Start Saving for College the Day They Are Born (2010-01-25)

by David John Marotta and Matthew Illian

My youngest is a first-year student at the University of Virginia. My coauthor Matthew's youngest child was born only a month ago. Matthew is just beginning to think about college funding, and I'm withdrawing from my final 529 plan.

Over their lifetime, college graduates gross $1 million more in earnings than their less educated counterparts. Education helps people both gain and keep wealth. But paying for it can be daunting, especially if you have to pay all at once. For some families the price tag exceeds the cost of their home. Thus starting a savings plan early is critical. Fortunately, compounded savings eases the financial burden.

The State Council of Higher Education for Virginia study reports that the average costs for a year at a public in-state college or university will set you back $15,642. For every dollar you spend at an in-state college, only 36 cents goes toward tuition. Room and board account for 42 cents and the extra 22 cents covers books, supplies, transportation and other costs.

Expect an average price tag of $28,832 if your child enrolls as an out-of-state student or $35,636 if he or she attends a private college. Aid from grants and tax subsidies help reduce the price about 40% on average. However, those families making over $100,000 in income should not expect much help.

Saving for college requires time and money. The more you have of each, the better. Time puts the miracle of compound interest on your side. And the more money that is earning money, the less you need to continue contributing.

There is no such thing as saving too early, even for Matthew's youngest child. Saving early can cut the cost of his college education in half. Imagine he decides to go to the University of Virginia like his parents. Currently four years of tuition costs about $47,000. But by the time Matthew's son is ready to enroll, the price tag will have risen to $98,960. The earlier Matthew and his wife begin saving, the more manageable the monthly amount that should be saved.

Saving early allows you to buy your education at a discount. After saving $225 a month for 18 years, the newborn's college savings account will have grown to $98,960. An astonishing $49,235 of that amount accrued through the magic of compound interest. The great benefit of a 529 plan is that all the growth in the account can be withdrawn tax free.

Those with the money upfront could deposit $26,500 and let compound interest generate the remaining $72,460. Buying a college education for a 73% discount while receiving several years of tax deductions is a deal those with money should not pass up!

My daughter's 529 plan was first funded at the end of 2002 and has experienced a time-weighted return of 88.3%, or 9.4% annualized, since then. Yes, it was once up 121.6%, or 17.7% annualized, but it has still earned over $30,000 and saved us a tremendous amount of money.

If you cannot invest a large sum now, save a little every day. Started young enough, even a few dollars a day will pay the tuition at many public schools. By investing in a college savings plan, your money can grow faster than the inflation rate of higher education. These costs have been rising at a rate of 5%, and over the past 10 years, tuition at public schools has gone up more than 50%. If you are not saving for college, you are falling behind.

Saving for college is a critical part of financial planning. But saving for retirement is even more essential. You can borrow money for college but not for retirement. So prioritize your savings plan based on your specific situation.

For many of our clients it is the grandparents who are secure enough financially to be able to fund their grandchildren's education. The added benefit of having a grandparent own a 529 plan is that these funds are not counted in the formula for financial aid.

Higher education is critical in uncertain economic times. Although official unemployment is more than 10%, unemployment for those with a college education is only about 5%. And for people who did not finish high school, the unemployment rate is 15.3%. These are the official rates that do not count any workers who have been unemployed awhile and presumably have given up. Jobs that do not require a college education continue to move overseas into the emerging market countries.

Virginia has two of the best 529 plans in the country. For more information on the College America and the Virginia Education Savings Trust (VEST) plans, visit www.va529.org. Saving for college should be part of comprehensive wealth management. Only a fiduciary has a legal obligation to sit on your side of the table and put your interests first. The National Association of Personal Financial Advisors website (www.napfa.org) lists fee-only advisors in your area.

 

from http://www.emarotta.com/article.php?ID=373

Reflecting on 2009 Returns Provides Lessons Going Forward (2010-01-18)

by David John Marotta and Matthew Illian

Many are breathing a sigh of relief after participating in the largest stock market roller coaster since the Great Depression. Others bailed out at the wrong time and are unsure whether they will ever recover their nest egg. A valuable exercise in January is to review your investment returns in light of what occurred in the broader asset classes.

The unwinding of the highly leveraged real estate bubble continued throughout 2009. But flooding the markets with credit and currency commitments from central banks around the globe staved off further asset price atrophy.

In 2009 we were reminded that sometimes the greater the fall, the bigger the bounce. After hitting a low on March 6, the markets started a fierce climb. Those with nerves of steel were rewarded.

Standard deviation (SD) is a statistical measure of volatility. Although most market movement occurs within 1 SD, 2009 saw a six-month (March through September) S&P 500 growth period of 40.5%, a 3 SD event. Also called "three sigma" events, under normal conditions they are only predicted to appear once every 56 years. Although rare, stock market returns are capricious by nature and regularly exceed the statistical norms for such wild events.

Money flows from equity mutual funds suggest that investors were pulling their money out in record amounts as the market neared the bottom. Many investors were selling at the bottom! In contrast, disciplined investors stick to an established plan to rein in their emotions. Those who regularly rebalance their portfolios used the sharp decline in the markets to acquire stock investments at half the price they were going for only six months prior.

The S&P 500, which represents the largest American-based companies, finished the year up 26.46%. Smaller companies, represented by the Russell 2000, slightly outperformed, ending up 27.17%. This confirmed a long-term trend that suggests small companies tend to average higher returns than their larger counterparts.

Value stocks historically outperform growth stocks. They didn't last year, however. Both small- and large-cap growth stocks were the winners. The Russell 2000 Growth Index was up 34.47% compared to the Russell 2000 Value Index, up 20.58%. One year of outperformance, even by such a wide margin, did not reverse the long-term trend. The Value Index has a 10-year average annual return of 8.27%. But the Growth Index is still in the red at -1.37%.

Weakness in the U.S. dollar (USD) was another strong theme for 2009. Flooding the world with newly printed greenbacks and growing deficits is causing unease across international markets. Many believe the days of holding dollars as the international reserve currency are numbered.

It is difficult for U.S. investors to comprehend the effect of a devalued USD. International investors saw quite clearly the effect of a weakening dollar. Developed international investments as measured by the Europe, Australasia and Far East (EAFE) Index finished up 31.78%. A foreign investment has two moving parts. The first is the stock price, which fluctuates based on the performance of companies in their own currencies. The second part is the currency exchange. If you could strip away the currency exchange, the EAFE Index return would have only been 24.72% with the remaining 7.06% coming from a weakening U.S. dollar.

Investing in countries with a strong currency and healthy balance sheet showed particular strengths. Australian markets finished the year up 66.16% for U.S. investors but only 36.78% if measured in Australian dollars. Investors gained an additional 29.38% from the U.S. dollar weakening against the Aussie dollar.

The largest growth came from the emerging markets. They were up 78.51% in USD, triple the return of developed foreign or domestic indices. Brazil led the pack, finishing the year up 128.06% in USD and 70.48% in local currency. India, Russia and China all had superior performance.

Natural resource stocks, also called hard asset stocks, were up 37.54%. Hard assets include companies that own and produce an underlying natural resource. These include oil, natural gas, precious metals (particularly gold and silver), base metals such as copper and nickel and other resources such as diamonds, coal, lumber and even water. These stocks are unique in that they have a low correlation with other stocks and bonds and they appreciate with inflation.

Those who moved their investments to the supposed safety of Treasury bond investments were deeply disappointed. The Barclays Capital U.S. 1-3 Year Treasury Bond Index finished the year with a meager gain of 0.8%. The Barclay Capital U.S. Aggregate Bond Index (including corporate bonds) finished the year up 5.93%. Foreign bond performance was even better due largely to currency exchange.

Take the time to compute your 2009 returns and review your asset allocation and investment selection. Too many American investors have most of their investments tied up domestically. We suggest you expand your investment mix to include foreign bonds, foreign stocks and hard asset stocks. Adding these to a diversified portfolio of U.S. stocks and bonds will reduce the average volatility of your portfolio while boosting returns over a full market cycle.

 

 

from http://www.emarotta.com/article.php?ID=372

Last Chance for a Segregated Roth Conversion (2010-01-11)

by David John Marotta

A tax tsunami is coming at the end of this year. The higher your adjusted gross income (AGI), the closer you live to the coast where the tsunami will hit. This is the last chance you will have to put your assets in a lifeboat and avoid getting swamped with taxes.

At the end of 2010, the Bush tax cuts will expire. The Obama administration is not expected to alter the rates significantly before then. They don't want to be held accountable for raising taxes before the midterm elections. And they would rather blame the previous administration for a crazy expiring tax law.

Right now, tax rates are at a historic low. But after 2010, counting all the tax changes, top marginal tax rates may rise from 44.6% to 62.4%. Thus you will only have to pay a maximum of 44.6% on income you can take before 2011, but after that you may have to pay 17.8% more in tax.

If you have an income over $100,000, this is the first year you can take money from your traditional IRA, pay tax as though that money is ordinary income and convert it to a Roth IRA. This procedure is called a "Roth conversion."

Roth IRA accounts are to your advantage if your tax rate will be higher in retirement when you withdraw the money than it was when you contributed. With a Roth IRA, you pay tax on the acorn. With a traditional IRA, you get a bigger acorn to start with, but you pay tax on the oak. Many families have actually lost money by investing in their traditional IRA when they were young and in a lower tax bracket, only to find themselves in a much higher bracket during their retirement. A year from now, we will all be in a higher tax bracket.

If you execute a Roth conversion this month, January 2010, you do not have to pay the tax on that conversion until April 15, 2011. You also may change your mind. If you decide the conversion wasn't worth it, you can move the money from the Roth account back to a traditional IRA account. This is called a "Roth recharacterization."

Recharacterizing a Roth conversion can be done any time before you file your taxes, including the filing extension. So if you file an extension you can change your mind any time before October 15, 2011. And you can decide to recharacterize part or all of what you converted.

The upside is that you can use all these laws and changes to maximize your after-tax investments. During the next few years, tax planning and management will be a significant part of wealth management. But it needs to be put together as part of a larger plan.

Here's the timeline of how to use a Roth conversion to maximize your investments. Now is the time to do five Roth conversions of equal amounts into five separate accounts. You aren't going to keep them all, so you can convert five times as much as you want to end up keeping and actually paying tax on. Invest each Roth account in a different asset class (e.g., large-cap U.S. stock, small-cap U.S. stock, foreign stock, emerging markets and hard asset stocks).

The five accounts will appreciate differently, but the entire portfolio will be fairly well balanced. Before April 15, 2011, decide if you will be keeping only one account or more than one. If more than one has appreciated significantly, you may want to keep more than one account's conversion. Compute your tax liability for the year and pay the tax, but instead of filing your return, file an extension.

Before the October 15, 2011, extension deadline, decide which of the five accounts you are going to keep. By now, nearly a year and three quarters has elapsed. You can easily determine which account has appreciated the most. Keep that one, and recharacterize the other four. Because you only have to pay taxes on the amount you originally converted, it's like betting on the horse race after the winner has already been determined. After recharacterizing the accounts, file your tax return before October 15.

If all of the accounts decrease in value, recharacterize them all and pay no tax. Financially, you are none the worse for having filled out a stack of paperwork. If only one account appreciates significantly, you only keep one conversion. But you have increased the odds of your Roth account appreciating by five times.

The average return of the S&P 500 is about 11%, but the standard deviation is about 19%. All of the other asset classes have an even higher standard deviation. It is likely, for example, that emerging markets will be either the best or the worst performing asset class over any two-year period. Using this technique you can guarantee that the Roth conversion you keep will have been invested in the best asset class during that year and three quarters.

Segregating each of the five conversions into a separate account allows you to decide to recharacterize or let each account stand separately. The difference in returns between the average and the best account is liable to be 20% or more over the year and a half before you have to choose which accounts to keep. Coupling the 17.8% tax savings and this Roth segregation technique could boost your returns by 30% or more.

In the quite likely event that all five accounts have appreciated significantly, you may decide to keep them all. Once you have reached the maximum tax rate, the top marginal rate does not increase from there. Those most fearful of expectations of higher tax rates soaking the rich after 2010 would be those most likely to benefit from converting everything.

You are a good candidate for a Roth conversion in 2010 if you have the following characteristics. You have an AGI more than $100,000 and so have not been able to convert previously. You have a large IRA that could be converted. You expect your tax bill to be higher in the future. You have sufficient taxable assets to pay the tax. You would like to reduce the value of your gross estate and leave a tax-free asset to your heirs. You are willing to pay estimated taxes and increased tax preparation fees.

Even thought this technique could boost your after-tax returns, be careful. Executing a Roth segregation account requires professional assistance. Such a technique should be just one small part of a larger comprehensive financial plan. And you should seek the guidance of a personal fee-only financial planner and certified public accountant (CPA) who have a legal obligation to act in your best interests. The laws are changing annually, and as a result so is the optimum path.

 

from http://www.emarotta.com/article.php?ID=371

Compute Your Net Worth Once a Year

by David John Marotta

Since the end of last year the markets are up about 25%. You may not have been on track at the beginning of last year, but now you should reevaluate again. The wave has propelled you miles toward your goal, and at least once a year you should measure your progress.

Everything in the financial markets has changed again: energy, financials, real estate, bonds, equities, even the dollar. If you are within 20 years of retirement (age 45 to 65), it's critical to get your retirement planning updated. Computing your net worth annually is like taking a sextant reading to chart your course toward financial security.

Net worth gives you a snapshot of how much money would be left if you converted everything you owned into cash and paid off all your debts. Compute your net worth by creating four lists.

<b>Liquid assets</b>: An asset is something you own that has significant value. A liquid asset can be sold in a matter of days. Include personal bank accounts (checking, savings and money market), certificates of deposit, bonds, mutual funds, stocks and exchange-traded funds. Use values as of December 31 of the previous year so all of your amounts are calculated on the same day.

<b>Nonliquid assets</b>: Nonliquid assets are those things you own that incur a penalty when they are sold. Include the value of your retirement accounts (IRAs, 401ks, 403bs, SEPs, profit-sharing plans and pension plans). Add real estate investments as well as the market value of your home. Use the assessed value.

Other nonliquid assets may include proprietorships, partnerships or company stock in a firm that is not publicly traded. Add the cash value of any life (nonterm) insurance. Some people include jewelry, collectibles, cars and boats in this category. Although these items often have a high retail value, their true worth is often a small fraction of their initial cost. I do not recommend including personal property.

<b>Immediate liabilities</b>: List what you owe to creditors. Immediate liabilities include credit card debt, car loans, student loans, other loans and any bill or debt that must be paid within two years.

<b>Long-term debt</b>: For most people, long-term debt is primarily their home mortgage, but it may encompass other real estate or business loans.

The first time you gather all of this information will be challenging, but it gets much easier each subsequent year. By keeping an annual record of your net worth, you're creating a valuable financial planning tool.

Next compute three additional values. For your <b>total assets</b>, add your liquid and nonliquid categories; for your <b>total liabilities</b>, add your immediate liabilities and long-term debt; and finally, for your <b>net worth</b>, simply subtract your total liabilities from your total assets.

Use these net worth numbers to compute other values useful for reaching your financial goals. For example, your emergency reserve (liquid assets minus immediate liabilities) should be at least half your annual income. Any extra can be invested more aggressively for appreciation. Your debt load ratio (total liabilities divided by total assets) should be under 35%, with your home mortgage comprising most of your debt.

If you are trying hard to pay off your mortgage ahead of schedule instead of making a huge effort to save and invest, your attempts are laudable but mistaken. The quickest path to wealth includes holding a home mortgage you could pay off but you choose not to in order to take advantage of the tax benefits. The rich leverage wisely and invest.

A net worth statement helps you measure your progress toward retirement. At age 65 you can only withdraw 4.36% of your portfolio to maintain your lifestyle. In other words, to keep the same standard of living, you will need about 23 times what you spend annually.

Take your net worth and divide it by your annual take-home pay. The result shows you how many times your annual standard of living you have amassed in savings. If you are younger than 40, the number probably comes to less than five, which is adequate for now.

Progress toward retirement is not linear. This equation, determined by quadratic regression, estimates how much of your current net worth you should have saved given your age. It gives you a benchmark for determining if you are on track to retire by age 65:

Savings should equal 0.0125 x^2 - 0.5746x + 7.4668, where x is your age in years.

The result should be between zero and 23. That number tells you how many times your current annual income you should be worth. The formula is most accurate between ages 45 and 65.

By age 45, you should be worth about seven times your annual spending. More sophisticated retirement planning includes the difference between taxable, tax-deferred and Roth accounts as well as Social Security guesses and defined benefit plans, but the method described here will approximate your progress. This table shows by what age you should have saved different multiples of your annual spending.

If your net worth is higher, congratulations! You may be able to retire earlier than 65. For every 1 unit you are over, you could consider retiring about a year earlier. Conversely, for every 1 unit you are under your age's benchmark, you may have to work an additional year beyond 65.

Between ages 40 and 50, your net worth should increase by 1 unit of your annual spending every two years. That means your current net worth divided by your take-home pay should be 1 unit greater than it was two years ago. And if you are between age 50 and 65, your net worth should have increased this year by 1 times your take-home pay.

Want to retire younger? Try lowering your standard of living. Most retirees spend about 70% of the gross salary they earned while working. If you can live off 50% of your take-home pay, it's not as essential to save as much.

Need to catch up? Save more than 15% of your take-home-pay. Determine how far you are behind and what additional percentage you can save each year. For example, at age 30, you should be worth 1.5 times your annual income. If your numbers don't match that ideal, an additional 0.3 times your annual income will help you get there. You could save an additional 10% of your income (for a total of 25%) for three years. If that's too much, try saving 20% (an additional 5%) for six years.

Money makes money. By the time you reach your 40s, you should have enough investments to be earning about half of your annual spending each year. Early in life what you save is most important for building wealth, but as you approach age 40 what you earn on your investments becomes critical. While you are young, the best advice a professional can offer is to "save." As you amass significant wealth, it is more pressing to "manage" well what you already have.

All financial planning begins with a clear understanding of your net worth. A PDF template on our website (<a href="http://www.emarotta.com/budget" target=_blank>www.emarotta.com/budget</a>) can help you compute and keep track of your net worth each year. Contact us or visit our website to download a free copy.

 

from http://www.emarotta.com/article.php?ID=370

Seven Financial Resolutions for the New Year

by David John Marotta

Financial resolutions usually don't even last until the end of January. Making a permanent change in our behavior requires both time and a steely resolve to keep the practice until it becomes habit and finally character. We can only develop financial character one action at a time. Here are seven practices that will take you from pauper to prince or princess if you add one each year.

Read through the list. If you already practice the resolution, move on to the next one. Find the first one that isn't already a practice, and make it your resolution for this year. Adding one behavioral change is labor enough for the next 12 months. If you can keep it long enough for practice to become habit, you are well on your way to developing a millionaire mindset.

Resolve to set the habit in place and keep it for an entire year. Share your resolution with everyone you meet. You are 10 times more likely to act on a goal that you have articulated to someone else. Don't wait until you have everything perfect to take ownership verbally.

First, and most critical, resolve to be and stay debt free. You are allowed to have a fixed-rate fixed-year traditional mortgage on your house but nothing else. No equity line of credit on your house. No car payments. Certainly no credit card debt. You have to learn to live within your income, which sometimes means going without. Millionaires are frugal. Learn to enjoy it.

Second, automate saving enough to get the entire match that your company's 401(k) plan offers. Usually this translates to saving 5% of your salary while the company contributes a 4% match, which is the fastest way to get an 80% return on your money. Studies show that most Americans forgo this match, believing they need to spend 100% of their salary. Don't be foolish. Learn to think like a millionaire. You can learn to live well on 95% of what you make.

Next, fully fund your Roth IRA, which in 2010 will be $5,000 for the year. If you can't manage the entire amount in January, put in $416 monthly. Saving this amount manually is too difficult. It requires remembering every month. Millionaires have their default set at saving money. They make spending money difficult, requiring a manual override.

Automating deposits in an employer-defined contribution plan is easy. Fortunately, automating saving in a Roth IRA or a taxable savings plan is equally painless. Most brokers offer an automatic money link between your checking account and an investment account. Set your savings on autopilot.

Fourth, save an additional 5% of your salary in a taxable account. Again, set up an automated transfer. If your paycheck gets deposited the first of the month, arrange for a transfer of 5% to your investment account on the second or third. You need taxable savings for a host of financial planning opportunities as well as for a plethora of life's challenges.

By now you are saving 15% to 20% of your salary and living off the remainder. Learning to live deferring many of your wants until later is a crucial habit that millionaires have cultivated. Money makes money. And the money you need to make money is called "capital." The textbook definition of capital is "deferred consumption." Money now is spent and gone. Money saved and invested works for you, adding income every year.

Fifth, save an additional 10% for charitable giving. Many millionaires might suggest that being generous with a portion of your income should be first on your list, not fifth. But I've found that until you have your own financial security on track, it is difficult to help others don their own oxygen mask.

No matter where you think charity belongs in your priorities, a sensitivity to the truly needy will change your perspective about distinguishing needs and wants. Many millionaires live simply in order that others may simply live.

Save this additional 10% in your taxable account. By now you are saving 15% in a taxable account. For your charitable giving, gift the investments from the account that has appreciated the most.

No matter which worthy organizations you support, you can donate up to 15% more if you give appreciated stock instead of cash. If you sell $1,000 worth of appreciated stock, you will have to pay the capital gains tax of 15%. If most of the stock's value is appreciation, the tax owed approaches $150, leaving only $850 for charitable giving. But if you give the stock directly to the charitable organization, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock.

Up until now I expect you have been giving cash to charities. Now that you are developing some taxable savings, run your giving through your taxable investments. For every $1,000 of appreciated investments you donate, use the $1,000 in cash you would have gifted to buy additional investments. Think of this as planting the saplings you will harvest later for future gifting.

After several years, your $1,000 worth of cash should have grown to $2,000 worth of investments. Gifting a $1,000 worth of appreciated investments leaves the original $1,000 to keep increasing in value and fund future giving. This is one reason why frugal supersavers can be much more generous than those whose rich lifestyles preclude saving and investing.

Sixth, save an additional 10% in your taxable account for unknown unknowns. If your response is to ask, "Like what?" you are not understanding what I mean by "unknown." You can't plan for everything. But you can save cash for the unexpected.

Inevitably, families run up against cash flow problems because of unanticipated expenses. If you are living hand to mouth, your budget cannot handle large unplanned outlays such as the car breaking down, the roof leaking or emergency medical bills.

When a financial crisis strikes, you will be glad you have such a fund. Then, after using the money from your emergency fund, see if you could have predicted the expense, and adjust your plan accordingly. My wife and I learned this way to budget each month for the inevitable expense of buying our next car. The more you can foresee these expenses, the more this category can fund discretional big purchases instead of financial emergencies.

At this point you are saving more than 35% of your salary and living on less than 65%. This is the benchmark for a millionaire mindset. As you save and invest, the appreciation on your investments can provide income that replaces your salary, bringing you closer to financial freedom. When you can replace all of your income, you are free to retire or tackle challenges that do not make any money.

Every 25% of your salary you save replaces over 1% of your regular income in retirement. Money makes money, which then gives you the gift of financial freedom.

The seventh and final challenge is to expand this financial engine beyond 35% toward 50%. Living off half of your income requires a frugal lifestyle in comparison to your income. Impossible, you say? Unless you are among the truly needy, there are families out there living comfortably on less than half of what you earn.

And if you are among the genuinely wealthy, the only obstacle standing in your way is being accustomed to an affluent lifestyle. Learn to value financial freedom over opulence. Developing an engine of wealth production takes foresight and self-restraint in addition to time and patience. But the reward is financial peace and contentment.

 

from http://www.emarotta.com/article.php?ID=369

There's Still Time for Charitable Giving (2009-12-21)

by David John Marotta

The markets are up, and yet most nonprofits are still struggling financially. If you are charitably inclined, there's still time for end-of-year giving.

Charities are hit especially hard during tough economic times. They face reduced giving and often greater needs. They must find supporters who will donate more to offset those who will give less.

Charity freely offered is a virtue distinctly more valuable than any government program funded by taxes, which are an obligation and a duty. With no resources of its own, the government can only take the production of others and redistribute it. Political support for government entitlement programs is like being generous with your neighbor's credit card. Those who seek to be charitable must first produce more than they consume to have something to share. Only when you give of your own resources is it truly charity.

Americans are a generous people. But we don't like to pay taxes. Instead of giving cash, there are two additional ways you may be able to give so more of your money goes to charity instead of the IRS.

First, giving appreciated stock allows you to donate more generously. By contributing appreciated stock directly to charity, you can avoid the 15% capital gains tax. For example, if you sell $1,000 worth of appreciated stock, you will have to pay a 15% tax on the gains. If most of the stock's value is appreciation, the tax you owe will approach $150, leaving only $850 for charitable giving.

But if you transfer the stock directly to charity, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock. By giving stock, you can save on capital gains taxes and can make a bigger gift.

Second, if you are age 70 1/2 or older, there is another powerful way to give. This year you are allowed to make tax-free qualified charitable distributions (QCDs) directly from your IRA account.

Normally you would be obliged to take the distribution, increase your adjusted gross income (AGI) and then gift to charity as a charitable deduction. The difference may not be obvious, but it's there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you increase your phaseouts and other additional taxes. Take $100,000 from your IRA and give it to charity, and the tax code still punishes you despite your generosity.

The QCD provision allows you to gift directly from your IRA. Although you won't get a deduction, it doesn't matter because it won't count as AGI in the first place. Each account owner may give up to $100,000 in 2009 without having to pay income tax on the distribution. Gifts from IRAs are also an excellent estate-planning tool, if you are interested in making a large gift to reduce the size of your estate. The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules.

If fear and worry about your own investments are eclipsing your charitable nature, there's help. Find out the state of your own finances, so you are confident you can afford to be a donor rather than a recipient of charity.

Not knowing is sometimes worse than finding out. Fear drives out emotions like kindness and compassion. And such angst may block purposeful giving from the heart. As St. Paul admonishes, "Each man should give what he has decided in his heart to give, not reluctantly or under compulsion, for God loves a cheerful giver" (2 Corinthians 9:7).

With the unemployment rate currently at 10.2%, this is an especially good year to focus on organizations that support families in financial need. Although everyone has been affected, some families have been singularly hurt and are in need of a little extra help.

Contributions this year could also determine the very survival of some nonprofits. Organizations, especially those without endowments, have been especially strapped this past year. Although the fundraising letters of many organizations can often seem desperate and dire, this year they are most likely to be true.

If you want to know if your gifts to charity are being used as well as they could be, you are not alone. Four of five Americans worry that the charities they support are not stewarding donations well. Fortunately, checking up on them is simple.

Because charities don't pay taxes, Form 990 serves only as an informational return. But for the curious donor, it provides a benchmark to compare the relative health of charities. On the form, you'll find data about how much of your donated dollars go to overhead versus program services. The form also includes facts on revenue streams, general expenses, wages paid to key employees, plus a list of board members.

Although charities are required to send you a copy of their 990 upon request, the fastest way to locate a free copy is to go online. GuideStar.org and FoundationCenter.org both provide free access to 990s as well as search tools to find other charities in your state or city.

Management and fundraising is expensive. Do you ever wonder how much of every dollar you donate actually goes to such overhead costs? Form 990 provides a clear breakdown of funds spent on overhead and fundraising compared to expenditures on program services.

When examining a charity's spending, experts suggest that 65 cents (or more) of every dollar should be spent on program activities. However, due to the type of service the charity performs, more or less may be allocated to program services. For example, an art museum typically has higher operating costs because of its specialized facilities and security requirements and may allocate as little as 50% of the overall budget to program services. A food bank, in contrast, might be able to devote more than 90% of gifts to feeding the hungry. The key here is to compare similar charities to each other.

A host of online tools can give you additional insights about the nonprofit in question. Charity Navigator, at <a href="http://www.charitynavigator.org" target=_blank>www.charitynavigator.org</a>, lists ratings for charities based on their financial health. And the Better Business Bureau Wise Giving Alliance measures public charities against its 20 standards for charity accountability. Their analysis of nearly 1,600 national charities can be found at <a href="http://www.give.org" target=_blank>www.give.org</a>.

When you give to charity, you make an investment. By doing a little homework, you can be sure your gift gives you the best possible return on your investment. And although certainly giving is its own reward, giving wisely increases the blessing.



from http://www.emarotta.com/article.php?ID=368

Marley's Ghost Was Haunted by Regret (2009-12-07)

by David John Marotta

"Marley was dead." That's how Charles Dickens's  "A Christmas Carol" begins. Jacob Marley, dead exactly seven years to the day, is the real ghost in the story. We see Ebenezer Scrooge's life in light of his partner's death. Although the way the two men approached their finances may seem identical, when we take a closer look, subtle but important distinctions emerge.

In his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes different financial personalities. He depicts a "miser" as someone who is strongly motivated by fear but has a natural inclination to save.

Whitehead maps financial personality on two different scales. The first measures people's tendency toward greed or fear. As a miser, Marley is motivated by fear (low risk acceptance), whereas his longtime partner Scrooge tends much more toward greed (high risk acceptance). The second scale measures an individual's tendency to save or spend. Here both Marley and Scrooge are practiced savers.

When two portly gentlemen stop by Scrooge's office soliciting charitable donations, they discover that Marley has been dead for seven years. One comments, "We have no doubt that Marley's liberality is well represented by his surviving partner." The narrative continues, "It certainly was; for they had been two kindred spirits."

Liberality cannot come from someone who is personally fearful. Distrust drives out emotions like tenderness and compassion. Scrooge confirms this condition in Marley as he looks through his ghostly form and remembers ironically that it was said of Marley he had no bowels. Marley had no empathy for others because he was too anxious for himself.

To Americans celebrating a traditional credit card Christmas, the distinction between a scrooge and a miser may seem insignificant. Both types are cold skinflints who don't spend money to make merry at Christmas. Although their tendency toward frugality may match, however, their investment philosophies do not.

"Misers," Whitehead writes, "are champion savers, but they have little to show for it. They are fearful about investments, even straightforward ones that are simple to explain and understand. At the most extreme, these are the people who keep all their money in a mattress or cans buried in the backyard. More commonly, people with miser-like tendencies hoard their money in bank accounts and Treasury bills."

Unlike scrooges, misers are fearful, a trait they share with Whitehead's other personalities, bon vivants and spendthrifts. All three types worry there won't be enough money. Spendthrifts spend it before it's gone; bon vivants spend it, but only on themselves; and misers hoard it in case they need it later. However because risk and return often go together, playing safe generally does not lead to building real wealth. Wealth is not just what you save; genuine wealth grows from what you save and invest.

Marley may have been a good man of business, but Scrooge was such an opportunist that on the day of his partner's death he "solemnised it with an undoubted bargain."

Scrooge lives in Marley's former chambers. But where Marley saw security, Scrooge envisions opportunity. Scrooge stays in three of the rooms and rents out the others, both above and below his quarters, as offices. He even leases the cellar to a wine merchant.

Misers like Marley don't like to take any such chances. They prefer investments that are touted as secure and come with guarantees. For example, fear often motivates misers to buy life insurance as an investment. Salespeople tout the safety of their company and switch fluidly between guaranteed returns and rosier projections or illustrations.

Misers also buy annuities, which they believe are tax shelters or will guarantee an income for life. With immediate annuities, misers can be so enamored by the annual lifetime return of 6%, they fail to notice the guaranteed 100% immediate loss of their principal. They also generally don't factor in the incredible drag of inflation and the devaluing of the dollar.

It can take a while before misers understand the long-term effects of their actions. They can be shocked to find their financial institution bankrupt, their ultimate taxes higher than necessary and their cumulative return less than savings bonds.

Misers may sleep well tonight, but they won't eat well in 20 years. They are relieved not to have been invested over the past 14 months, although balanced portfolios have shown gains. They are especially glad not to be invested in emerging markets, even though that's the asset class with the highest gains. They are content earning less than 2% while the government devalues the dollar with inflationary spending.

Not taking any risks is a recipe for long-term regret. Some risks are worth taking in life, including calculated financial risks. The danger of a miser's long-term regret is easily avoidable. The solution, of course, is financial education.

There are many worthy long-term investments. But misers worry that much of the financial world is just trying to part them from their money. They need someone who sits on their side of the table to teach them. Misers have learned to love saving their money. Now they just need to learn to love investing. And misers can be very quick learners.

A second regret of misers, and the true moral of Dickens's story, is saving money without any purpose. Marley dies having translated very little of his money into anything of value. Dying having spent the smallest amount is even more meaningless than dying with the most. At least Scrooge invested his money. And after seven years he had probably doubled it.

Perhaps one reason why misers are tightfisted is because they haven't learned how to handle investments. They can't share from an abundance of wealth because they've been too cautious in handling their finances to afford such largess.

Neither Scrooge nor Marley ever asked what the money was for. Marley held on to his out of fear of not having enough. In contrast, Scrooge saved and invested, so he was more able to look beyond his counting house when the spirits haunted him. Marley, looking back on his life, was the first to warn Scrooge, "The dealings of my trade were but a drop of water in the comprehensive ocean of my business!"

We might well feel sorry for Marley. He did nothing wrong. He just wanted to be left alone. His sins were of omission, not commission. To paraphrase the words of the Book of Common Prayer, it wasn't that he did the things he ought not to have done. It was that he left undone the things he should have done.

As Jesus preached, Marley was like "the one who received the seed that fell among the thorns . . . who hears the word, but the worries of this life and the deceitfulness of wealth choke it, making it unfruitful" (Matthew 13:22).

Marley wanted to be left alone to deal with his business. But after death he laments, "Mankind was my business. The common welfare was my business: charity, mercy forbearance, and benevolence, were all my business." Marley saved money but never understood why.

Failing to ask what the money was for left Marley in death with "No rest, no peace. Incessant torture of remorse." And time matters for both investments and our lives. In the long run, we all will be gone from this life, so we must make the most of time, both for our investments and for our lives. The two, it turns out, are inexplicably intertwined. Our wealth is just a placeholder for what we value.

Marley tells Scrooge bluntly in the first chapter of the book, "Any Christian spirit working kindly in its little sphere, whatever it may be, will find its mortal life too short for its vast means of usefulness." And in the final chapter, Scrooge has learned the lesson and found the joy it brings. Having found his affections changed, he finds that "everything could yield him pleasure."

Work kindly in whatever sphere God has placed you. Know what the money is for. And remember Marley's admonition: "No space of regret can make amends for one life's opportunities misused!"

 

from http://www.emarotta.com/article.php?ID=366

Best Christmas Presents (2009-11-30)

by David John Marotta

Many people spend more during the holiday season than they can afford. Guilt or shame drives them to put too many big-ticket items under the tree. But the satisfaction is both short-lived and shortsighted. Understanding the economics of gift giving may help you decide when and what to buy for Christmas.

You might take comfort in Wharton School professor Joel Waldfogel's book, "Scroogenomics: Why You Shouldn't Buy Presents for the Holidays." In his economic analysis, people are the most efficient when spending their own money, producing at least a dollar in satisfaction for every dollar they spend. But spending money on those we don't know well results in what Waldfogel calls a "deadweight loss" of about 20%.

A deadweight loss is an economic term signifying a loss by one party (in this case the giver) that is not offset by a corresponding gain by another party (in this case the receiver).

With Christmas spending in the United States at $100 billion, this loss results in "an orgy of wealth destruction" to the tune of about $20 billion.

Waldfogel's study found that givers with infrequent contact were those most likely to give less appreciated gifts. This group includes aunts, uncles and grandparents who live in another town. He compares these gift givers to the loss experienced when some government bureaucrat guesses at what we really need and makes choices for us. According to economists, people are better off when they make their own choices. For this obvious reason, Waldfogel suggests giving money or gift cards instead.

His original 1993 paper, "The Deadweight Loss of Christmas," was perceived as an attack on the holiday. So Waldfogel clarified that his critique is a study of the economic inefficiencies caused by the commercialization of Christmas and gift giving to strangers.

To the criticism that he had taken the joy out of Christmas, he responds that after watching desperate last-minute shoppers, he thinks the joy was taken out of Christmas long before his critique.

Of course railing against the commercialism and waste of Christmas is a cliché. Finding creative ways of showing your love and caring for others is more complex and nuanced. Here are some categories of gift giving and receiving you may find helpful.

First, learn to distinguish between a gift and a present. It's a gift when you give something the other person wants to have. It's a present when you give something you want the other person to have. When we offer a dictator military support, it is a gift. When we give him a copy of the Constitution, it is a present. At Christmas, sometimes we are trying to give gifts; other times we are trying to give presents.

Some gift giving is a social expectation and a test of the relationship. For example, for couples who are dating seriously, the message is much more important than the medium. Give a book the other person despises, and you have revealed how little you pay attention to your loved one's opinions. But a pair of gloves, with a heartfelt note saying, "These will keep your hands warm when I'm not there to hold them" would show your affectionate side. Or perhaps the receiver doesn't like romantic mush, and you are expected to know better.

Parents can help extended family members select gifts for their children by providing specific wish lists to ensure that what they buy will truly be appreciated. If you aren't confident, include a gift receipt. You are guarding against deadweight loss when the recipient can exchange the gift or return it for cash.

Families can help make exchanging a gift more socially acceptable. It doesn't mean that the recipient did not appreciate the gesture or does not love the giver. Sometimes with after-Christmas sales, if you have the receipt you can get the original value back, purchase a different make or model at a discount and still pocket a sizable amount of cash.

And in families where children don't have any spending money, cash may be the best possible gift. Handling cash with all the complexity of choice is an experience that offers irreplaceable life lessons.

Presents are handled differently. A present is when you buy Grandpa an iPod because you know he would never buy it for himself. Or when you give Grandma a computer with a built-in video camera so she can enjoy more contact with her grandchildren. It is a present if you want the recipients to have it more than they realize they want it.

Thoughtful presents may kindle new interests or prove inspiring. For example, they can encourage children to develop their talents or expand their horizons. My favorite Christmas gift idea comes from "The Homecoming," the first movie about the Waltons, in which the father buys John Boy paper and pencils. His gift, which affirms his son's choice of writing as a career, is the emotional climax of the story.

Try asking people, "What Christmas present changed the course of your life the most?" to see how much influence you can have. A pair of binoculars sparks a love of ornithology. A telescope fuels a fascination with astrophysics. A microscope leads to a biology career. An electronic toy prompts your daughter to join a robotics competition.

Not all presents need to be academic. A graphics tablet can lead to a design career. A guitar can inspire your son to form a new band. Or a video camera can lead to a later career choice in filmmaking.

Discovering talent, calling and vocation is never foolproof. Every success will be accompanied by many more failures, but that's what it takes to help children find their passion. Sometimes the risk of giving a present that may or may not be wanted is worth the possible deadweight loss. It is like research and development in the pharmaceutical industry. Most experiments are dead ends, but the whole process is worth the one success. Think of presents as R&D for the course of someone's life.

Presents that expand a child's horizons are a satisfying way to fight the commercialism. Another way is to work toward redefining our expectations for Christmas. That's what Christmas is all about. Their website explains, "It's not about reinventing the holiday. It's about changing the way we look at gift giving and receiving."

At the site you can arrange for gifts to nonprofit organizations in lieu of personal gifts and send gifts in someone else's name to his or her favorite charity. Consider their wise words: "There is no question we are in the midst of difficult financial times. And if it has you feeling unsure or uncomfortable this holiday season, imagine how purely difficult it's becoming for people who already, or are about to, depend on the generosity of others for the things that only a donation can provide."

Finally, some parents who are still unemployed will disappoint their children if they are hoping for expensive gifts this year. I've known a few families who had to tell their children that celebrating a traditional American credit card Christmas would jeopardize the family's financial security. Many parents are experiencing the first economic setback in their adult lives. Being financially cautious doesn't mean you love your children any less. And if you can be positive and reassuring, you needn't try to shelter you children from household economics.

The greatest joy of the holiday season is not bought in a store and does not increase your credit card debt. There is a better way to celebrate that builds long-lasting family ties.

Recognize that serenity during the holidays comes from taking time to celebrate values that don't show up in your net worth statement. Start by asking your family to share their fondest holiday memories. Make a list of all the things you have gotten right in past years and make them annual family traditions. Add a few new ideas each Christmas. The best holiday traditions don't cost a lot of money, and they aren't wrapped and put under the Christmas tree.

 

from http://www.emarotta.com/article.php?ID=365

Fourteen Tax Management Techniques (2009-11-23)

by David John Marotta

No one approaches financial planning with the goal of paying more taxes. Tax management, like all financial planning, is based on the premise that small changes made over time can achieve big goals. Good investment returns are important. But over the next few years, comprehensive tax management may reap even greater gains.

Don't file your taxes in April and then forget about them for the next 10 months. By investing a little time throughout the year, you can create compounded value. The 14 techniques described here may help you lighten your tax burden.

1. Check line 45 on your 2008 IRS form 1040 to see if you paid any alternative minimum tax (AMT) last year. People subject to AMT pay an average of $6,000 more than they would otherwise. AMT turns tax planning upside down. Because conventional wisdom may not apply, be sure to review your financial affairs with a professional.

2. This year offered a spectacular opportunity for realizing capital losses. Realized losses can offset realized gains. They can also be deducted against ordinary income up to $3,000 a year. Any excess above $3,000 is carried forward and can be deducted in future years.

3. You can realize capital losses and still stay fully invested. Sell the security, and then wait 31 days before buying it back. Alternately, double up. Purchase the same number of shares you currently hold. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a so-called wash sale, which would prevent you from taking the tax loss.

4. Individual stocks offer more opportunities to realize capital losses or gift capital gains. This is useful primarily in larger portfolios. A portfolio of individual stocks collectively may mimic the return of an exchange-traded fund and still provide additional tax savings. For example, although the total return might be 10% for the year, one of the individual stocks has doubled and two others lost 50% of their value. By holding individual stocks instead of the fund, you are able to sell the two stocks that have a 50% negative return and take the loss on your taxes. Holding the stock that has doubled in value postpones paying capital gains.

5. Using appreciated stock for charitable giving can avoid paying capital gains entirely. This allows you to contribute up to 15% more than you could with a cash gift.

6. This year also extended the opportunity to make qualified charitable distributions. If you are 70 1/2 or older, gifts you make directly to charity from your IRA are not counted as income. In this way you can reduce your tax deduction phaseouts for additional savings.

7. Perhaps you are considering funding a 529 college savings plans for your children or grandchildren. Contributions in some states (including Virginia) qualify for a state tax deduction if executed before the end of the year. Up to $4,000 per account can be taken, with the remaining amount carried forward to future years. Account owners over age 70 are allowed to deduct any amount they contribute to a 529 plan in 2009.

8. Keep in mind that if you make your fourth-quarter state estimated tax payment prior to year-end, you can use it as an itemized deduction next year.

9. You may also give $13,000 per person in 2009 to an unlimited number of individuals without gift tax implications. Families interested in maximizing intergenerational wealth transfers should explore with a professional how trusts can minimize their tax burden and maximize estate planning.

10. Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.

11. Although small business owners shoulder much of the tax burden, they also enjoy more tax-maneuvering flexibility than other taxpayers. Reducing your taxes may be as simple as deferring income until next year or accelerating Section 179 expenses in the current year.

12. If you own a business, consider stashing cash in a retirement fund to reduce your tax liability. With a solo 401(k), you can contribute to the plan both as the employer and as the employee. As the employer, you can contribute either 20% of self-employment income or 25% of compensation income, depending on your company's structure. Plus, as the employee, you can contribute another $16,000 ($22,000 if age 50 or older). Finally, for the employee portion, tax planning can help you choose between a Roth 401(k) or a traditional pretax contribution.

13. Converting traditional IRA assets to Roth IRA accounts offers a chance for additional tax savings. Couples with an adjusted gross income below $100,000 can always consider a Roth conversion. Next year everyone, regardless of their tax bracket, can convert or contribute to a Roth IRA. And because 2010 is also the last year of the Bush tax cuts, you can use the conversion as a way to avoid the coming tax tsunami in 2011. Make plans now to prepare for next year's conversions.

14. Finally, a complex technique called "Roth segregation accounts" could earn your investments even more savings over the next two years. By segregating your Roth conversions in 2010, you can undo (or "recharacterize") those that underperform and keep the winners. This strategy offers you 20 months to determine which accounts to keep. It's as profitable as betting on the horse race after you know the winner.

Although just a small part of a larger comprehensive financial plan, savvy tax management requires professional assistance. Seek the guidance of a personal fee-only financial planner and certified public accountant (CPA), fiduciaries with a legal obligation to act in your best interests. The laws and ensuing complexities are changing annually, and as a result so is the optimum path.



from http://www.emarotta.com/article.php?ID=364

Mindless Spending 2: You'll Get By with a Little Help from Your Friends (2009-11-16)

by David John Marotta

Both mindless eating and mindless spending rely on our subconscious need to follow scripts to pace our consumption. Community plays a huge role in regulating our financial destiny--either a path of savings that builds real wealth or a path of spending that leads to impoverishment.

In one study cited in <a href="http://www.mindlesseating.org/" target=_blank>Brian Wansink</a>'s book "<a href="http://www.amazon.com/gp/product/0553384481?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0553384481">Mindless Eating</a>," people were invited several times to a lunch of pizza, cookies and soft drinks. They were watched both eating by themselves as well as in groups of four or eight. When the subjects ate alone, researchers used a baseline that allowed them to categorize people as typically light or heavy eaters. Interestingly, when people dined in the groups, the quantity they ate changed.

Light eaters ate more in a group, and heavy eaters ate less. Both kinds of eaters conformed somewhat to the average pace and quantity of the group's consumption. Mindless spending works the same way.

If you tend to be a conservative spender, shopping in a group can easily entice you to buy more than you would normally. Conversely, if you have trouble saving money, taking along a frugal friend will help you resist. In fact, following the lead of penny-pinching friends or family can help you evaluate your own lifestyle and change the way you view money.

Millionaire couples may have very little in common except that they all answer "yes" to these three questions: "Are you frugal? Were your parents frugal? Is your spouse even more frugal than you are?" A culture of frugality builds a lifestyle of wealth. You subconsciously learn an appropriate lifestyle from those around you.

My wife and I formed our spending habits right out of college. Our first community of friends earned very little. Their lifestyle made even ordering pizza an extravagance. Combined with the example of my parents' depression-era thrift, we started saving and investing early.

In contrast, if your parents golf at Farmington or play tennis at the Boar's Head Country Club, you may struggle to maintain a frugal lifestyle. If your friends live rich, you will too. Your spending scripts will be based on comfort and convenience. You will get the deluxe model with all the features. And you will invariably buy the added service, protection and accessories.

Spending money just to socialize with friends is an especially common trap. Teenagers who work all day for minimum wage and then go out for dinner and a movie can easily end the day having spent more than they earned. Meals out in expensive restaurants with elaborate appetizers, drinks and desserts add both to the bottom line as well as to your waistline. Consider inviting friends over for potluck and a game night, and everyone might afford to send their children to college.

Spending money is contagious. If you go to the mall and a friend is hunting for the perfect purchase, it's easy to get caught up in the excitement. If you want your turn in the spotlight, you have to be shopping as well. Even if what you buy is small, the expense still depletes your finances.

And if you don't spend money or you resist going to the fancy restaurant or the full-priced movie, you risk being perceived as cheap. You may even worry that your friends won't invite you because you spoil the party.

By voicing your concerns, however, you may allow others to agree without feeling as uncomfortable. Truth be told, the person most worried about the expense is often the most secure financially. After all, wealth is what you save, not what you spend. And if your friends won't adjust to help you meet your financial goals, maybe you need different friends.

A life of country clubs, facials and galas will obligate you to spend money. If your social life includes such activities, budgeting will be difficult. Your financial stability may ultimately require developing relationships with people who are more fiscally conservative. It's your choice either to live rich or actually be rich.

Spending habits begin very early as we follow the lead modeled by our parents. In many homes, financial matters are a well-kept secret. Children are left to guess and infer from their elders’ actions and cryptic remarks. As a result many children learn habits that threaten their ultimate happiness and success.

<a href="http://www.kinderinstitute.com/" target=_blank>George Kinder</a>, author of "<a href="http://www.amazon.com/gp/product/0440508339?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0440508339">The Seven Stages of Money Maturity</a>," asks his clients to write an autobiography that focuses on their relationship to money and the beliefs they have acquired. This exercise can help you examine your ingrained assumptions about money. Belief is powerful. As people think, so they will act.

And if everyone around you is doing something, it seems normal. Consequently, one person in a family can't single-handedly change the family's financial DNA. Deeply entrenched traditions generally will overwhelm any one family member who tries to question them.

So galvanize the whole family behind budget changes. It takes explicit communication. Children as young as four years old can contribute and learn from the process. There's no stigma attached to living within your means. If a budget isn't a team effort, then one family member will end up holding the purse strings and everyone else will be resentful.

Both spouses must start on the same page and with the same degree of humility. Every financially struggling family has one partner who believes he or she is the careful one with money and that any financial problems are the other person's fault. Most of the time, this generalization is untrue. It is relatively easy to be frugal by comparison if you abdicate all the spending decisions to your spouse. That way you can enjoy the results of spending without any of the guilt.

Serving as a role model in the family includes setting the pace and nature of spending. Learn to regulate when and how much money gets spent. Norms are set in the trenches of everyday spending, not in criticizing the number of presents on Christmas morning.

Even the most reclusive among us relies on spending scripts and norms to regulate when to open their wallet and when to refrain. If you are happy with your spending scripts, that's great. But if you are trying to change them, you need a little help from your friends.

Behavioral changes are best reinforced when you ask everyone you know to help you make the change permanent. It takes explicit thought and energy within your social network to overcome mindless spending scripts. And it takes a consistent effort for at least a month or more before new habits begin to take root.

The task is challenging but certainly not impossible. And small behavioral changes can result in building significant long-term wealth. The reward of financial peace and security is worth developing a prudent and thoughtful lifestyle.

 

from http://www.emarotta.com/article.php?ID=363

Mindless Spending: Frequency Matters More Than Height (2009-11-09)

by David John Marotta

Dieting and budgeting face similar hurdles in the American lifestyle. Some of us live to eat; others eat to live. Attempting to reduce our spending is every bit as challenging as trying to slim our waistlines. Some shop to live; others live to shop.

We can better understand mindless spending by looking at some of the psychological studies that <a href="http://www.mindlesseating.org/" target=_blank>Dr. Brian Wansink</a> describes in his book "<a href="http://www.amazon.com/gp/product/0553384481?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0553384481">Mindless Eating</a>." He explains, "Everyone--every single one of us--eats how much we eat largely because of what is around us. We overeat not because of hunger but because of family and friends, packages and plates, names and numbers, labels and lights, colors and candles, shapes and smells, distractions and distances, cupboards and containers."

"We all think we are too smart to be tricked," warns Wansink. "That is what makes mindless eating so dangerous."

One study compared the amount people would drink using two differently shaped glasses. One glass was tall and skinny. The other was short and wide. Each glass had the same capacity, but people would drink 25% to 30% more from the short glasses than the tall ones.

Interestingly, our brains focus too much on the height of objects and underestimate the effect of their width. So people with short wide glasses had to fill them more before they believed they had consumed the same amount as those with the tall skinny glasses.

We all think we can't be fooled by something as obvious as the shape of a glass. But our brains are wired that way, without exception. If you want to drink less, you can measure every portion or simply buy tall skinny glasses. Better yet, buy glasses that are very narrow at the bottom or elevated on a stem.

Finances work the same way, and by extension, so does mindless spending. Many families are struggling to get a handle on their savings. They are trying, often in vain, to find ways to cut back. But when we are worried about our expenditures, we tend to look at the dollar amounts more than the frequency of our purchases.

For example, a young woman named Emily inherited a sizable sum of money. She could have used it to make a sizable down payment on her first house. But instead of protecting her windfall, Emily attached a debit card to the account for the convenience of paying for a few items she needed.

In less than two years she had spent most of her inheritance in increments of no more than $35. That doesn't seem like a lot of money because the $35 height is relatively small. Given a width of three times a week, the height isn't even noticeable. The same $105 Emily spent would have seemed like a much larger budget item if it had been in a single purchase. In that case she might have refrained from handing over her debit card so casually.

Other purchases were $50 monthly memberships or $100 a month services. Very few of these purchases were over $100, but when they were added up, Emily had drained her account.

The frequency of a purchase matters even more than its height. But our brains tell us to be more concerned about the height.

Marketing firms use this principle all the time to bypass our defenses when they break annual purchases down into low monthly payments.

An offer I received in the mail recently explained its cost as "Only $4.99 per month with an annual subscription (billed as one payment of $59.88)." The advertised rate only applied if you were willing to purchase the entire year. If you wanted to be billed monthly, the rate was $9.99.

Advertising a $59.88 annual subscription fee as $4.99 per month relies on the fact that consumers are more sensitive about height than breadth. Note that the primary way they advertised the subscription, $4.99 a month, was not one of the options! Even more deceptive would have been making the offer 16.4 cents a day for an annual subscription. Less than a penny an hour!

They even marketed as a feature the service of charging your credit card automatically each year: "All subscribers get the hassle-free advantage of the Unlimited Automatic Renewal Program. At the conclusion of your first term and each subsequent term (one year or one month) we will automatically renew your membership upon expiration for the same period so you get continuous service unless you tell us otherwise."

Madison Avenue takes advantage all the time of the way your brain works. So it's in your best interest to learn to use your brain to your own benefit.

We recommend that every household have a dollar limit that domestic partners agree not to exceed without consulting the other. This way they can avoid budget busters, single items that can wreak havoc on a spending plan. The same caution ought to be put in place for any reoccurring charge, no matter what the price.

Similarly, when people are seeking ways to reduce their spending, they tend to look at big-ticket items or daily needs. A much less painful and more productive alternative is to look at the purchases you don't have to decide about every day (e.g., automatic subscription services).

Consider that the average family spends hundreds of dollars on a host of monthly services such as iPhone, Skype, TiVo, Netflix, Palm Pre, GPS Pet Locator, World of Warcraft, The Sims Online, anime subscriptions, comic subscriptions, health clubs, season tickets, and online file sharing or backup. Average people who can't afford to pay for their own health-care costs pay twice that amount in monthly subscription fees.

And each of these monthly fees is laden with extra features for an additional charge. Before the era of cell phones, I would save my quarters. If I needed to call home, I would stop at a pay phone. In addition to driving safely without the distraction of talking at the same time, which of course is still advisable, my phone expenses for the month were minimal. The latest base cost for an iPhone over two years is about $4,000, which could go a long way toward covering a family's annual health-care costs.

If you can afford a full-featured cell phone, by all means indulge. I assume you've done your retirement planning and are saving more than enough each month. If not, and you only need a cell phone for emergencies, however, buy a single-use cell phone and keep it in your car. You will only pay for the minutes you use, and the money you save will be significant.

If you saved and invested $2,000 a year at market rates of 10% a year, you would have about a million dollars in 40 years. Every young person with an iPhone is missing a million dollars at retirement to fund that trendy subscription.

Cutting back on reoccurring spending is easier because you don't have to decide every day to refrain from spending. Sometimes it is as simple as deciding to eliminate features. Extra charges accrue for voice mail, another for call waiting and still another for unlimited text messaging. If after you have dropped all these subscriptions and features you decide you really miss them, you can always add them back later.

If you are trying to cut back on your spending and save money, review every reoccurring charge on your credit card. Try living without the service or at least eliminating features. Many companies will release you from your contract and cancel your service for reasons of financial hardship. If you need to stop paying immediately, cancel the credit card being charged and get a new one.

Take your savings and set up an automatic transfer to your investment account. You can achieve big goals by making small changes consistently over time, which is the cornerstone of successful financial planning.

And although our brains aren't wired to realize it, frequency matters even more than height.



from http://www.emarotta.com/article.php?ID=362

Women Have Unique Financial Needs (2009-11-02)

by David John Marotta

Retirement planning is even more crucial for women than for men. Although most women are married, 85% outlive their husbands and are alone during their last years. Financial planning must address the unique issues facing older women who probably worked fewer years and earned less money than their spouses.

Sophie Tucker, whose early claim to fame was the song "The Last of the Red Hot Mamas," said at age 69, "From birth to age 18, a girl needs good parents. From 18 to 35 she needs good looks. From 35 to 55, she needs a good personality. From 55 on, she needs good cash. I'm saving my money."

Sadly, many older women lack good cash. Five of eight women rely on a husband's work records to receive their Social Security benefits. And for almost three of eight, those benefits represent 90% of their total income. Of those seniors who live in poverty, more than half are women.

Planning to have good cash must begin long before retirement. Many frugal and hardworking parents sacrifice to give their children the comforts that money can buy. In the process, however, they rob their children of character-building lessons they can only learn through personal experience.

This psychology is especially true for daughters, who are often protected from the discipline of handling money. Our daughters can only gain experience if we give them real responsibility. In other words, they need a safe way to learn the lessons of irresponsibility. As early as possible daughters should be given the slice of the family's budget that most directly affects them. By the time they are teenagers, they could be handling much of their own money.

A teenage budget offers financial training wheels. Only if teenage daughters are given money for clothes can they learn the tradeoffs between expensive outfits and other spending choices. Remember, not having sufficient money for everything you want provides a financial lesson that cannot be learned any other way. By giving your daughter enough money for all her wants, you're actually depriving her of future financial satisfaction and stability.

Be sure to include your daughter in family discussions about charitable contributions too. As children take charge of their own money, they can also learn generosity by choosing the organizations they want to support.

Parents are apt to require their sons to take a first job and protect their daughters from the working world. But by age 14 daughters should be working and funding their Roth IRA accounts. If you want to help, offer to match whatever your daughter earns so she can put your contribution into her Roth and still have spending money.

Every seven years a woman waits to start funding her retirement halves the amount of money she can save. Helping your daughter add $2,000 annually to her Roth IRA for the years between age 14 and 19 actually is a better choice than starting her at age 20 and funding her account for the rest of her life.

From age 18 to 35, Sophie says women need good looks. What they really need is a fiscally responsible husband. Often women leave the workplace completely to raise a family. Yet because women generally live longer and earn less, they cannot leave their retirement planning to later in life. A loving husband makes sure his wife's retirement isn't sacrificed to his career and the children's needs.

My advice to all women: Make your retirement a priority. You may be more concerned for your family's needs than for your own safety. Just as you must do in an airplane emergency, put on your own oxygen mask first so you'll be able to help those around you.

Fund your retirement even if you don't work. Unemployed spouses can still fund their retirement through traditional or Roth IRA accounts or simply by savings in a taxable portfolio.

Don't guess at the amounts you should be saving. Know what goal you are trying to achieve.

In addition to inflation and interest, retirement planning needs to take into account taxes, capital gains and the different ways to save: taxable, tax deferred and Roth. Retirement planning also involves projections of accumulating assets for 40 years and spending during a retirement nearly as long. You can't compute how much you should be saving on the back of a napkin.

Know what percentage of your retirement goal your current assets can grow and cover, so you can determine if you are ahead or behind schedule. It also helps to calculate if you are pacing yourself correctly. And then you can decide how much you need to be saving each month toward your retirement.

Pay yourself first. Your savings should be automatic. You won't miss what you don't see.

Automating your contribution to an employer-defined contribution plan is easy. If you aren't employed, you can still automate a taxable savings plan. Most brokers offer a link between your investment account and your checking account and also an automatic transfer between the two. It's a painless way to move money each month into your retirement or savings account.

Save and invest as little as $100 a month for 46 years earning 10%, and you can retire with a million dollars. And $500 a month grows to an astounding $5 million. Those gains can only happen if you start saving while you are young. If you are beginning later in life, you will have to save and invest more each month.

From age 35 to 55, Sophie says a woman needs a good personality. By that time in her life, Sophie was running her own company. At this point many women have finished raising young children and have time for business ventures. Serendipity in the business world often arises from our reputation for kindness. Sophie showed kindness even to strangers as a part of the Jewish practice of "tzedakah."

Best translated as "righteousness" or "justice," tzedakah goes beyond charity. It is the responsibility to reach out to others, giving of our time and money. According to the great philosopher Maimonides, the highest form of tzedakah is providing a person work so he or she can remain independent and self-supporting. Thus age 35 to 55 is a perfect time for women to turn their success into significance by starting a business.

From 55 on, Sophie continued to use her economic independence to help and empower others. She founded the Sophie Tucker Foundation, which contributed to a host of worthy causes.

Sophie Tucker continued working until weeks before her death at age 82. "The secret to longevity," she said, "is to keep breathing." Today's women are likely to keep breathing a lot longer. We recommend that women anticipate a retirement well into their 90s. Dying young isn't a good plan.

Preparing for retirement is more than putting money in an account. You must work periodically through mathematical assumptions and projections to ensure you will meet your retirement goals. Annual financial physicals ensure that your portfolio will remain as strong and healthy as you want to be.

Financial success is only one of the three components of a successful retirement. Having a healthy diet and staying active physically is equally important. And maintaining a good relationship with engaging and meaningful work is the most critical of all.

Sophie's gusto for enjoying a full life provided several generations with an example of a strong independent woman. Women at every age should be saving and investing at least 15% of the lifestyle they want in retirement. For every seven years they delay saving and investing, they cut that lifestyle in half.

Any plan older than two years is out of date. As your savings change, their projected value will cover a different percentage of your retirement goal. While market returns fluctuate and your standard of living increases, you may need to adjust your monthly savings. And your investments should grow gradually more conservative as you approach retirement age.

Financial independence opens doors for success and significance later in life. As Sophie Tucker reminds us, "I've been rich and I've been poor--and believe me, rich is better."



from http://www.emarotta.com/article.php?ID=361

Portfolio Recommendation Beats S&P 500 by 9.4% (2009-10-26)

by David John Marotta

Exactly a year ago I encouraged you to avoid another lost decade in the markets. I recommended a specific balanced portfolio that today is beating the S&P 500 by 9.4%.

At the end of September, the S&P 500 was down 6.9% after one of the most volatile 12 months in the market's history. Even over the past 10 years it lost money with an annualized return of -0.15%. So although buy-and-hold investors are relieved the markets have recovered much of their losses from lows in early March, all is not dividends and capital gains.

To add to their distress, many buy-and-hold investors did not even receive the market return. They purchased closet index funds with overly inflated expense ratios. Excessive fees sapped value from their investments while the underlying strategy proved fruitless.

Many active investors fared far worse. In their scramble to avoid bloodshed, they sold near the lows. They didn't get back into the markets until the recovery passed the point at which they had exited. Timing the markets this past year was nearly impossible. The drop was precipitous, but the recovery was equally steep. Those who rebalanced at the low took money out of safe investments and bought into equities just when the outlook was the bleakest. These fortunate contrarians boosted their returns significantly.

So did those people who simply diversified into the blended portfolio I recommended a year ago. That portfolio experienced a 2.48% gain over the past year in contrast to the S&P 500's 6.91% loss. It beat the S&P 500 by an impressive 9.39%.

We generally do not recommend S&P 500 index funds. The S&P 500 is a capitalization-weighted index. It tends to buy more of a stock when it goes up and hold less of a stock when it becomes more reasonably priced.

If the S&P were a financial advisor it would say, "Let's buy mostly large-cap growth stocks in the industry that did well last year with a high price per earnings ratio." The result would be a very aggressive and volatile portfolio that does better at the end of a bull market than at the beginning. And it does miserably at preserving capital during a bear market--exactly what happened over the last decade.

So if you are invested primarily in funds that mimic the S&P 500, a lost decade should be no surprise. If we use market history to run hundreds of Monte Carlo simulations on a portfolio invested in an S&P 500 index fund, projections indicate returns at or below zero about 6% to 7% of the time. This scenario is an astonishingly accurate snapshot of trends in the past 100 years in which six 10-year periods showed no gains. These periods were the 10 years ending in 1914, 1921, 1932, 1938, 1974 and 1977.

If you were invested in the Vanguard 500 Index, your 10-year average return through the end of last month was -0.23%. The official rate of inflation during the past decade averaged 3.0%, but in reality it was probably at least 5%. If you were invested in an S&P 500 fund, your decade-long progress toward your retirement goals has stalled significantly.

But if you were a savvy investor, you did not lose this past decade. If you committed to a balanced portfolio, you experienced both higher returns and lower volatility.

Even a balanced portfolio of just six different common funds could have boosted your 10-year average return to 6.21%. And it would have lowered your volatility from a standard deviation of 16.25% to only 14.83%, a 6.36% better annual return with 1.42% less volatility.

The portfolio I recommended didn't cherry-pick investments that have done the best recently. Rather it chose widely used funds from each major asset class.

My comparison portfolio allocates 20% to fixed income in the Vanguard Total Bond Index (VBMFX). Of the remainder, it designates 31% to U.S. stocks with 21% in the Vanguard 500 Index (VFINX) and 10% in the Vanguard Small Cap Index (NAESX). Another 31% goes to foreign stocks with 21% in Vanguard Total International Stock (VGTSX) and 10% in the Vanguard Emerging Market Index (VEIEX). The final 18% is invested in hard asset stocks in the T. Rowe Price New Era Fund (PRNEX).

The funds just described have been popular for over 10 years. They have not made their gains from active trading. And they have low expense ratios. These are not necessarily the ideal funds to select today. Nor is this the flawless asset allocation. These are simply reasonable funds in each asset class.

Both in theory and practice, a balanced portfolio has proven to be a far superior way to meet your financial goals. In Monte Carlo simulations, balanced portfolios earn money over a decade, even the bottom 5% of random returns. The exact portfolio construction is less critical than including asset categories with a low correlation to the S&P 500. A well-balanced portfolio should result in good returns with lower volatility. Returns will still vary widely because the markets are inherently capricious, but the worst cases should be considerably better.

Of the six holdings listed here, the best return over the past 12 months was the Vanguard Emerging Market Index (VEIEX), up 17.38%. This holding dropped the most a year ago but recovered even faster.

Downward pressure on the U.S. dollar has continued in recent months. So we are still strongly advocating portfolios that hold a significant percentage of assets denominated in other currencies. These assets include foreign and emerging stocks, foreign bonds and hard asset stocks.

Holding on to an undiversified portfolio will, on average, keep on providing inferior returns with higher volatility. Don't continue to wait in vain for a poorly balanced portfolio to satisfy your investment requirements. You can't afford to miss another year or another decade.

 

from http://www.emarotta.com/article.php?ID=360

Credit Card Karate: The Moves to Block Spending (2009-10-19)

by David John Marotta

The availability of easy credit does not encourage financial virtue. Five minutes of credit card indiscretion literally can undo a life of financial responsibility, just like flirting at a bar with an available stranger can threaten marital fidelity.

You are trying to stick to your budget and live well within your means. You want to be a supersaver, someone who amasses real wealth by living simply and investing the remainder. To achieve these goals, you have to set rules in advance for how you will handle credit. If you don't, credit cards could undo all your hard work and planning.

A life of credit card debt is like the worst slavery imaginable. Failing to pay just a few hundred dollars a month will cause your debt to spiral out of control. At the end of just three years you could owe about $9,600, the average family's credit card debt.

Credit cards rates of 18% or even more are typical when you fail to pay. It used to be called usury and was illegal. But nowadays it is described as financial services and has become a highly respectable career.

If you don't stop buying that $200 worth of junk on credit, your debt will only worsen. After 24 years, you could be over a million dollars in debt for just $58,000 worth of merchandise. But if you switch that engine from reverse to forward, you could retire as a millionaire simply by saving and investing what you aren't paying on your credit card.

Consider the two sides to using credit. On the one hand, credit cards provide you with convenience, protection and help you maintain your budget. On the other hand, they can be a seductive siren's song leading you to financial ruin.

A few visualization techniques can help you avoid the wanton use of credit cards. Studies show that when people pay with a credit card, they are willing to spend twice as much money as when they use cash. Other research indicates that the biggest savings are enjoyed when people refuse to make small everyday unnecessary purchases. Put these two studies together, and by simply using a credit card you risk doubling your spending and cutting your savings in half. Thus credit card debt can sink families even faster than saving and investing can help them grow rich.

In the first visualization, imagine that everything you buy with a credit card costs twice as much as the number on the price tag. Only if an item costs twice as much will you be as hesitant to purchase it as if you had to pay cash.

To use the second technique, remove the decimal place on the price when you use your credit card. The younger you are, the more failing to save early will cost you when you retire. For example, at age 20, the $8.50 lunch you charge will cost you $850 in your retirement at age 63. If that isn't incentive enough, add another zero. It will cost you $8,500 in your retirement by age 85.

The years after college and before children are a great time in your life to save. You may not have another time to save aggressively until the kids graduate from college. You lose time and squander your resources if your credit card spending dampens aggressive savings. Every seven years you wait to fund your Roth IRA, you cut your retirement standard of living in half.

There's a greater advantage to contributing $2,000 annually for the seven years after college then beginning during the eight year and continuing for the rest of your life. With normal market returns, after seven years of $2,000 annual contributions, your investments will be appreciating at a rate of more than $2,000 a year, without any additional contributions.

Reining in your spending anytime is better than concluding that credit card debt is inevitable. Wait seven years from now and you cut your retirement lifestyle in half again. So visualize cutting your retirement in half or your credit card.

If you don't think you have any problems with your use of credit cards, but you haven't been saving and fully funding your 401(k) and Roth IRA, you do have a problem. If so, put the credit card back in your wallet and start saving.

Using a credit card properly is important. Not abusing a credit card is essential. Unless both partners in a marriage agree on how they handle credit, the cards aren't worth the plastic they are printed on. Either spouse should have veto power regarding the use of credit.

Each partner needs this respect because both parties can be liable for the underlying debt. So if you are part of a couple who are always paying fees or interest, you are better off running your budget with cash and envelopes.

There is no shame in alcoholism, only in being a drunk. Similarly, there is no shame in having credit troubles, only in continuing to be spendthrift. Financial troubles sink a great number of marriages, nearly all of them because they fail to admit that for them an open credit line is an empty credit line. Alcoholics struggle similarly with an open bottle.

Thus the only shame around credit problems is an unwillingness to accept help. Many people use credit cards intelligently for nondiscretionary purchases such as bills, utilities, groceries and gasoline. But smaller impulse items, such as eating out or spending on books, music, electronics or clothes, can quickly wreak havoc on their spending plans.

If one type of purchase causes you trouble, stop using credit cards in that area. If one person has difficulty, the other should be willing to bear the burden of paying the bills. Cash accounting means you can't spend too much. It is the perfect exercise of sobriety for your spending habits.

One of my favorite movies is "The Karate Kid" starring Pat Morita as Mr. Miyagi. Miyagi trains his young apprentice Daniel by having him wax his cars, sand his floors and paint a fence. Only after several days of backbreaking work does Daniel realize that his body has learned the defensive moves of karate through the muscle memory of "Wax on, wax off."

You can't learn the critical lessons of finance with the electric waxing machine of plastic credit. By refusing to use credit, you have the visual feedback of money going from your paycheck to a budget envelope and then leaving your wallet in exchange for something you really need.

Most people don't learn these lessons from their parents. And even if your elders handled money well, you still have to learn the lessons for yourself. Having a parent who excels in karate doesn't mean you can crane kick.

So if your spouse vetoes the use of credit, you can either get mad like Daniel did at Mr. Miyagi or you can get busy learning financial karate.

 

from http://www.emarotta.com/article.php?ID=359

Using a Credit Card Properly (2009-10-12)

by David John Marotta

Getting the right credit card for the right reasons is half the battle. Using it correctly is the other half.

When the perfect card arrives in the mail, sign it, activate it and pull the sticker off the front. But before you put it in your wallet and start using it, deny the credit card company the permission to market to you.

Dial the 24-hour customer service number on the back of the card. Tell the representative you want the maximum amount of privacy on your account. The credit cards companies have multiple lists in their system. You may find it challenging to turn off each possible marketing opportunity.

Specify that you want no phone calls, statement inserts or junk mail. That means no phone calls from third parties, no selling your information, no sweepstakes offers and no offers of credit protection.

Most importantly, make clear you do not want any access checks. These checks look innocent, but micro print on the back explains that by cashing the check you are accepting the company's offer to bill subscription charges directly to your credit card.

When you think you have listed every marketing possibility, be sure to ask, "Is there anything else I can turn off?"

None of these offers help you build real wealth, which is why they have to advertise them. You won't miss anything. We've all made the mistake of wasting too much time on a deceptively easy offer that subsequently was very difficult to rescind. Your time is worth more than sifting through the ashes of advertising looking for valuables. Do yourself a favor and repeat the process just described for all of your other credit cards too.

If you have already taken my advice, put all your purchases on your ideal card. If you spend $50,000 and earn 2%, you will receive an extra $1,000 to save and invest. It's worthwhile using a card that pays you.

Debit cards can be dangerous. Every time you use one, you reveal how to access your entire bank account and drain it dry. Hackers are targeting merchants who have debit card personal identification numbers (PINs) as the weak link in their security system. Your bank's computer system may be secure, but the computer in the gas kiosk where you just paid is not. Even using your debit card like a credit card leaves your entire account exposed.

The most you can lose with a credit card is $50, which you can simply contest and refuse to pay. The most you can lose with a debit card is $500 if you wait more than two days to report the fraud. Your liability is unlimited if you wait more than 60 days. And while you are waiting for the money to be replaced, supporting your lifestyle is up to you.

Additionally, debit transactions are routinely approved even you have insufficient funds. The bank processes the $5 charge and tacks on a $35 overdraft fee. It would take $1,750 in spending on your dream credit card earning 2% cash back to pay for one overdraft fee.

Pay the bill as soon as it arrives in the mail. Don't wait until the last minute. You never want to risk paying interest or late charges. Paying electronically via electronic transfer, Bill Pay or by using your debit card is the quickest and easiest method. Because these are bank-to-bank electronic connections, this payment method is secure. You will save both time and money.

If for some reason you are late paying the bill, pay it as soon as you can, and then call customer service. Explain the reason for the late payment, and ask for the interest and late charges to be waived. If you have been a good customer, they may agree but usually only once in a 12-month period.

If paying either interest or late payments becomes a pattern, put the credit cards in a drawer and opt for a debit or cash system. Both people in a marriage should agree on the use of credit, with either partner having veto power about using credit.

Watch out for a few other special situations. Some merchants require a minimum purchase to use your credit card, which violates Visa and MasterCard agreements.

Vendors are also prohibited from adding on a credit card surcharge, but they can offer a cash discount. Although this may seem like not much of a distinction, it means that if merchants have an advertised price, they are not allowed to charge over that price just because you are using a credit card.

If you believe a specific merchant has violated these rules, call either 1-800-VISA-911 or 1-800-MASTERCARD. Merchants need to keep the credit card companies satisfied, which is leverage you can use in a dispute. Having charged a purchase on your credit card can help if you believe a specific merchant has treated you unfairly.

Try to resolve the dispute directly with the merchant if you can. Most merchants are reasonable, but if they are obstinate, the question isn't "Can they do that?" The only question is "Will you let them get away with it?"

Every one of us has felt cheated by being promised more than we actually received. But you may not realize that leverage and the law are on your side if you are willing to take the time to dispute the charge. Wrongdoing thrives when good people do nothing. You can do something.

You can refuse to pay for any charge on your card during a dispute. I've only take the time to fight regarding a few charges on my credit card. It requires lawyer-like patience and an eye for details. Documentation, especially of the portion in dispute, is critical. So is following the rules, which includes putting everything in writing as well as keeping copies for your own records.

Remember that your credit card's financial institution wants to keep you as a customer. Issuing a charge back is easy for them to do pending the resolution of a conflict.

The merchant's bank similarly wants to keep the merchant as a customer, but only if their business practices don't generate time-consuming disputes. They only make money from a seamless volume of transactions.

The final step in using your credit card properly is to record your spending information. Part of wealth management is spending money deliberately. You need a way to keep track of your expenditures.

For couples in financial trouble, establishing and following a budget eliminates fights about the first dollar spent. It frees them to focus on those categories where they went over budget.

Capturing how you spend doesn't even have to take the form of a budget. It can just be a tool to see what you have done, decide together what you would like to do and adjust how you will spend your money going forward. Think of a spending plan as simply the process of adjusting how you spend to best reflect what you value. Nothing is better for a relationship than talking together about what you hold dear and your hopes and dreams for the future.

Simplify whatever method you use by capturing your spending electronically. For every vendor on our credit card statement, we download our information into QuickBooks. But other interfaces such as mint.com or an Excel spreadsheet can work just as well.

Credit cards can provide convenience, protection and a little extra savings. But you must pay promptly and take the time to negotiate a fair resolution if your payment is not received or you don't get what you've paid for.

 

from http://www.emarotta.com/article.php?ID=358