny effect on the stock market. Usually, a weak currency suggests better trading opportunities for the country, and the stock market improves. Of course, when the currency decline is due to a shock to the system, like what is happening to the Euro over Greece, the rapid decline leads to a drop in the stock market. Unfortunately, as the Euro declines right now, for any reason, the US Dollar is getting stronger. This causes less favorable trading conditions for the US, and causes the stock market to suffer somewhat. Add to that the additional shock of the European debt crisis on the heels of our 2008 debt debacle, and the US stock market is not happy right now.
Why is oil dropping? It ties back to currencies again. Due to the European crisis, the American dollar is strengthening against all the world currencies, including (wait for it) the Australian Dollar. The poor Aussies down under are caught up in a mess that really isn't their fault! There is a high correlation between the price of oil and the price of the Australian dollar, so as the Aussie dollar falls, so does the price of oil. This will likely continue until the Aussie dollar can strengthen, or the US dollar weakens a little. Talk about complicated!!!!!
What do we do now? I will not tell you what to do. I will tell you that this market has my full and undivided attention. I'm really trying to weigh all of the positive news out of US earnings and improving economic data against this European crisis. It's a close balance, and I haven't fully decided yet......
Be prosperous (in spite of this)!
Peggy

Home Repair Concerns

I live in Oklahoma, and houses near mine were badly damaged in last Monday's tornado outbreak. We were lucky--we lost a few shingles, a fence, and a mammoth tree ripped out by its roots. As we were standing outside not half an hour after the tornado, a guy in a pickup truck pulls up saying he could see the tree damage, and would we like to have him remove it. I said no, but my husband said, "What would it cost?" He tells us that for $1200, he will cut it up and drag it to the curb for the city to remove. We tell him we will think about it. He reminded us that he was a neighbor, just living a few streets over. I really wish I had thought to ask the address, as I don't actually believe it. By midweek, we had arranged to have the tree cut up and taken away for $500.

The first offer of "help" was by no means the last, and we were harassed for 48 hours by people we didn't know representing companies we had never heard of. Replace the roof, fix the roof, replace the fence, fix the fence, and my personal favorite--the young kid who showed up in 98 degree weather in black slacks, long-sleeved black shirt, and a black suede vest with a fleur de lis on the back. He offered to act as my "personal representative," and negotiate with the insurance company, the contractors, and even attorneys if necessary. He had asked my husband to sign a blank contract earlier in the day, and my husband said he deferred to me. This old boy was waiting for me on my driveway when I pulled up after work and started talking fast. I told him I understood my insurance policy and didn't need his help. When he pushed, I told him I was a financial planner, and REALLY didn't need his help. I guess I looked like I meant it because he got in his truck and drove away.

Your takeaway from this: Even when there has been a disaster, try to work with people you know. If you don't have a roofer chosen already, then talk to your friends, and use someone that already has a personal tie to someone you know. I'm not saying these guys weren't all honest, but it felt like I had landed at the midway in the carnival. When all I wanted to do was get my life back together, I had to fend them off. I noticed they were especially pushy with older people living on the street. Say no. If they don't leave, say no again, or walk inside. You're not being rude; you're protecting yourself.

Be prosperous!
Peggy

Am I Crazy Or What?

Thanks to all who gave me encouraging words on my goal of finishing my master's degree in financial analysis. (BTW, the first half of the capstone isn't quite done, but it's really, really close.) I'd like to explain to you why I'm doing this. I've been in college a long time, ultimately earning a Ph.D. in curriculum development in 1998. I've been a junior high English teacher, a university freshman composition instructor, and a corporate trainer. I entered the financial world in 2002, after a horrific experience when a broker lost much of my mother's IRA because she was not diversified out of technology during the dot.com bubble burst. I have worked since that time to increase my level of competency. Even though I was legal to "do business" after taking my Series 65 exam in 2003, I didn't believe I possessed the skill set necessary to really do the best job that I wanted to do. That's why I began by completing my CERTIFIED FINANCIAL PLANNER(TM) practitioner status, passing the 10-hour exam in March of 2005. However, I still felt uneasy with my skill set in portfolio management, so in August of 2007, I began working toward a master's in financial analysis. I will graduate this summer.
Now, I will admit that some of what I have learned I am not likely to use in my practice, but nearly everything I have learned has been in the media in one way or another. After the financial meltdown of 2007, complicated financial concepts and products have received national attention. At least I can explain what that means to my clients.
To me, this is what being a fiduciary means. I believe it is my duty to go the extra mile if it might help my clients. I'm extreme in this, I know, but I really believe it matters. I've given an additional four years of education toward it, after my Ph.D. I encourage you to work with a financial advisor who is willing to go the extra mile. I'm not the only one--I know several personally. It isn't a requirement to be legal in the field, but I believe it's the least we can do.
Be Prosperous!
Peggy

Apologies

I have been the world's worst blogger this week. As some of you may know, I am completing a Master's in Financial Analysis. I've finished my coursework, and now I'm working on the capstone. It takes a lot of time, and it's been a primary focus for me recently. I'm sorry--I'll try to provide you with something interesting next week!

Be Prosperous!
Peggy

Help Me Make This Better!

I'm one quarter finished with the 2010 blog, and I have been excited with the feedback I get from readers on Facebook, Twitter, and the blog, itself. However, I really want this blog to help you meet your financial goals and dreams for the "sort of" New Year! Please respond to any post you find helpful, and also let me know if I need to provide more information about a subject. Tell me if I left anything out, or if I didn't explain the background enough.

I have discovered that five blogs a week are more than I can keep manage! The goal for the rest of the year will be 2-3 per week. Should something propel me to national acclaim, maybe I can write more, and my staff can pick up the extra work!! Until that happens, two - three times a week keeps me busy.

Thanks for all your support, and I look forward to hearing from you!

Be prosperous!
Peggy

Financial Reform Limits

I was extremely disappointed that the financial reform bill dropped the mandatory fiduciary standard. Many leading minds, including Vanguard founder Jack Bogle, wanted the bill to include language that required all financial advisors (individuals who help clients with their portfolios) to act as a fiduciary. This means that they must always act in the client’s best interest. Investment Advisors, like my firm, already must hold this standard; however, the brokerage industry does not. This means that a stock broker does not have to uphold a fiduciary standard. Instead, he or she must maintain a “suitability” standard, which means that the investment choices must be suitable, but don’t have to be the “best” choice in the mind of the broker. I find this fact both amazing and appalling. I had no idea when I entered the industry that there were two standards!

Now, some brokers choose to act as fiduciaries, but it isn’t a mandate. And acting as a fiduciary doesn’t mean that I am not compensated for my work. If I went out of business, I believe it would not be in the best interest of my clients! But my fiduciary standard means that I am always trying to take care of my clients, keeping their expenses lower without sacrificing quality, and helping them maximize returns in their level of risk. Further, I try to provide financial planning, that ensures all areas of their financial lives have attention. Our industry needs fiduciary reform.

Be Prosperous!
Peggy

Life Insurance and Estate Tax

A good use of life insurance is to help lessen the impact of estate tax. This column begins with a disclaimer that the information I'm going to provide is an overview, and you absolutely MUST speak with an attorney for details and to see if this strategy would work for you.

First, the best estate planning possible should make use of as much estate tax credit for both the husband and the wife through the use of irrevocable trusts and maybe lifetime gifting. We'll talk more about these topics later. Once the estate has been lowered as much as possible, the owner of the estate sets up an irrevocable life insurance trust (ILIT). Then, the trust purchases life insurance itself, insuring the life of the estate owner. Since the trust is irrevocable, it isn't the property of the decedent (the person who dies), and as a result, the life insurance isn't included in the decedent's estate. Instead, the proceeds of the policy can be used to pay the remaining estate tax liability. Consult your attorney about the best ways to pay for the policy.

This is a complicated strategy, but sometimes, it's better than the decedent buying the policy himself. Why? Because in this situation, the life insurance is included in the decedent's estate, and as a result, the proceeds are also subject to additional estate tax. Remember that life insurance is usually exempt from income tax, but it isn't exempt from estate tax unless it's out of the estate. Further, the strategy often won't work well if an existing policy is placed in the trust. Usually, the trust needs to buy the policy, itself. Be careful with it, but an ILIT can often help pay estate tax liability in a cost-effective way.

Be Prosperous!
Peggy

Business Life Insurance

Suppose you are a small business partner, running your company with one other owner. It is likely that much of your net worth is tied up in your business, and if you died, much of your estate would involve assets of the company. If your family doesn't want to take over your roll, and they (rightly) want your share of the business value, what should your partner do? One of the easiest solutions is for both of you to purchase life insurance on each other at a value approximately equal to your share of the business. Then, when you die, your business partner receives the life insurance proceeds and pays it to your family. This is called a "cross purchase" agreement. If more than two of you own the business, buying a policy on everyone can be more complicated. In this case, it's more likely the business itself would purchase insurance on the lives of the owners, which could be used to pay each owner's business value to their families. This is called an "entity purchase" agreement. Many small businesses have had to close due to the death of one of the owners. Don't let your business become a statistic!

Be Prosperous!
Peggy

Life Insurance

Life insurance is designed to manage the risk associated with your death. For many people, life insurance helps provide funds for their families to pay off the house, pay for children's college educations, or provide income replacement. For others, it provides a way for a small business partner to have sufficient funds to "buy out" your half of the business if you die.

The two major types of life insurance are term insurance or whole life insurance. Term insurance is pure insurance that provides a benefit for a predetermined period of time (like twenty years). Term insurance is less expensive, but it is not permanent. If insurance is needed to pay off a liability with a definite end (like a mortgage), then term insurance can be an excellent choice. If, however, the risk has an uncertain time horizon or a certain loss (like a small business partner or estate tax), then permanent insurance is a more appropriate choice. The concept of "buying term and investing the difference" (with the idea that the investment can grow to meet the need) works at times, but be careful to do enough financial planning to determine that this is the best decision for you.

Again, I remind you that working with an insurance agent who is also a CERTIFIED FINANCIAL PLANNER (TM) pracitioner might help ensure that the person giving you advice looks at your finances holisitically, and not just as a sale.

Be prosperous!
Peggy

Managing Risk

I didn't call this column "Introduction to Insurance" for a reason. I believe that many times, with all of the complicated products available, people forget that the goal of insurance is to manage risk. I want to start with how we can control the risk in our lives.

We can AVOID it. We simply don't participate in those activities that lead to the risk. Of course, some risks cannot be avoided, so we must choose another strategy.

We can REDUCE it. We engage in the risky behavior less.

We RETAIN it. We simply live with the risk the event will happen.

We TRANSFER it. This is the purpose of insurance. We transfer the risk to the insurance company by paying them a small amount, so we can avoid a large gain.

Over the next few blogs, we will look at different kinds of insurance and choices we have in insurance products.

Be prosperous!
Peggy

The Cleveland County Chronicle is Changing Formats

Some of you may know that I write a column for The Cleveland County Chronicle, a local newspaper serving Cleveland County. Today I learned that the publication is becoming electronic. I would like to encourage you to check out the website, theccchronicle.com, and enjoy the hometown content. At first, I was disappointed that the "paper" wouldn't be paper anymore, but I realized that I get much of my news from the internet, and what I don't get there, I watch on cable television. I don't read papers either!

A problem of this transition involves some people's reluctance or fear of learning how to use the internet. I would like to challenge you to work with someone who still views themselves as computer illiterate, and teach them how to go online. Share your email address with them, and correspond until they feel comfortable on their own. Seniors can be particularly uncertain in using the technology, but the fear isn't limited in generations. Some of my senior clients love emailing grandchildren and checking out the latest pictures on Facebook! But you will do a great deed if you help someone make the transition.

Be Prosperous!
Peggy

Estate Taxes

If there is a confusing area of tax law it involves the current status and future changes in the Federal estate tax laws. For several years, the amount of an estate that was within the estate tax credit amount has been increasing. This means that you could have a bigger and bigger estate without owing any estate tax. This year (2010), there is no Federal estate tax for anyone. However, the shoe drops next year!

If you die next year, and your estate is greater than one million dollars, you will have estate tax liability. Your estate includes anything in your name or anything over which you can exert control. If you are married, it's likely that half the value of your house is included in this value.

It's expected that the law will change, raising the amount of the tax credit, and therefore, allowing you to leave a bigger estate without tax. However, it hasn't happened yet. It's very important to work the an attorney and a CERTIFIED FINANCIAL PLANNER(TM) practitioner to help you with your estate planning needs. If you might owe estate tax, it matters even more.

We'll talk more about your estate planning issues later this year!

Be prosperous!
Peggy

Census Scams

I heard this on the news tonight, and it seems worth sharing, as identity theft is a financial issue. Apparently, some enterprising scammers have created bogus census documents requesting Social Security numbers, bank accounts, and credit card numbers. The real census is a 10-question document that doesn't request personal financial information! I'm sure you know this, but it seems worth saying. Also, anyone taking census data door to door must have identification.

It's easier to be careful than fix damage!

Be prosperous!
Peggy

Putting the Client First

Did you know that by law, someone can call themselves a financial advisor and not have to uphold a fiduciary standard? What's a fiduciary standard, you ask. It means that they put the clients' best interest ahead of their own best interest. Now, the fiduciary standard allows the advisor to be paid, but it means that this payment needs to be within a fiduciary level of care.

The latest financial reform legislation originally required that everyone who worked with your money as a financial advisor had to follow fiduciary standards; however, due to heavy industry pressure, this language was dropped, and the current legislation does not require it.

In today's investment news, a dozen industry leaders, including Nobel prize winners, and Vanguard founder John Bogle, are asking that the fiduciary language be put back into the bill.

The language needs to be there. Clients believe it to be true that their advisor is always acting in their best interest, so the laws need to be changed to make it true. If you feel like being an activist, contact your senator asking him or her to support that the Fiduciary Statement language be added to the bill.

Tomorrow, we will review the different names and titles that financial advisors can use and what they mean.

Be prosperous!
Peggy

Procrastination

In short, don't do it! Today's thoughtful, data-filled blog isn't going occur because I am teaching a new class for the College for Financial Planning, and I need to read the module before I teach it! Always plan ahead.......
Be prosperous!
Peggy

Gifts and Taxes

Most of us don't really think about tax implications of gifts we want to give. However, the IRS has rules about how much money we can gift each year without reporting it, and how much we can gift over our lifetimes without owing gift tax. Let's review some of the highlights:

If you want to give someone a gift, you can give $13,000 in 2010 without having to file a gift tax return. If you and your legal spouse want to gift together, you can "gift split" and give $13,000 each to a person. (As an odd note, if you choose to split your gifts for one person, you must split all your gifts to everyone all year.) This allows you to give away $26,000 a year to someone (like a child or grandchild) and not have to report your gift. Many people use this as a chance to lower the value of an estate and potential liability for estate tax.

What if you give more than $13,000? Well, then you file a gift tax return. The value of your gifts begins to accumulate over time, and when you have eventually gifted over $1,000,000, you must pay gift tax. Remember that gift tax is always paid by the gifter, not the recipient. You don't owe any gift tax until your lifetime gifting exceeds a million dollars.

If you want more information about this, check out IRS Publication 950, available at www.irs.gov.

Be prosperous!
Peggy

Last Chance to Fund Your IRA

Quick blog tonight to remind you that April 15 is your last day to fund a traditional IRA or a Roth IRA for 2009. Even if you file for a tax extension, April 15 is still your deadline. Now, if you have a small business retirement plan or your employer has a small business retirement plan, the plan may be able to be funded as late as the business tax return is filed, including extensions. However, your traditional and Roth IRA funds are due in April. So if you need your last chance for a 2009 deduction, consider a traditional IRA if you are eligible. (Check earlier blogs to see if you can.)
Be prosperous!
Peggy

Income Tax Tips

Here are a few tips when you complete and submit your income taxes.
1. If you aren't going to be finished in time, file for an extension. You will owe interest, then, on any unpaid liability, but you won't owe penalties, as well.
2. Use a CPA or tax preparation software to help you avoid tax errors. If your return is complicated, the CPA may well save you more money than his or her fee, giving you a net profit.
3. If you choose to go it alone, get everything organized well in advance to help you when you actually begin completing the return.
4. If you calculate your own taxes or use software, proofread everything once you have entered it, just to avoid typos. The IRS knows what was reported, and they will check to make sure the numbers match.
5. Use the Internal Revenue Service website www.irs.gov to help you check regulations.
6. SIGN YOUR RETURN! It's a leading cause of audits!!!

Be prosperous!
Peggy

Capital Gain Tax

If you hold investments in a taxable account, you have to pay capital gains tax on them. If you just hold investments in an IRA, you don't pay capital gains each year. Instead, you will pay income tax when you take a distribution. Further, if you are currently in a very low tax bracket, you might not owe capital gains tax, but this rule is expected to change shortly, so don't count on it!

Capital gains tax has two different rates. If you hold an investment a year and a day, your rate currently is 15%. I have heard that in 2011, the rate may increase to 20%, which is still likely lower than your income tax rate. If you sell an investment in less than a year, you pay tax at your nominal income tax rate. This difference is one reason why long-term investment strategies might result in lower taxes.

Be prosperous!
Peggy

'Cause I'm the Tax Man!

As you know, April 15 is the deadline for filing your taxes (or an extension if you just can't make it). I thought today I'd define a few terms that are confusing. First, is your "nominal bracket." Well, this always makes me think that somehow, they want me to believe the bracket is low--that it's nominal. That's not what it means. We have a series of tax rates that increase as you earn more money. Everyone begins by paying the lowest income tax rate, until they earn more money than applies to that bracket. Then, they fill the next lowest bracket. They continue this process until they run out of money in a certain bracket. This bracket is called their "nominal bracket," and it's the highest bracket the person pays. Any additional dollar they earn will be taxed at this bracket, until eventually they might move to an even higher bracket. As a result, if you take your income and multiply it by your nominal bracket, you will get a tax liability much higher than you actually owe. The tax tables and income levels are available on irs.gov. (If I reproduced them here, you would all fall asleep!) We'll cover more terms tomorrow.

Be Prosperous!
Peggy

Differences can be Taxing

Sometimes, as I am talking with clients, I realize that there is great confusion over the different kinds of taxes that we pay. Tonight is a brief overview of tax classifications:

Sales Tax--the taxes we pay when we buy something

Income Tax--the taxes we pay on money we earned

Capital Gains Tax--the taxes we pay on passive income, or income we receive but don't actually do anything to earn. Examples of this are bank interest or gains on a mutual fund.

Transfer Tax--some of us will live our whole lives and never pay transfer tax, but it can still be a huge issue for those who owe it. Transfer tax is paid when large amounts of money are transferred from one person to another. Gift tax, paid by the person giving the gift, is one example. Estate tax is another example. A more rare type is generation skipping transfer tax, when a grandparent attempts to avoid gift tax by giving money directly to a grandchild, rather than giving it to the child, who would then give it to his child (causing it to be taxed twice).

April 15 is our deadline to pay income tax, and we'll talk more about that on Monday.

Enjoy the end of the Olympics, and Be Prosperous!
Peggy

Death and Taxes

Nothing is certain but the title of this blog, or so people say. Well, it's almost March, and tax day is a mere 45 + days away! I thought we'd talk about tax issues for awhile, hopefully giving you information before you have to file.

Tonight, I want to share my favorite tax research website with you, www.irs.gov. Yes, it's the same IRS you think it is, but the website is well organized, user friendly, and full of good, free information. The IRS publications are great, short books that provide information on different tax topics. Two of my favorites are publication 590, about IRAs and publication 560, about small business retirement plans. There is also a great small business page.

Other sources are available, but you want to be careful that they are accurate. Only trust sources that give you IRS references, like publications or code sections.

Be Prosperous!
Peggy

Tips to Remember for Retirement Savings

Sorry I haven't been here for a few days! Here is a list of tips to help you with your retirement savings.
1. Time is your best friend when investing. The longer the time you have, the less market volatility impacts you, if you are properly diversified.
2. Spend a little less discretionary that you won't remember in a week, and put it into a retirement account for your future. It's amazing how small contributions add up over time.
3. Learn what type of retirement plan is available at your job, and understand the rules around it. If you don't have a retirement plan, then use some version of an IRA to help you with your retirement savings.
4. If your boss "matches" your retirement account, then participate at least up to the level of the match. It's free money!
5. Try not to use your retirement money as a revolving door of available funds, or it won't be there when you need it!
Be prosperous!
Peggy

Uses for a penny

On a bit of a dare, I am providing a helpful "heloise-style" tip tonight. And this has something to do with money (sort of)!! If you're going on vacation (or leaving a freezer alone for awhile), begin by freezing a cup of water. Once it's frozen, put a penny on top of the ice. When you return to the freezer days later, check the status of your penny and cup. If the penny is still on top, you know that you didn't have a power outage while you were gone. If the penny has sunk to the bottom, you know the ice melted!

Be prosperous!

Peggy

IRA-based Plans

Two kinds of retirement plans are based around the individual retirement account (IRA). One is the SEP IRA, and the other is the SIMPLE IRA. They are both common in small businesses, and many of you don't have them. As a result, I'm not going to discuss many of the plan details except one very important fact.

When you work for a company as an employee (not an owner), you are allowed to let your retirement account grow until you actually retire, even if you are older than
70 1/2. However, if you have a SEP IRA or a SIMPLE IRA, you MUST begin taking required minimum distributions (RMDs) from them at age 70 1/2, like they were traditional IRAs, even if you are still working for the company. Be careful of this, as many people, and even some advisors, aren't aware of the law. Talk with your financial planner and make sure you are following the rules!

Be Prosperous!
Peggy

403(b) Plans

A second very popular company retirement plan is a 403(b) plan. If you are a teacher, you probably have a 403(b) plan, and if you work for a not-for-profit organization, you might as well. Basically, 403(b)'s are the 401(k)'s in the non-corporate arena.

A 403(b) plan works very similarly to a 401(k) plan. There are just a few differences that I will highlight here. One is that 403(b) plans often do not have an employer contribution component, and instead, simply provide a vehicle for the individual to save pre-tax money for their retirement. Second, investments in 403(b) plans are limited to mutual funds and annuities. 401(k) plans don't have that restriction. Finally, in addition to the $5,000 additional deferral for those over 50, 403(b) plans also offer long-service deferral amounts for employees. These rules get complicated, and it's important that you talk with your CFP(r) professional about what works best for you.

Be prosperous!
Peggy

401(k) Plans

Many companies choose to offer a 401(k) plan to help their employees save for retirement. A 401(k) plan isn't actually a plan at all, it's an addition to another plan! A 401(k)cash or deferred alternative is added to a profit sharing plan or a stock bonus plan, so let's start there.

A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.

Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.

Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.

If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.

Be Prosperous!
Peggy

Staying True to Yourself

I know I missed two days the end of last week. I'm blogging tonight to make up for one of them, to apologize, and to offer a bit of a reason.

The details of my week aren't important. Suffice it to say that I had to make a difficult decision in my business. I opted to stay true to a business principle I established before I even opened rather than compromise. So here I am on Sunday, glad with my decision, and encouraging you to always believe in yourself.

Be Prosperous!
Peggy

Company Retirement Plans

Another option for retirement savings is your company's retirement plan. Retirement plans can take many different forms. Tonight, we are going to talk about the two biggest classifications of plans--defined benefit plans and defined contribution plans.
Defined benefit plans are what people informally call "pension" plans. Now, actually, the word "pension" means something else officially in "retirement speak," but we'll talk about that later. A defined benefit plan is what people imagine after thirty years of service and a gold watch. Every month during retirement, the company sends a check of a set amount, and that money is a reliable source of monthly income. Defined benefit plans get their name because the amount of the benefit is defined to the recipient. In other words, you know how much money you get as a benefit each month in advance. If you have a defined benefit plan, you don't have to choose the investments because your employer chooses them, since they are liable for the benefit.
The other kind of plan, which is much more common, is a defined contribution plan. In a defined contribution plan, the company gives you an amount of money, defined by the plan formula, each month or year. All you know is how much money you receive--a defined contribution. The amount of your monthly benefit during retirement depends on your account balance. And the account balance depends upon how well you do with your investments because you are responsible to choose them. Now, I worded the definition kind of strangely because the plan formula could go two different ways--the promise of a benefit each year or a benefit that depends on whether or not the company made enough profit to contribute to the plan. Creatively, this is called a profit sharing plan, and it's a very popular structure.
So which do you have? A defined benefit plan or a defined contribution plan?
Be prosperous!
Peggy

Wow--blogging from my phone-- cool technology. (If I can get the hang of the keyboard!
Be prosperous!
Peggy

IRA Distributions

If you choose to fund a traditional IRA, it's important that you understand when your money is available for withdrawal and when you must take withdrawals. Typically, the youngest age you can take a distribution from your IRA without penalty is 59 1/2. If you take a withdrawal prior to this age, you will have to pay a 10% penalty in addition to your owed taxes. There are a few exceptions to this minimum withdrawal age including funding college, buying a house, or paying for excessive medical bills. If you are facing an extraordinary situation, check to see if it meets the IRS' limitations in allowing an early distribution. Another way to access the funds is through something called Substantially Equal Periodic Payments, (also known in the industry as 72T). SEPPs allow you take money out of an IRA, but there are several hitches. First, you must establish how much money you will be withdrawing, through one of three methods. Then, once you start taking distributions, you must continue until you are 59 1/2 or five years, whichever is LONGER. This can cause you to seriously erode the value of your account, which is intended to help you through old age.

If you save your traditional IRA carefully, the IRS makes you eventually take money out (so they can get their taxes). The maximum age is April 1 of the year after the year you are 70 1/2. Now, originally the answer was easier than that--70 1/2. However, the IRS will allow you to postpone the first payment until April 1. If you do this, be aware you must take two distributions that second year--the postponed one and the one scheduled for year two. Further, if you are employed, and your company retirement plan is a SEP IRA or a SIMPLE IRA, you must take your required minimum distribution on the same schedule as a traditional IRA. This confuses some people because 401(k) plans don't require a distribution until you retire for most rank-and-file employees. If you forget to take your distributions, what's the penalty? 50 PERCENT!!! Don't make the mistake.

Be Prosperous!
Peggy

Thank You For Your Generosity!

For anyone reading this blog who donated food to the "Extreme Home Makeover" food drive from Ideal Homes, THANK YOU!!!!!!! We compiled 386.7 pounds of food to help toward the goal of 23000 pounds! The generosity of my colleagues, clients, and friends is amazing! If you weren't part of the food drive, please know that there are amazing people in Norman, OK! I'm incredibly fortunate to have these people in my life and grateful for their assistance!
Be Prosperous!
Peggy

Traditional IRAs

When you say, "IRA," most people assume you are talking about a traditional IRA. A traditional IRA may provide you with a tax deduction if you meet certain requirements. You can fund a traditional IRA with $5,000 in 2010, unless you are 50 or older, in which case you can fund an additional $1,000, for a total with six.

If you are not a participant in your company's retirement plan, or if your company doesn't have a retirement plan, then you can get a tax deduction for this contribution. If you do participate in your company's retirement plan, you can only deduct your IRA if you earn less than the phaseouts. If you are single, you can deduct your IRA if you earn less than $56,000. You get a partial deduction if you earn between $56,000-$66,000. You cannot deduct your IRA contribution if you participate in your company's retirement plan and earn more than $66,000. If you are married and file a joint return, your income phaseout is $89,000-$109,000. If you are married and filing separately (not the IRS' favorite activity), then the phaseout is $0 - $10,000. Yes, I really meant zero.

Tomorrow, we'll look at the rules about when you can take your money out easily and the age you must start taking distributions.

Be prosperous!
Peggy Doviak

Bubbles-Too Good to Be True

Okay, since we are off topic anyway, I thought I would share my latest book acquisitions with you:

Hot off the presses, Henry Paulson, Jr.'s memoir, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System."
Slightly older but still very relevant, Andrew Ross Sorkin's book, "Too Big to Fail."

I have always had a passion for reading books about stock market "bubbles" and the following "busts." Prior to these, my favorite was "Dot Con: The Greatest Story Ever Sold." That was about the technology bubble.

Bubbles are defined as prices that grow higher than the actual value of the underlying item, stock, or commodity. One of the funniest was the Dutch Tulip Bubble of 1637, where citizens became tulip crazy and traded the bulbs at higher and higher prices. The problem is always for the last purchaser before the bubble bursts. They pay the item at an inflated price, intending to sell it. Then, the bubble bursts, the prices fall, and the asset stays in their position, as they are unwilling to let it go at a loss. Often, the loss accelerates, until many times, the underlying asset is worthless.

This happened with the tulips. It also happened with some dot.com startup companies. Fortunately, however awful the housing bubble became, at least the houses still have some value. The problem is that people borrowed money against the supposed "value" of their house, leaving them today with more debt than home value. When this happens to someone, we say they are "underwater" in their mortgage (or other debt).

Bubbles can be seen in advance, but the allure of "flipping" the item can be overly tempting. Just remember, if it seems to good to be true, you're right.

Be prosperous!
Peggy Doviak

"One More Thing...."

Remember how Columbo used to leave a room, stop at the door, turn around, and say, "Oh, yeah, one more thing....."? Well, I have one more thing related to yesterday’s blog! By the way, this was prompted by an article I read over the weekend, published by a pro-brokerage house magazine. I was planning on covering this later, but I got inspired!!
The other thing I want you to talk with you about is broker/advisor compensation.
Now, although I run a fee-only practice, I am not wholesale against the concept of charging a commission. If you have a small amount of money that I put in a diversified mutual fund, we reinvest the dividends, and you dollar cost average into it, I may not trade in your account much. Taking a one-time 5% commission and then letting you hold your money in that fund for four or five years works well for you. You might even save money over my annual fee.
(I actually get around this problem by helping very small future clients open an account at an online firm like TD Ameritrade, Schwab, Fidelity, etc. Then, they can hold that money there and come back to me when it's a larger account. This way, they don't pay the commission or the fee.)
Part of the financial reform involves lowering the annual fees (called 12(b) 1 fees) that brokers receive in the years after they sold you the product. They get the commission in year one, then each year after that as long as you own the product, they get 12(b)1 fees. Not a problem, but the issue is sometimes brokers don't disclose the 12(b)1 fees, or for that matter the amount of commission received.
The issue isn't how you get paid; it's in the transparency of the advisor’s model and how much he or she gets paid.
For example, a common practice is for an advisor to claim he or she is fee based. Now, this doesn’t mean that they don’t take commissions; it means they can take commissions or fees, on different parts of your portfolio. If you want to work with someone who takes no commissions, you need to work with a fee-only advisor.
What do you do? First, ask your advisor how they are compensated: fees, commissions, or both. Then, ask them how much compensation they will receive from any source for the transaction they are proposing. Be careful that they disclose all money received, as annuity companies pay the advisor directly. That’s why you have a surrender period. The surrender period ensures the annuity company gets their money back. Ask how much of an annual fee the investments carry. If the numbers seem high, ask if there are cheaper, equally effective investments. Don’t hesitate to take time to think about it. If you work with a fee-only advisor, you should regularly get an itemized invoice explaining how much fee was charged. Check this amount against your statement to make sure the fees were taken accurately.
This isn’t a “fee versus commission” fight. In my mind, that’s the wrong fight. The right fight is for transparency. The second right fight is to require fiduciary conduct on the part of anyone who manages your money, all of the time. If someone is a transparent fiduciary, how they are compensated ceases to matter.
Be Prosperous!
Peggy

"You Don't Know What You Don't Know"

Donald Rumsfeld sparked ire from opponents when he made this statement about terrorist threats. Yet, I think it’s a very intelligent statement and applies to many different areas. When you are trying to study an issue to make conclusions, what you cannot calculate is what you don’t know. It’s like doing a math problem when you don’t have all the terms. You can get any answer when you don’t know what you’re adding.
I am very concerned that many people also don’t know what they don’t know when it comes to how financial service companies do business. Right now, there is a huge fight brewing in Washington about forcing brokers to adhere to fiduciary standards. Now, that requirement rests only on investment advisors. Do you know that there are two different models that people who manage your investments can choose from? One, the brokerage model, does not require that the broker act as a fiduciary with your money. The other, the investment advisory model, does. What does the word, “fiduciary,” mean? My summary of the definition really boils down to the person who you trust to make decisions with your money needs to be acting in your best interest, not his or her best interest. The “fiduciary” standard is higher than the “suitability” standard that brokers follow, which says the investment is fine for you—it’s suitable. The fiduciary standard requires that the choice be the best for you.
For the record, the brokerage industry hates this and is pouring large amounts of money into the fight to be allowed to maintain their “suitability” standard. However, financial reform legislation is in the works, with an outcome still to be determined. So what do you do?
First, be aware that the term “financial advisor” is generic and is applied to anyone in the financial services industry. Just because they call themselves a financial advisor does not make their firm an “Investment Advisory” firm. It’s a specific business model. Second, ask your financial professional if they are willing to act as your fiduciary in their advice and execution of any trade, and if they will put the fiduciary disclosure in writing. Be very specific about your terminology and your insistence that their response be written. Any financial professional (broker or investment advisor) can choose to act as a fiduciary; many brokers just don’t. Investment advisors must, by law. If your professional won’t agree to this, I can’t tell you what to do, but you need to be aware that he or she won’t make that commitment. Third, begin to follow the national debate about this issue. You need to be informed—it’s your money.
Be Prosperous!
Peggy

Roth IRAs

I told you yesterday that I loved Roth IRAs, and today, I'm going to tell you why. Roth IRAs are funded with after-tax dollars, so you don't get a tax deduction at the time you invest your money. However, if your Roth has been open for five years, and you are at least 59 1/2, you pay no taxes on any distribution. In other words, the growth is tax free!

In addition, Roth IRAs don't have the same kind of penalties for early withdrawals as a traditional IRA. If you fund an IRA and you later need the money, as long as you only withdraw the money you invested, you pay no tax and no penalty. Let's look at an example:

You invest $5,000 in your Roth this year, and you earn $500 in growth, making your account balance $5500. If you have an emergency, you can take a tax-free distribution from this Roth, regardless of your age and regardless of when you funded it, for $5,000. If you touch the $500 growth, you will owe taxes and penalties.

This is somewhat logical, since you already paid your taxes on the $5,000 before you put it in the account. However, it's a very nice feature, especially for a young investor who can't imagine tying up money until she is 59 1/2.

The other advantage to the Roth is that you don't have to take Required Minimum Distributions (RMDs) when you're 70 1/2 from your own Roth. You can maintain the account and pass it to heirs. Therefore, the principle has longer to grow before distributions must be made. Also, as long as you have earned income, you can fund your Roth after the age of 70 1/2.

In 2010, you can fund your Roth with $5,000, assuming you don't fund a traditional IRA. (The total funding of both cannot exceed $5,000). If you are 50 or older, you can invest an additional $1000.

If you are single, you can fully fund a Roth if you earn less than $105,000 a year. You cannot fund a Roth at all if you earn more than $120,000. The $15,000 phaseout allows partial funding. If you are married, filing a joint return, you can fully fund a Roth if you and your spouse earn less than $166,000, and you cannot fund at all if you earn more than $176,000. The $10,000 phaseout (yes, I know it makes no sense when compared to the single phaseout) allows partial funding.

Tools and Taxes

Greetings from the Arctic! As I sit working, ice is accumulating on all the trees, the grass, the now, finally, the roads. How happy am I that technology lets me work wherever I am?

No, I'm not talking about hammers and screwdrivers today! I'm talking about the tax impact of different kinds of accounts you can use to save for retirement.

Basically, the tax treatment of your investment accounts take one of three forms, and they each have advantages and disadvantages.

1. You put the money in the account in pre-tax dollars. This means that you don't pay any tax on the money until you withdraw it during retirement. The idea is that you have more money to grow for all those years, and that helps your compound rate of return. (We talked about that a couple of days ago.) Then, once you are in retirement, you are supposed to be in a lower tax bracket, so when you take the withdrawal, you pay fewer taxes than if you had paid taxes back when you were working. This is the most common way to save for retirement. The only thing to ask yourself is whether or not you believe you are in a higher tax bracket today than where you will be in retirement. And this assumes that you do, in fact, retire. I'm beginning to think that for some people, retirement is actually no longer a major goal. Of course, health issues can interfere, but I really believe this demographic is changing quickly.

2. You put the money in a Roth IRA in after-tax dollars. If you wait until you are 59 1/2 and the account has been open for five years, when you take the distributions, you pay no tax. Withdrawals are totally tax free. I love Roth IRAs and will be devoting an entire blog to them in the near future.

3. You put the money in a normal, taxable account in after-tax dollars. Then, rather than paying income tax, you pay capital gains on the realized gains of each investment. A realized gain is a position you actually sold for a profit, not a position that you still hold. Also, if the investment pays any dividends, these are also taxable. Capital gains tax takes two forms: short term and long term. Short term capital gains are for those investments you have held less than a year. The short term capital gain rate is your ordinary income tax bracket. Long term capital gains are for those investments you have held longer than a year. Capital gains tax rates have been very low and are expected to increase, probably in 2011, but only to 20% on most investment portfolios. The advantage to this kind of account is the access to the funds and the lower tax bracket than ordinary income taxes.

What to do? I can't tell you. But I would suggest looking at your financial situation and deciding whether or not you would be wise to diversify the tax treatment of your invested money.

Be prosperous!
Peggy

Extreme Makeover Home Edition info. (yes, with Ty)

Okay--change of topics just for today (not caused by the boring nature of yesterday's post)!!!

D.M. Wealth Management, Inc. is a food drop off point for Ideal's EXTREME Food Drive, in conjunction with "Extreme Makeover Home Edition's" coming to Norman for a segment.

The food goes to United Way of Norman, and is distributed among local charities.

Bring me nonparishable food (cans, bottles, dried, etc.)! I want to fill three offices!

D.M. Wealth is located at 3750 W. Main St., Norman, OK 73072 in Park on Main Executive Suites in a two-story building with a red roof behind the Kinkos. Call 405-329-8884 if you get lost.

Thanks a lot and be prosperous!
Peggy

Calculating the Numbers (Ugh!)

First, thanks to everyone who attended the Norman Chamber of Commerce Business Marketplace this evening--lots of fun and a nice opportunity to meet more community members!

Now, let's talk about how financial planners dazzle you with "The Number" you need to retire. "The Number" is the size of the account you need to live in the way you want. It's not magic--it's a financial calculator. Here's how it works.

The calculator has a built-in function that calculates compound interest. It needs to know several things:
1. How many years will you live during retirement (the assumption today is that you will live to between ninety and one hundred years old).
2. How much interest can your money earn during this period of time? This is the rate of return your portfolio grows (often a number between 5-8%).
3. What will inflation run?
4. How much money are you going to need every month to live?

With these numbers, the calculator can help you calculate the total value of all money you will need at the beginning of retirement.

You offset this need with any monthly pension or Social Security you expect to receive.

The next step involves how long you have until you retire:

1. How many more years are you going to work?
2. How much money do you have saved right now?
3. How much money are you going to be able to save every month?
4. What rate of return will your portfolio grow (again, being safer involves assuming between 5% and 8%)?
5. What will inflation run?

The calculators are easily purchased at discount stores. My favorite is the HP 10B II, and there is also a function in Excel that can do it.

I know, I know......you're never going to do this. I don't blame you. Ask your financial advisor to show you the steps involved (in fact, make them calculate it for you).

I just want you to understand the inputs and the assumptions. This way, you understand how "The Number" is calculated.

Be prosperous!
Peggy

Retirement Spending

There is a common rule of thumb that suggests you will need about 80% of your current expenses during retirement. Although a convenient assumption, if you think about it for a minute, it likely isn't true. Some people dream of a retirement with cruise ships, warm water, and fruity drinks. Others, look forward to spending a week or two at the lake. Some want vacation property; others just dream of Sunday dinners surrounded by children and grandkids.

Your vision for your retirement will determine how much money you will need.

Now, there are some trends about retirement income. Low income individuals need nearly as much in retirement as they make while working because their monthly expenses consist of paying all the necessary bills with little money left. If someone rents, not owns, and has little "spending" money, they will have virtually no difference between working and retirement.

Middle class families often see a decline in expenses, as houses are paid off, working expenses minimize, and retirement plans are modest.

However, upper-middle to upper class families may actually see an increase in retirement expenses, as the desire for living the good life leads to second mortgages and expenses.

Just be careful not to accept immediately a vision of your retirement provided by someone who doesn't know you!

Be prosperous!
Peggy

Summing It Up

We've spent the first three weeks of the year looking at cash flow. You've written down your short, mid, and long term goals, and you know about how much they will cost. You know (or you're figuring out) how much you spend each month, and you're looking at ways of cutting down your discretionary spending if you need more to save.

If you have credit card debt, you're creating a plan to pay it off. And I believe that if you're still reading this three weeks later, you will be successful in that goal! Patience is the key. If your credit score isn't great, you're taking steps to repair it.

Where do we go from here? I think it makes sense to address a question I hear often from clients: "Do I have enough money to retire?" We're going to look at how to determine the answer to that question. We're also going to look at different ways you can save for your retirement and advantages and disadvantages to each. It is not my goal to tell you what to do this year. My goal is to give you all the tools and let you do it, yourself!

Be prosperous!
Peggy

The Magic of Compound Interest

Albert Einstein, the scientist of Relativity fame, is rumored to have said "The most powerful force in the universe is compound interest." Not a bad endorsement from a man who believed that time could turn on itself in certain conditions! I don't know if he really said it, but I hope so. And I know that compound interest is an amazing phenomenon.

Compound interest is the alternative to simple interest. If you earn 5% simple interest on $100, at the end of one year, you have $105. You put the five dollars in your pocket, and at the end of year two, you have $105 again. On the other hand, if you earn compound interest, at the end of the first year, you again have $105, but this time, the entire $105 earns interest the second year, raising your amount of interest earned to $5.25, for a total of $110.25. The third year, you earn interest on that entire amount. The results of this compounding can be incredible.

For example, if you invested $46,030 at 8% compound interest for 40 years, at the end of that time, you would have $1,000,000! Of course, the problem with this equation is that you have to start with $46,000, and most 25 year olds can't do that. So let's use an easier (more realistic) example.

Let's assume you can save $50 a month for forty years and earn 8% compounding interest. At the end of the 40 years, you will have approximately $174,550! If you could save $100 a month for forty years, the final balance grows to almost $350,000! That's impressive.

Don't get discouraged if you haven't been saving as much as you need--start today, and you will be excited with the results.

Be prosperous!
Peggy

How Are You Doing?

For Christmas, Santa brought my husband and me a Wii, with "Fit Plus." Now, every morning, I turn it on and a virtual balance board asks me how I'm doing and whether or not I've eaten breakfast. It congratulates me if I've lost weight and encourages me if I haven't. Today is my Wii update to you.

How are you doing writing down all of your expenses? Really good? Great--keep it up! Not so good? That's okay. You could actually start today and still be on track for nearly all the year. Don't give up! You can do it!

The hardest part of any lifestyle change is beginning. Your goal to gain control of your finances in 2010 is super! Don't let a little slump stop you.

(Now, don't you feel better?)

Be prosperous!
Peggy

"The Way You Do The Things You Do"

I am a big fan of Suze Orman, as I think I have already told you. I particularly enjoy her conversations about how the events in our lives impact our financial choices. She is actually participating in a bigger conversation where people in different professions discuss the emotional component of our money.

To illustrate my point, I'm going to give you a fictionalized account of a conversation I have had with many (usually, but not always, female) clients.

"Peggy, I don't know how I got back in debt. I had paid everything off, and suddenly the debt is back."

To which I say something to make them feel better (because they are already beating themselves up; I don't need to help). Then, I start asking questions about how life is--work, relationships, attaining goals, etc.--and because I work from the beginning to establish a position of trust, they tend to tell me the truth. 99.9% of the time, something is going wrong somewhere else in the person's life. When I ask about the timing of this other event, it nearly always coincides with the reacquisition of the debt. Why? Because our relationship with our money is impacted by our relationship with other things.

Not only that, once it starts going wrong, it gets worse. Think about the last diet you tried. Somewhere along the way, you ate something not on the "approved" list. What did you do? Well, I have a tendancy to eat everything in sight for the rest of that day. Once I've made a mistake by eating the donut at the office for breakfast, I might as well have fast food for lunch and buttered popcorn that evening as I watch television. I reason that if I've already messed up, what's the point. Well, people make this same mistake with their money. If they make a mistake and buy something they didn't need, they rationalize that they might as well buy two or three other things as well.

Suddenly, you're spiraling out of control. Diets don't work, and budgets don't work, either. They are lifestyle changes.

I close with two pieces of advice: if you're wondering why the debt won't go away, look at other areas of your life. Sometimes, when those situations can be resolved, the money problems resolve themselves. The second piece of advice is whether you are on a diet or a budget and you make a mistake, forgive yourself. Don't compound it out of guilt.

Be prosperous!
Peggy Doviak

Becoming a Perfect "10" (credit, that is)

Tonight I'm going to give you a few ways of improving your credit scores. We'll see next week why the scores matter so much. If your credit score isn't as high as you like, try these ideas:

1. Never, ever make a late payment. Credit card companies don't actually care if you pay the balance off in full, but they care if the payment is late. (I care if the card isn't paid off in full, but this column isn't about me!) If you can set an automatic minimum payment coming from your bank account, you won't forget to pay the bills.

2. In fact, set every payment you can to be made automatically out of your bank account. Be aware that in spite of credit reform legislation, you may have a very short window between when you receive your bill and when payment is due. If the payments are autodeducted, you don't have to keep up with them as much.

3. After you have paid off a credit card, don't cancel it. Part of your credit score is your debt to potential credit ratio. Cancelling a card lowers your potential credit.

4. Make more than the minimum payments on bills whenever possible, as often, the minimum payments may not even cover the interest expense. This causes you to lower that debt to credit ratio even further.

5. Don't apply for too many cards. A rumor is that if it looks like you're desperate for credit, the credit ratings lower your score. I'm not sure this is true, but I do know that every time you apply for credit (even just to get that in-store discount), they run a credit check on you. An excessive number of credit checks lowers your credit score.

Come back on Tuesday, and we'll look at the impact of credit scores an areas of your life you may not believe! Have a great holiday weekend.

Be prosperous!
Peggy

Frisbees, Airline Miles, and Debt

When I was in college, walking between classes, there were always tables set up with young people in brightly colored t-shirts tossing around Frisbees or offering free pizza. The only requirement for obtaining the shirt, disc, or dinner was to sign up for the credit card they were offering. They promised low interest rates and the lure of using more money than you had. Many students were lured by this (which is why you have exactly the same memory as I, even if you live in another state).

The number one reason that students have to drop out of college isn't bad grades; it's that they cannot afford to stay any longer. They have applied for too many cards, spent more than they can afford, maxed out student loans, tapped loved ones dry, the minimum wage job they have isn't enough.

As we age, the promotions don't go away; they just change. Now, I get credit card applications with the promise of enough free miles to take a trip if only I will apply.

I have credit cards. My favorite offers free miles, but my husband and I pay it off every month. If you want to rent a car, you have to own a credit card. Using credit responsibly is not a bad decision, but the trick is understanding the difference between good credit decisions and poor decisions.

Taking a loan to purchase a home is very common. If the home is within your budget, you pay a sizable down payment, and every month, you pay off both principle and interest, you are likely okay. (I've seen situations where the person wasn't okay, but usually one of the criteria wasn't really met.) Taking out a student loan to pay for a college education is an investment in yourself and your future. However, buying a bigger house to impress others or using student loans for Friday night parties with friends is a poor use of credit.

Often, if you break down your credit card purchases, you will find they are spent on the discretionary items in your budget. Borrowing money for discretionary spending creates nightmarish situations. If you can't afford to pay for it this month, just wait a month. Don't put it on a card with the idea of paying it off over time. Save the credit for those items that really matter, where you can obtain a long-term accomplishment or gain. The Frisbee just isn't worth it!

Be prosperous!
Peggy

Emergencies in Retirement

First, sorry for the gap yesterday. I got caught up doing other projects--my bad.

Many times, I'm afraid we think of an emergency fund in terms of younger peoople with less job stability, less money in savings, and more monthly bills. However, emergency funds aren't only for the young. Do you need an emergency fund during retirement? Yes, you do. Even if your house is paid off, you pay cash for cars, and you don't carry a credit card balance, you still need an emergency fund during retirement. Two areas loom over your plans--healthcare and a stock market decline.

A reserve fund for healthcare can assist if an unexpected illness has treatments not covered by insurance or if your out-of-pocket is high. If you rely on your investments for monthly income, the worst thing that can happen is the need to sell securities to generate monthly cashflow in the middle of a market turmoil. (Now, by this, I am not saying that buying and holding through anything is correct. A buy and hold strategy actually needs to be implemented as carefully as a trading strategy, but that's a conversation for another day.) Not holding enough cash forces the selling of stocks, bonds, or funds at times you might not want.

How much reserve fund do you need? Well, the healthcare component has a lot to do with the quality of your current insurance (both health and long-term care). Holding at least the deductibles might be wise. The investment emergency fund is much more complicated. I like to hold at least a year of monthly distributions in cash, but I cannot advise you what would work for you in this blog. Everyone's needs are different, and you might need two or three years. I recommend you talk with a CERTIFIED FINANCIAL PLANNER (TM) certificant to help you with this decision.

Retirees are often looking at their life savings in front of them and a significant number of quality years ahead. Planning for financial emergencies at this time can help with your quality of life and your ability to sleep at night.

Be prosperous!
Peggy Doviak

Financial 911

Those of you of a certain age remember the television show, "Emergency." For those of you who don't, the title gives it away. It was a show with two good-looking paramedics who went on emergency runs to help people deal with unexpected events. We also have unexpected financial emergencies, and it's important that we plan for them as best we can.

In today's economy, if you aren't worried about losing your job, you're lucky. With one cold snap, pipes burst and carpet, appliances, and dry wall suffer. In that same cold snap, going to get the mail can be a treacherous adventure. (Sorry I'm focusing on arctic weather; it just seems so appropriate right now!) The one thing these emergencies have in common is a need for money.

Everyone should have a financial emergency fund. Last week, you began calculating your monthly expenses. Your emergency fund should be equal to three (if your world is extremely stable) to eight (Suze Orman's recommendation) months of these expenses. If this amount of money seems overwhelming, eat it like an elephant--one bite at a time. You don't have to save it all right now. Just make saving the emergency fund a monthly goal.

Where do you keep your emergency fund? The answer is really boring--the bank. Your emergency fund is NOT to be invested in the stock market, mutual funds, or annuities. The only acceptable investment would be in a money market fund. Don't even use a certificate of deposit (CD). Why am I being so picky? Your emergency fund must be safe and liquid (or quickly convertible to cash without loss of principal). Stock market investments aren't safe, even if they're liquid. Annuities (variable) are often not safe or liquid, due to investment subaccounts and surrender periods. CDs are safe (insured by the FDIC), but they aren't liquid--you can't immediately convert them to cash. Savings accounts or money market funds are both safe and liquid.

Don't have a financial emergency, even to meet the cute paramedics. Keep your money safe and sound and know that there is space between you and a financial disaster.

Be prosperous!
Peggy Doviak

Getting Help

If you watch television at two o'clock in the morning, you've seen the ads for companies promising to help you get out of debt, reduce your bills, and pacify the IRS. Well, this column is a warning. Most of those companies overstate in promises and understate in performance. Yes, some are legitimate, but it is really a "buyer beware" world. Where do you turn for debt reduction advice you can trust?

One of your best bets is to call Consumer Credit Counseling Services, the not-for-profit organization. They can help you devise a plan for managing your debt. Their website will end in .org, not .com. Websites ending in .org are not-for-profit organizations. Companies using .com are commercial endeavors. CCCS can begin to help you get organized. Not only are the commercial sites expensive and of varying levels of competence, but they can also completely destroy your credit, depending on what tactic they choose.

If you owe the IRS money, talk with a good CPA. The CPA can tell you your payment options.

Finally, never pay off credit cards with home equity lines of credit. Depending on your situation, some of the credit card debt could be relieved in bankruptcy. Don't risk your home to pay off your discretionary spending, even though the interest rate is better.

Now, everyone's situation is different, and it's possible that some of this advice won't work for you. However, for most people these are good initial steps.

Be prosperous!
Peggy

No, really, where DID it go?

I promised you yesterday we would talk about what to do if you are cash flow negative. Remember, that being cash flow negative means you spend more than you earn. It's likely that you are cash flow negative because of your discretionary spending habits (rather than your nondiscretionary expenses). If you are cash flow positive until you reach your discretionary purchases, then look for places you can reduce. Maybe you should discover gas station coffee rather than designer coffee. Or you could eat a few less meals out, or take your lunch to work. Perhaps you should go to the mall or home shopping channel or amazon.com a little less. We are doing cash flow analysis (not budgeting), and it's your decision.

What if your nondiscretionary expenses are too high? This is more complicated. Here, you may need to do a combination of approaches. First, cut some of your discretionary spending. Then, look for adjustable nondiscretionary expenses. Turn off lights when you leave the room, buy regular gasoline not premium, and cut back on the cable premium channels. If you are still in trouble, cut more discretionary expenses and look at replacing cars with less expensive models.

If this is too painful, your other option is to earn more money. Maybe you want to keep your lifestyle more intact, and you would prefer to add an additional income to your household (through a first or second job by a family member). This may be an option for you.

Often, these approaches are sufficient, but sometimes, they are still not enough. If you are really in trouble, who can you trust? We will talk about that tomorrow.

Be prosperous!
Peggy

Where Did It Go?

As you track what you spend, you will notice that it falls into two basic categories--items you need to maintain your normal lifestyle and items you don't really need (but just want). The necessities include your mortgage, car payments on a reasonable vehicle, utilities, taxes, groceries, and the like. These are called nondiscretionary expenses. The wants include trips to retail stores, eating out, and a million text messages a month. These are discretionary expenses. On top of this, if you are "cash flow positive," you have extra money left at the end of the month. Later, we will be talking about saving for your retirement. You may already have a plan for this. However, any additional money you want to save for retirement will need to come from your positive cash flow or discretionary spending. That's why it's so important to know your expenses. What if you're cash flow negative? Don't panic. We'll talk about that tomorrow.

Be prosperous!
Peggy

Try to Remember!

Yesterday, I gave you a task to write down everything you spend for a month. Today is your second day of that task, and I'd like to offer some suggestions on how to keep track of what you do.
1) If you have a "smart" phone, make a note to yourself.
2) After you finish shopping, call yourself and leave what you spent as a voice message.
3) Buy a little notebook, and carry it in your purse or pocket. That way, it's always with you.
Most people have trouble with this exercise when they are busy and make purchases early in the day. By dinner, that stop at Starbucks is a distant memory!

Be prosperous!
Peggy

Personal Cash Flow (We don't like budgets)

Yesterday, I told you that you would have an easy task today, and it's easy, but it will take you a little time to complete it!

I want you to write down every dollar you spend and what you spent it on for one month. I had a client return one time after completing this task, and $2,000 was labeled miscellaneous! Now, I don’t mind if just a little bit of money isn’t categorized, but $2,000 in misc. is a cop out. You need to be honest about how you spend your money. Remember that these are your cash flow decisions, so don’t worry about making me (or somebody else) mad. If you don’t do this honestly, it won’t work.

If you use an ATM card, the withdrawal isn’t the transaction, it’s what how you spent the money. So “ATM” isn’t a category either! If you have a weakness for $5 lattes, write it down. If you like electronics, write it down.

I don’t want you to judge yourself while you do this. There are no wrong answers, just an honest look at where your paycheck’s going. I told you it was easy. Tomorrow, we’ll figure out why this is so important…..

Be prosperous!
Peggy

Budget--a four letter word

Okay, I know that "budget" is a six-letter word, but you know what I mean! Budgeting is an awful process, and yet most of us (me too) need to understand how we spend our money. Since we all hate the word, I propose a new term: Personal Cash Flow.

"Personal Cash Flow" sounds like a corporate process, not a way to keep me from buying those cute Valentine napkins at the discount store that I don't really need! And I think the term is more descriptive.

Your cash flow decisions are personal. At the end of the day, you will spend whatever you want to spend. I might give you some ideas. Your loved ones might have ideas, but it's your choice.

I think when we realize that we actually get to control our money decisions (rather than feeling "acted on" by our money), we begin to change our relationship with money and become more successful. A new task tomorrow (it's easy)..........

Be prosperous!
Peggy

Merging Cash Flows and Dreams

After too many hours of football, today it's back to work! My friends (who don't own their own business) say "Isn't it nice to take off whenever you want?" I tell them yes, I'm free to work any sixty hours a week I want! So today, I'm back at it. And probably tomorrow, the Christmas gets put back in the closets and attic.

Yesterday, I suggested that you list some of your goals and dreams, from short-term goals to long-term. Why is it important to write things down? I believe that writing things down makes them more real to us. It's easier to change our minds when we don't have written proof otherwise! Some of your goals may be very achievable and some of them may be difficult or seemingly impossible. That's okay. You might be surprised what you can do.

Now, without worrying whether or not you can afford it, put a cost or price beside each of them. Don't underestimate it. Just write it down. If you aren't sure what it costs, then look it up before you continue. Remember the old proverb that if you don't know where you're going, you won't know when you get there!
Be prosperous!
Peggy

Happy New Year!

Welcome to 2010, the second decade of the new millenium! My name is Peggy Doviak, and I'm a fee-only CERTIFIED FINANCIAL PLANNER(tm) practitioner and a portfolio manager. Before I entered the finance field, I was a freshman composition instructor and then a corporate trainer. I changed careers when I saw some close friends suffer huge financial losses in their portfolios because they didn't understand investing, and they trusted that their financial professionals would take care of them. Now, many financial advisors are wonderful, but I believe it is still important for every single American to understand their money.

That's the goal of this blog. We are going to talk about all different kinds of financial issues, everything from budgeting to estate planning to knowing what questions to ask an advisor. Did you know that the number one New Year's resolution is getting control of money issues? If you break this goal into little pieces, it is much easier to achieve.

Most days I will give you a task. Your task for today is to write down where you would like to be financially in one month, one year, five years, and twenty years. If you would like to comment on these goals and dreams in the blog, feel free to do so!

Disclaimer: I work with many financial literacy organizations and teach for the College for Financial Planning. Please kinow that everything I say this year is only my opinion and doesn't reflect the views of any organization. Also, information I provide might not work for your risk tolerance or individual needs. Investing is risky, and you can lose money.