Last week we discussed the many ways you can save money as you learn to live on your own. Our suggestions included sharing housing costs, buying a previously owned car with cash, preparing meals instead of eating out, and eliminating the frills from services that are deducted automatically each month from your checking account. Here we offer some sound advice on how to put that money you've saved to work for you.

First, look carefully at your company's benefits plan. Disability insurance is probably the most neglected insurance. Consider signing up through a work plan. More employers are implementing health savings accounts, which allow you to pay for your medical expenses with pretax dollars. They are coupled with a high-deductible health insurance plan. If you are young and healthy, these provide you with disaster insurance as well as health-care insurance savings. If your employer has one, put the maximum away annually, and invest it if possible.

All the pundits say, "Save as much as you can," which is fine advice but not specific enough. You need to take a substantial chunk of change out of your discretionary money each month, some before it even makes it to your checking account and most of it after you deposit it. The amount, about half your take-home pay, may seem excessive at first, but remember, you are trying to grow rich, not live rich.

As your first priority, get the benefit from your company's 401(k), which usually amounts to contributing 5% of your salary while your employer matches with another 4%. This is the portion we mentioned that's deducted before you ever see a paycheck. If your employer has a health savings account, the money you contribute will also come out before your collect your paycheck.

After these deductions, you probably have the remainder of your paycheck deposited automatically into your checking account. You should then automate a transfer out of your checking account into an investment account to meet many of your long-term financial goals. Money in your investment account will appreciate. Always keep your goals in mind and stay on track.

For example, make a list of all the big-ticket items you will need to pay for over the next several years. You need to pay your car insurance. Transfer the appropriate monthly amount to your investment account. You should be saving for your next car. Transfer the appropriate monthly amount to your investment account. All of these significant purchases may comprise around 10% of your take-home pay.

You should be fully funding your Roth IRA while you are young and in a relatively low tax bracket. For 2008, to meet the $5,000 limit for your Roth IRA, you need to save $416 a month. Put this money into your investment account and then transfer it once a year to a Roth IRA account.

Save 5% of your take-home pay in a taxable account allocated for your retirement. This is after fully funding your 401(k) match and your Roth IRA. There are times in life when you will need taxable savings, and you should be saving and investing 5% of your take-home pay.

Save and invest 10% of your take-home pay for charitable giving. As your investments earn money for you, you will give appreciated assets to the charity and replace the same dollar amount from your take-home pay. Donating appreciated assets provides an additional 15% tax savings.

Finally, as a margin of safety, save and invest 10% of your take-home pay to help cover the cost of unknown unknowns. If your first response to this suggestion is to ask, "Like what?" the answer is "Exactly." Most people who run up credit card debit keep their regular spending within 100% of their take-home pay until some unexpected expense causes them to deficit spend. You can't anticipate unknown unknowns, so the best you can do is set aside some money to cover them when they arise

All of these expenses can easily comprise half of your take-home pay. Even if you've landed a good paying job straight out of school, don't spend over half of your take-home pay on daily expenses. Transfer half of your pay directly to an investment account and let it start growing. Cash in the bank is the best financial security. Cash doubling in an investment account is the best financial future. By the time you need money from your investment account for some of those long-range purchases, ideally it will have already started earning a nice return.

Saving and investing should be automatic. You won't miss what you don't see. Have half your take-home pay transferred out of your checking account and into an investment account each month.

Live simply. Avoid buying items you have to store, repair and maintain. Produce twice what you consume. Be generous. Avoid liabilities you have to pay each month. Invest in assets that pay you instead. Do these things and you will have a peace of mind that your contemporaries may never find.

from http://www.emarotta.com/article.php?ID=271

Learning to Live on Your Own, Part 1 (2008-02-11)

by David John Marotta

If you're like most of today's college graduates, you may find yourself ill prepared for the real world of financial responsibility. You never saw how your parents lived when they were first married and struggling. Consequently, you may be basing your after-school expectations on an upper-middle-class lifestyle. Here is my financial advice for those of you learning to live on your own.

My own financial education began when I was very young. My parents shared openly with us about the cost of running the household. I learned our home mortgage was $12,500, or about half the value of the house, and the interest rate on the loan was 4.5%. I knew my father's annual salary ($7,500) and that a week's worth of groceries cost $20 for a family of five.

Although you have to count on spending about 6.58 times more than that today, the principles of proportional living I learned are still the same: You can look like you are rich or you can actually become rich by saving and investing. Wealth is what you save, not what you spend. So be rich. Live frugally, and learn to save and invest.

The people who are struggling financially buy things and clutter their homes with them. The middle class buy liabilities such as boats and vacation homes and must spend money every month to maintain them. The rich, in contrast, buy investments. An investment is anything that pays you money.

Now that you are learning to live on your own, learn to live like the rich. The frugal millionaire enjoys both financial security and peace of mind. Living well within your means is a skill you may not have picked up from your parents or in school. Rather than learning from the so-called school of hard knocks, consider the following suggestions.

Rent is probably your biggest expense, but keep it well under 20% of your take-home pay. To lessen the impact, share your living quarters with roommates. If you learned nothing else in college, you at least found out how to share a room. Later on, when you get married and want your own place, you'll need the money you can save and invest now.

Whoever actually signs the rental agreement or lease and pledges to pay the rent on time each month deserves a better financial deal. That person should be able to charge his or her roommates more and also get first pick of the rooming options.

If you decide to live in a house or apartment and sublet, make sure to factor in the possibility that a roommate may leave without notice, owing you rent. Insist on a sublet agreement that requires the first and last month's rent to lessen the impact.

Your car ranks as your number-two expense. Again, keep total costs well under 18% of your take-home pay. With the salary at your first job after college, you probably can afford to make the payments on a trendy new car. Don't. Expensive cars increase both your insurance and your maintenance costs.

Be practical. Your car is a means of transportation, not a lifestyle. Buy a reliable car that has low maintenance costs. One that is at least a few years old will have already depreciated the most.

Only buy a car you can pay for with cash. Shun easy credit. The only decision that's worse than buying a depreciating asset is buying that depreciating asset on credit. Paying interest on an asset that's going down in value may buy you a ticket to the poorhouse. Instead, start saving some of your monthly salary immediately for your next car.

After rent and transportation comes buying food. The average family spends 10% of their take-home pay on food. If you don't eat out, you should spend about 6%. When your earnings increase substantially, perhaps you'll be able to justify saving food preparation time and eating out. But until then, the time you spend cooking is well worth it. The calories you purchase at restaurants are about 2.5 times as expensive as those you prepare at home.

For example, if you brown bag your lunch all week, you can easily save $5.40 a day. Saving $27 each week adds up to $1,458 per year. After factoring in the rising costs of eating out and investing your savings in the stock market where they will grow and multiply, the difference to your net worth is amazing. Investing $27 each week will produce $100,000 in 20 years and $1 million in 40 years. Bring your lunch from home starting at age 20, and you'll have an extra million dollars at age 60!

Eating at home isn't the only way to save money. To extend your savings to the grocery store, here are a few commonsense rules that will lead to uncommon cents savings.

For dinners, master a dozen easy-to-prepare meals. If you can read, you can cook. Keep staples on hand to make these meals. Consider a bread machine and a slow cooker as essential purchases.

Plan your meals when you are hungry, but shop right after you have eaten. Shopping on a full stomach will help you limit impulse purchases. Make a shopping list. Buy staples in bulk at super discount stores.

Avoid convenience packaging and expensive processed foods. Try buying the generic store brand. If you don't like it as well as the leading advertised brand, many stores will refund your money. Actually compare the prices. Most stores make the bulk of their profit from products placed at eye level.

You don't have any extra in your budget for monthly services. You have only about 6% more to spend, and the remainder you should be saving and investing. You may tend to ignore the services that are billed automatically each month, but they will be the most serious drain on your finances. So consider getting the least expensive package of features or doing without entirely. These electronic transfers include phone service options, cable or satellite TV, high-speed Internet, and health club dues.

Next week, in the second part of this series on learning how to live on your own, we discuss how best to manage the money you're saving by living frugally.

from http://www.emarotta.com/article.php?ID=270

For Now, Avoid Real Estate Investment Trusts (2008-02-04)

by David John Marotta

I received my county real estate tax bill recently, and for the first time in several years, my property tax assessment went down by about 2.8%. The drop is very small, but the trend is significant. Commercial real estate investments fell sharply during 2007 and may underperform other investment choices during 2008.

Investors commonly purchase real estate through a real estate investment trust (REIT) that buys and manages properties. These are publicly priced and traded, and collections of REITs are available in mutual funds and exchange-traded funds.

Just over two years ago, we warned our readers that real estate prices might be peaking and ready to correct. We wrote, "A bubble is never known until after it has burst. What can be suggested is that the housing prices boom shows signs of weakness, and that they may correct or at least underperform for the next few years. Higher interest rates will slow housing growth in 2005, but the bubble, if it is a bubble, could pop as late as 2006 or 2007."

But getting out of real estate two years ago would have been a year early. It wasn't until 2007 that the Cohen & Steers Realty Majors Index turned negative, losing 18.03%. In fact, the three-year average is still positive, averaging 9.69%, and the five-year average is a whopping 19.79%. In the foreseeable future, however, we are very unlikely to see as much appreciation as the last five-year average.

Most real estate property sectors declined last year. Sectors with longer leases did the best. Health-care leases had a positive total return of 2.5%. The industrial sector of REITs was also positive. Apartments suffered one of the largest declines, down 25.4%. The office sector was also down 19.0%.

Since 2000, U.S. markets have experienced the ripple effects of the tech sector's correction. The latest waves were the slow decline of the housing market and the weakening of the commercial real estate market.

As a result of the 2001 recession, the Federal Reserve lowered interest rates to help stimulate the economy. These new rates created an unprecedented increase in lending activity in everything from refinancing for mortgage equity withdrawals to commercial real estate loans.

Lower interest rates also boosted available credit and the speed at which dollars were moving through our economy, in essence expanding our money supply. Lower interest rates for mortgages drove housing prices up. As interest rates hit historic lows, home buyers could now afford houses that previously were out of their price range. For example, in March 2000, a family with a 30-year fixed-rate mortgage at 8.4% could borrow $131,000 with a $1,000 monthly payment. By the time the interest rates had dropped to 5.4% in June 2003, that $1,000 monthly payment would service a $178,000 mortgage.

Housing prices soon skyrocketed in absolute dollars, but they were not rising as much in terms of monthly payments. Lower mortgage rates, along with a devaluation of the dollar and the resulting higher prices for all hard assets, explain the rise in housing prices over the past several years.

The rising real estate market boosted consumer spending in three ways. First, homeowners--because of rising home values--enjoyed a higher net worth and therefore spent more money. Second, low rates encouraged a huge turnover of houses, resulting in intensified levels of consumer spending as the new owners refurnished and remodeled homes and rentals. And finally, homeowners refinanced or set up equity lines of credit, turning their houses into virtual ATM machines.

As a result of Americans using their homes to finance bigger spending habits, their home equity began to dwindle. Many mortgages grew to exceed 80% of the home's value. Then the Federal Reserve started to raise rates.

Homeowners with adjustable-rate mortgages saw their monthly payments jump. Many found it impossible to stay in their homes. The rate of late payments and foreclosures increased, resulting in some of the lenders themselves declaring bankruptcy. Rising interest rates caused housing prices to fall.

Studies suggest that for every 1% drop in housing prices, the gross domestic product (GDP) could drop by 0.2%. Looking ahead, if falling home prices continue along with a slowing economy, the situation could result in a recession. Declining prices in housing would have a direct effect on company earnings and thus stock prices. If the real estate market does experience a downturn, the effects will continue to ripple through the economy.

More recently, Fed rate cuts have still kept mortgage rates near their low end. But if you haven't refinanced your home with a 30-year fixed rate, this is your last chance. As rates rise, home prices will continue to decline.

Short-term trends are difficult to predict accurately, but with foresight and a sound investment approach, you can still profit from some long-term trends. Diversifying your portfolio across noncorrelated asset classes is the best way to earn steady long-term returns while managing risk.

Investments in REITs are grouped in the hard asset stocks category, but C&S Realty's correlation with the GSSI Natural Resources Index is low at 0.23. Correlations change over time, but they haven't gone above 0.43 in the past three years.

Investing in REITs during normal markets makes a lot of sense, but we suggest you continue to steer clear of them for the coming year. The beta of REITs versus the S&P 500 is currently about 1.68, which means REITs are about 1.68 times more volatile than the movements in the S&P 500.

Perhaps 90% of wealth management is avoiding the financial products and mistakes that surround us and compete for our attention. Real estate may seem attractive with today's choppy U.S. markets, but we suggest you keep your money invested elsewhere until the Fed is done raising interest rates.

from http://www.emarotta.com/article.php?ID=269

Ever since communism collapsed in the early 1990s, stock markets around the world have been booming. This phenomenon is especially true in the former communist states of Russia and China. We also see it in countries that had been following the socialist model, such as India, and in former high-tariff countries like Brazil.

As students of stock markets and world economic trends, we try to determine which countries will benefit from various trends. For example, those countries with the greatest economic freedom and the highest level of gender equality also tend to exhibit superior performance in the stock market.

The World Economic Forum (WEF) conducted a study in 2005. It reported that the 10 best gender-equal countries are Sweden, Norway, Iceland, Denmark, Finland, New Zealand, Canada, the United Kingdom, Germany and Austria. These countries also scored high on the Heritage Foundation's measurement of economic freedom.

In 2006 when the Dow Jones world stock market index went up by only 19%, the stock markets of these 10 countries advanced 31.4%. Furthermore, in the Nordic countries, stocks went up 38%, twice the world average. In contrast, the United States advanced by only 19%.

In the WEF study, the United States did not fare too well in gender equality, coming in at number 17. Ranked 11 through 16 were Latvia, Lithuania, France, the Netherlands, Estonia and Ireland. The health factor dragged down the U.S. showing. Negative factors included the high number of teen pregnancies, only 12 weeks of unpaid maternity leave, high child mortality rates and the lack of quality child care.

Tax rates affect gender equality. Because of the marriage penalty in the U.S. tax code, a financially successful husband and wife are taxed as though they represent one very high income taxpayer. They must pay more for their combined income than they would if they were unmarried and just living together.

This tax disadvantage doesn't often affect the decision to get married. But it certainly may impact a wife's willingness to work. The incentive is to spend time shopping and preparing elaborate meals even if the wife's abilities could support much higher aspirations.

By combining their incomes, the couple pushes each other into the top marginal tax bracket. So for every dollar the wife earns, she could be taxed at over 50%, including federal, state and local taxes. In contrast, when the woman doesn't earn an income, every dollar the couple saves makes them a dollar richer.

Here's the bottom line. The flatter the tax system, the less it matters whether couples combine their incomes or not. That is, if every dollar of income was taxed the same and there were no deductions or credits, whether a husband and wife combined their incomes would be irrelevant.

The WEF study also rated other items related to women. These included their economic participation in society, economic opportunity, political empowerment, educational attainment and health and well-being. Americans are proud of the relatively high number of women serving in the U.S. Congress (85). But that participation rate is still 1% below the world average as measured in a WEF study of 58 countries. And it is well below the top-10 countries in the study. In fact, in the Nordic countries, 41% of the officials elected to the parliament are women.

Japan scored particularly poorly in the 128-country study, ranking 91. It suffered a 4.23% loss for 2007 and pulled the foreign EAFE index down to only 11.17% for the year. Japan has only averaged 4.48% over the past decade. It has struggled internally with both gender inequality and government regulatory intervention in the free markets.

In less developed countries, women have difficulty securing credit to start or expand businesses. You need a little money to make money. Often very small loans allow women to become entrepreneurs and pull themselves out of poverty. To facilitate this, many organizations have started giving small loans, called "micro loans," aimed at women-owned start-up businesses in developing countries.

It has been observed that loans to women more often benefit the entire family than loans to men do. Also, women are a better risk for micro loans, and providing them credit changes their societal status and offers them greater economic freedom.

A number of the countries ranked high in gender equality have exchange-traded funds (ETFs) that track their market indexes. They provide an easy and inexpensive way to invest there. ETFs combine the liquidity of individual stocks with the diversification of an index fund. They also typically have lower expense ratios than most mutual funds.

Democratic countries provide equal incentives for both men and women. As a result, women are able to participate as fully as possible in the economy. When women can pursue and achieve their own financial well-being, we see rich rewards in their country's economy and consequently the performance of their stock markets.

from http://www.emarotta.com/article.php?ID=267

by David John Marotta

A valuable exercise this time of year is to review your investment returns to analyze what occurred in the broader asset classes. First, check to see if your specific investments are capturing a majority of the potential market return of their asset class. Second, evaluate whether your asset allocation is optimized to balance risk and return.

The fourth quarter took away many of the gains in the U.S. markets. The S&P 500 broke a record on October 9 and then fell about 7% to end the year up 5.49%. The Dow and NASDAQ showed similar trends.

The S&P 500 ended the year up 5.49% and the Lehman Aggregate Bond Index up 6.97%. U.S. bonds beat U.S. stocks. Average investors often have a majority of their assets in U.S. large-cap stocks such as the S&P 500 with a small helping of U.S. bonds, even though these categories represent only two of the six asset classes they should be using.

Evaluate your specific investment choices against the index returns. For example, the Vanguard 500 Index Fund (VFINX) had a return of 5.39%, losing only 0.10% of potential market return, even though it has an expense ratio of 0.18%. An even better selection was the iShares S&P 500 Index Fund (IVV), which had a return of 5.43%, losing only 0.06% of the potential market return even though it has an expense ratio of 0.09%. Both of these funds performed slightly better than the S&P 500 Index before expenses and slightly worse than the index after expenses.

Compare the return of each of your funds with the return of an appropriate asset class index to see how much market return you lost to poor fund choices and how much you lost to high expense ratios. Every fraction of a percentage does make a difference.

Then evaluate your asset allocation against the entire domain of potential asset classes. Asset allocation is the most significant investment decision you will make. It is  even more important than selecting the best managed funds within an asset class.

Steady returns are an essential part of meeting your financial goals. Imagine two investment choices. Choice A returns 30% the first year and nothing the second year, for a total return of 30% over two years. Choice B returns nothing the first year and 30% the second year for the same 30% over two years. It seems as though no static asset allocation can do better than 30% over two years. But this isn't true.

<table border=1><tr><td align=center valign=top>Investment</td><td align=center valign=top>Year 1</td><td align=center valign=top>Year 2</td><td align=center valign=top>Total Return</td></tr><tr><td align=center valign=top>Choice A</td><td align=center valign=top>30%</td><td align=center valign=top>0%</td><td align=center valign=top>30%</td></tr><tr><td align=center valign=top>Choice B</td><td align=center valign=top>0%</td><td align=center valign=top>30%</td><td align=center valign=top>30%</td></tr><tr><td align=center valign=top>A + B</td><td align=center valign=top>15%</td><td align=center valign=top>15%</td><td align=center valign=top>32.5%</td></tr></table>

If you split your investment evenly between A and B, you will earn 15% the first year and 15% the second year. By compounding 15% the first year with 15% the second year, you will have a total gain of 32.5% over two years. You'll profit from the magic of compounding when you rebalance your investments after the first year and take some of the profit from A and move it to B. An even asset allocation between these two choices not only smooths returns, it actually boosts them. Particularly in volatile markets, periodic rebalancing can help.

The S&P 500 5.49% and the Lehman Aggregate Bond Index at 6.97% did not appear to provide much difference in potential returns in 2007. Most investors' asset allocation is built from these two categories, but they represent only one and a half of the six asset classes we recommend.

Economists are wary about a U.S. recession, and thus it makes sense not to invest exclusively in the market of a single country. But predicted recessions often fail to materialize. It is unwise to get out of the markets entirely. The markets are inherently risky, and unless you can time them within six weeks of a top or bottom, it is usually better to stay fully invested. But staying invested does not mean staying invested exclusively in U.S. large-cap stocks.

Including a healthy allocation to foreign stocks would easily have boosted your returns in 2007. The international EAFE index gained 11.17%. Freed from Japan's 4.23% loss, the 10 countries with the most economic freedom soared 19.97% for the year. And emerging markets produced a 39.39% return.

Investing in the S&P 500 index primarily represents large-cap growth stocks in the industries that did well last year. Broader indexes include more mid- and small-cap stocks.

Stocks with a smaller capitalization typically have better returns than large-cap stocks. Large-cap stocks have a capitalization greater than $8.5B. Small-cap stocks have a capitalization under $1.4B. Mid-cap stocks fall in between.

Small cap and value usually have better returns, but they didn't last year when small and value fared worse than large and growth, with small-cap value losing 8.15% compared with the 12.34% appreciation of large-cap growth. But over the past five years small-cap value is still ahead, averaging 16.43% annually versus large-cap growth's 10%.

We recommend leaning toward small and value even though large and growth did better this past year. Generally speaking, large and growth outperform small and value at the end of a bull market. Coupled with a slowing U.S. economy, this is another warning of a possible recession. Value stocks on the whole do better during market downturns, so we recommend staying invested in them.

Although U.S. bonds did well, foreign bonds did better as the value of the U.S. dollar continued to diminish. Having at least half of your assets outside the reach of a falling dollar protects you against currency devaluation. Unhedged foreign bonds, foreign stocks and hard asset stocks offer you some protection against a falling dollar.

Finally, hard asset stocks continued their growth, gaining 4.64% in the fourth quarter alone. The GSSI Natural Resources Index ended the year up 34.44%. Energy funds were up 38.77%, and industrial materials funds, which include precious metal mining companies, were up 40.94%.

Hard assets are not highly correlated to U.S. large-cap stocks as a whole, a distinct advantage. The correlation between the Goldman Sachs Natural Resources Index and the S&P 500 Index is only 0.38. Importantly, the correlation between the Goldman Sachs Natural Resources Index and the Lehman Aggregate Bond Index is even lower at -0.21. A negative correlation means that bonds and natural resources, as separate asset classes, are often moving in opposite directions. Balancing a bond portfolio with hard asset stocks can help hedge the risk that inflation poses to a bond portfolio.

Investments with low correlation mean lower volatility and better compounded returns. Your asset allocation should use all six asset classes: three for stability (money market, U.S. bonds and foreign bonds) and three for appreciation (U.S. stocks, foreign stocks and hard asset stocks). Then make sure to select the best specific investments in each class, those with low expense ratios that capture the majority of the return of their asset class.

You owe it to meeting your financial goals to review these aspects of your investments at least once a year.

from http://www.emarotta.com/article.php?ID=266

by David John Marotta

The first U.S. money market fund was created by Bruce Bent in 1970. The Reserve Fund, as it was called, offered investors a way to preserve their cash liquidity and still earn a small rate of return. Today 22% of all mutual fund assets are invested in nearly 900 money market funds.

Money market funds are a type of mutual fund that usually sells and redeems their shares for $1. The value to the consumer is the interest earnings plus the stability of getting their principal back. Unlike other mutual funds, money market funds are restricted to investing only in the highest quality debt with average maturities less than 90 days.

While money market funds typically are very stable, it's important to note that money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Money market funds seek to keep their share price at exactly $1.00, but this is not guaranteed. It is possible to lose money by investing in these funds.

Protecting the consumer, several rules govern those who offer money market funds. They must invest at least 95% of their assets in securities that get the highest credit rating. Money market funds cannot have more than 5% of the portfolio invested in debt from the same issuer, except for the federal government debt. They can invest in Asset Backed Commercial Paper (ABCP) which is backed by a pool of assets that can include credit card debt, car loans, regular mortgages and subprime mortgages. Money market funds can invest up to 5% of their assets in securities with the second highest rating, but cannot put more than 1% with any one issuer. When an issuer's credit rating drops from the best credit rating to the second best credit rating, a money market fund will be on alert to sell the position quickly in order to satisfy SEC rules.

Some money market funds have lent money to what are called structured investment vehicles (SIV). Since they promise to pay the money back within a short period of time, SIVs can qualify as legitimate money market investment. The SIVs then take the money and invest it in high-yielding risky investments such as subprime mortgage debt. The SIVs then repay their debt by bundling and selling this mortgage debt and making their repayment deadline. They make money by collecting much more in interest and the sale of the loans than the cost of borrowing the money in the first place.

The difficulty is that it has become much more difficult for SIVs to sell their subprime mortgages. When there is a rise of foreclosures and defaults, companies devalue the bundle of mortgages which increases the likelihood of SIVs being unable to repay their loans from the money market funds. The ratings on some of this commercial paper have dropped with the increasing defaults on subprime mortgages.

Because of the rules that govern money market funds and their diversification requirements, the credit risk problems of subprime defaults are limited. A good manager should be diversified enough to weather these storms without showing losses in the money market.

Money market funds have several purposes in an investment portfolio.

They provide a liquid stable place to park free cash. They provide a place to keep money for rebalancing your portfolio in case of a market run up or a market correction. And they provide a place to collect interest and dividend payments.

Money market funds can also serve as an investment class by itself. In the decade of the 1970's with its rampant inflation, money market was the investment category with the highest returns at the end of the decade.

When interest rates are falling, longer term bonds with higher fixed interest rates will appreciate in value. But if interest rates are rising, these same long term bonds will lose the most value. In a period of rising interest rates, your money market investments will adjust quickly and simply pay a higher rate of interest.

Some money market fund investors are worried about losing their money. If a money market fund holds bad debt, the money market fund's value could drop below $1.00 and "break the buck". A money market fund has broken the buck when you go to get your money out of your account, and they return less than you put in.

So far, only one money market fund "broke the buck." They paid their investors only $0.96 per share. Although only one fund has dropped below a dollar, there have been a number of cases where the banks have bailed out their money market fund by pumping in more capital in order to show a positive return.

Any brokerage firm that showed a loss on a money market fund would ruin their reputation and their future business. Brokers would rather spend a fraction of their marketing budget supplementing their returns than face the public relations nightmare of their money market losing money.

It is not impossible that a money market fund would lose money, but if it did, it would probably take down the company running it as well. As a result, I would expect the company running the fund to take the hit themselves and supplement the fund's return if it were at all possible. Large companies with highly visible reputations and expensive marketing budgets are the most likely to bail out a money market rather than break the buck.

Money market investments are clearly not the safest place to hide all your savings, but they are a reasonable and strategic place to allocate a portion of them in a well balanced and actively managed portfolio.

from http://www.emarotta.com/article.php?ID=264

by David John Marotta

We all want to be slim, eat healthy and get our financial house in order, but few of us are disciplined enough to accomplish all that without help. After the indulgences of the holidays, both gustatory and financial, inevitably you'll probably resolve once again to make some changes in all these areas. You owe it to yourself and your family to make certain you keep your financial New Year's resolutions this year.

I won't presume to offer help on your diet and exercise program, but I do know that with the help of a personal financial advisor, you can make your financial life more manageable and successful. Every six years you delay saving and investing, you cut in half the lifestyle you will have in retirement.

First, financial advisors listen to your personal goals and tailor their recommendations to your situation. Just the act of sharing what you hope to accomplish makes it a lot more likely it will translate from inside your head onto paper and then to taking action. And don't delay seeking a coach until you've worked out the details. A professional helps you ask the right questions and stays the course with you until you've found the answers.

Second, a coach works with you to make those goals concrete and then documents them. For example, your savings goals should be a specific annual percentage of your adjusted gross income (AGI), ideally at least 10% of your AGI in tax-free retirement accounts and another 5% toward retirement in taxable investments. If you are older and just getting started on a savings program, your advisor may recommend you save even more to catch up to where you should be.

Don't stop reading here with the idea that you are too rich or too poor to need a coach. Even financial advisors themselves seek professional help with their portfolios. Whether you live on $200,000 or $20,000 a year, you'll need to save enough to retire and keep that same standard of living. It will not be any easier to cut back on expenses when you're no longer working (if you think it will be easy, do it now and save and invest the difference!).

Relying on an objective advisor provides both a powerful catalyst for action and real peace of mind. You will have specific annual savings goals written down that you know will meet your goals, one for your retirement accounts and a second for retirement savings that will go into a taxable account.

Third, an advisor offers the best strategies to implement your goals, including prioritizing the appropriate retirement vehicles. You want to put your money into accounts that have the greatest number of asset allocation choices and the lowest fees. Many investors are frustrated by company 401(k) accounts that have high fees and poor choices and need help to sort out their choices.

For example, first invest just enough to get the entire match your company's 401(k) plan offers. Arrange for your contributions to get the full match in the company's Roth 401(k) if your company provides the option, next funding your Roth IRA accounts. After these two, make certain you have enough retirement savings in taxable accounts. There are strategic actions you can take as you enter retirement that require sufficient assets in taxable accounts.

Fourth, an advisor can also help you automate your savings. Making your contribution to an employer-defined contribution plan is simple enough, but few take the time to automate a taxable savings plan. Most brokers offer an automatic money link between your investment account and your checking account and also a monthly automatic transfer between the two accounts.

Say your paycheck is deposited on the first day of the month. Ask your broker to transfer money from your checking account into your investment account on the second day of the month. Then automate your investing. For example, if $600 is being deposited into your brokerage account each month, designate an asset allocation that purchases $100 or more of five or six funds. Most brokerage firms make this process both easy to set up and to change.

Once a year, rebalance your portfolio. Doing so after your June 30 statement is a convenient time, and your advisor can make that part of his or her ongoing recommendations.

You can get much more sophisticated than what's been described here, but a great way to start off this new year is to hire a financial advisor to help you realize the benefit of saving and investing with a minimal amount of work. Call the National Association of Personal Financial Advisors (NAPFA) at 1-888-FEE-ONLY (1-888-333-6659) to get a list of members in your area or visit their website at <a href="www.napfa.org" target=_blank>www.napfa.org</a>.

from http://www.emarotta.com/article.php?ID=263

Scrooge's Former Boss Fezziwig Is a Nester (2007-12-24)

by David John Marotta

One of my favorite Christmas movies is the version of Dickens's "A Christmas Carol" starring George C. Scott as Ebenezer Scrooge. I must confess that I understand Scrooge's character.

Scrooge -- a denizen of early Victorian London -- is a solitary and miserly businessman. He spends his days tracking in giant ledgers all the money he doesn't spend. He spends his nights alone in a huge drafty house he's too cheap to heat adequately. He isn't in debt, lives well within his means and makes shrewd investments. In fact, Scrooge is such a consistent and understandable character, sometimes it almost seems tragic that he has a change of heart at the end of the story.

Of all the colorful characters in "A Christmas Carol," I like Fezziwig the best. In Scrooge's youth, Fezziwig and his wife opened their doors wide to friends and family, spending three or four pounds to provide a fiddler, some foolishness and an unforgettable feast.

Financial advisor Bert Whitehead would describe Fezziwig as a "nester." In his description of financial personalities in his book "Why Smart People Do Stupid Things with Money," Whitehead describes nesters as family-oriented people whose homes are their greatest investment. And to Fezziwig, his employees are like family.

Fezziwig has achieved that wonderful balance between work and play, responsibility and frivolity. On Christmas Eve he and his staff work until seven the evening of the party, but once the guests arrive, the fun begins in earnest.

Like Scrooge, nesters like Fezziwig lean more toward saving than spending. Scrooge likely learned his propensity to save while working under Fezziwig. Because of this shared frugality, Fezziwig's willingness to spend a few pounds on holiday cheer moves Ebenezer's stony heart.

The greatest joys of the holiday season cannot be bought in a store and do not increase our credit card debt. Many parents spend more than they can afford out of a sense of guilt. But the satisfaction of putting a big-ticket item under the tree, unfortunately, is both short lived and shortsighted. There is a better way to celebrate that builds long-lasting family ties.

Holiday joy comes from taking time to celebrate values that don’t show up in your net worth statement, and Fezziwig certainly sets a great example. He hires a fiddler for the occasion. He opens his home to the six young admirers of his three lovely daughters. He invites all the young men and women who work for him. He extends his largesse to the cook, the milkman and even an apprenticed boy whose master doesn't feed him well enough.

They dance. And the Fezziwigs know how to dance: "advance and retire, both hands to your partner, bow and curtsey, corkscrew, thread-the-needle, and back again to your place . . . Fezziwig cut -- cut so deftly, that he appeared to wink with his legs, and came upon his feet again without a stagger" and "Mrs. Fezziwig was worthy to be his partner in every sense of the term."

And they feast. "There was cake, and there was negus [drink made from wine, hot water, lemon juice, sugar and nutmeg], and there was a great piece of Cold Roast, and there was a great piece of Cold Boiled, and there were mince-pies, and plenty of beer."

Scrooge's heart and soul are in the scene as he remembers and enjoys and joins his younger self in praising everything about the evening.

"A small matter," mocks the Ghost of Christmas Past, "to make these silly folks so full of gratitude. He has spent but a few pounds of your mortal money: three or four perhaps. Is that so much that he deserves this praise?"

Scrooge, defending the spirit of Fezziwig's Christmas party, replies, "Fezziwig had the power to render us happy or unhappy; to make our service light or burdensome; a pleasure or a toil. Say that his power lay in words and looks; in things so slight and insignificant that it is impossible to add and count them up: what then? The happiness he gave was quite as great as if it cost a fortune."

There is great financial wisdom to be learned from these two characters. Scrooge's riches did not make him happy. Fezziwig's celebration did not impoverish him.

Start by talking to your family about their fondest holiday memories. Make a list of all you have done right in past years so you can establish some annual family traditions. Add a few new ideas each year. The best holiday traditions don't cost a lot of money and aren't wrapped and put under the Christmas tree.

Some traditions are as simple as playing radio stations with Christmas music, reading favorite Christmas stories, or watching a Christmas movie. Your list won't be complete without a description of everyone's favorite holiday food. One tradition might involve holiday church services that reflect your family's spiritual values. Another might be as simple as a family game night. One family plants an evergreen sapling on their property every Arbor Day to have a supply of their own Christmas trees every December. Another family uses the children's school photos to make new ornaments for the tree.

When complete, your list should include a hundred ways to enjoy the holidays without going into debt. Like Fezziwig, the happiness these traditions bring you will be quite as great as if it cost a fortune.

Take Fezziwig's advice to heart: "When happiness shows up, always give it a comfortable seat." Merry Christmas to you and your family! And as Tiny Tim would say, "God Bless Us, Every One!"

from http://www.emarotta.com/article.php?ID=262

Scrooge's Nephew Fred Is a Traveler (2007-12-17)

by David John Marotta

Every December I reread "A Christmas Carol" by Charles Dickens. Ebenezer Scrooge's nephew Fred is the character young people most easily relate to. He is young himself, carefree, in love and enjoying life with his friends. He has a "traveler" personality.

In his description of financial personalities in his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes a "traveler" as someone who would rather spend money on experience than things.

Whitehead maps financial personality on two different scales. The first measures people's tendency toward greed or fear. Fred, like all travelers, is neither particularly greedy nor fearful, whereas his uncle Ebenezer appears greedy in the extreme. The second scale measures an individual's tendency to save or spend. That Scrooge is a saver we have no doubt; Fred, like all travelers, tends to spend freely.

Travelers yearn to see new places and learn new things, and they love celebrations like Christmas. Sometimes they even pride themselves on their antimaterialism.

Uncle Scrooge asks, "What right have you to be merry? What reason have you to be merry? You're poor enough." To which his nephew Fred replies, "What right have you to be dismal? What reason have you to be morose? You're rich enough."

Fred's wife comments that Scrooge is very rich. "What of that, my dear?" Fred replies. "His wealth is of no use to him. He doesn't do any good with it. He doesn't make himself comfortable with it."

Fred got married simply because he fell in love. To Scrooge, his nephew's decision is even more ridiculous than a merry Christmas. The young are such romantic idiots!

Travelers like Fred may not have realized the value of saving and investing to reach their objectives, but they have such delightful goals: to marry for love, to celebrate happiness to its fullest and to live in peace with everyone.

Fred wants nothing from Scrooge and he asks nothing of him other than friendship. So every year at Christmastime he invites his uncle to come to his house and join in the celebration.

In Victorian England, being invited to someone's house was not as simple as merely attending. You were expected to repay the favor in some way. As a result, rich relations were invited more places than they really cared to go.

So Scrooge isn't just being overly cynical when he's suspicious about Fred's invitation. Scrooge even swears at his nephew, but Fred keeps his Christmas spirit to the last and wishes his uncle a merry Christmas. Fred is thoroughly good-natured, laughs freely and sometimes doesn't even care what they are laughing about. He passes the bottle with good humor.

The idea of a rich old uncle leaving a poor nephew a bundle of money is a cliché for a reason. Fred may have the purest of motives for inviting Uncle Scrooge, but the thought of an inheritance from the old man is never far from his thoughts.

Fred's beautiful bride confesses, "I'm sure he is very rich, at least you always tell me so." To which Fred replies, "But he hasn't the satisfaction of thinking that he is ever going to benefit us with it." Fred hopes that his encounter with Scrooge has at least rattled the old man enough so he leaves 50 pounds to his poor clerk Bob Cratchit.

Even if Fred's motives are altruistic, his thoughts often return to Scrooge's money and the potential inheritance that might come his way. And so even if Scrooge is as cold as the winter toward Fred, his cynicism is at least partially justified.

This suspicion between travelers and nontravelers over motives and money is a common one. Young people are more likely to be travelers until they settle down and become what Whitehead calls nesters. The older generation knows that money can get tight later on in life, and the sooner you start saving the better.

For young people, meeting basic needs may seem simple: income often easily covers expenses, and the surplus can be used for savings, investment or added consumption. Many young people mistakenly assume they are doing so well financially that they can simply spend their extra money and consume more. They do not realize that the urgent needs of family life typically follow these years of plenty. Bob Cratchit knows all too well that expenses multiply once children enter a family.

Additionally, saving when you are young gives you more time in the markets and more time for your investments to grow. For example, saving $5,000 a year for seven years and then stopping is worth more than starting in the eighth year and saving for the rest of your life. After seven years of saving, your investments should be earning more than you were contributing each year.

Or looked at another way, for every seven years you delay saving and investing, you cut your retirement lifestyle in half. So in the story, Scrooge is focused on the long term while Fred is living in the moment. But achieving a balance between these two impulses is possible.

Fred is interested in experiences and supposedly doesn't care about money. But if he truly was indifferent about the money, he could save and invest half his income while enjoying life just as much. After all, if money doesn't bring happiness, Fred shouldn't need to spend all he earns. He can become both rich in wealth and rich in experiences.

If Fred saved and invested he could have given to the poor himself, started a business and hired his own clerk or provided for Tiny Tim's medical expenses out of his own largess. For someone who consumes everything he produces, he is overly critical of the spending of those who through frugal living produce more than they consume.

At the Christmas party, Fred and his wife are described as a musical twosome. After dinner they sing a Glee and a Catch. Fred's wife plays the harp admirably, which helps soften Scrooge's heart toward the couple. Travelers often appreciate music, which doesn't have any monetary value.

After a musical interlude, the partygoers play "Forfeits" because "it is good to be children sometimes." Each person in the room gives up some personal belonging for the game. One player is chosen to be the judge and another holds items one at a time over the judge's head so he (or she) can't see them. For each item the judge orders the owner to do some stunt to get their property back.

The commands are usually silly requests intended to get everyone at the party laughing, such as "dance a jig," "tell how to make a pie without talking," "yawn until you make someone else yawn" or "try to stand on your head." The judge must be careful what he demands because at some point in the game his own item will be held over his head!

Next they play the games "Blindman's Buff," "How, When and Where" and then "Yes and No." None of these pleasures cost a cent, which is a lesson Scrooge has forgotten.

Victorian priorities dictated that men attend to business. Hard work was the way to achieve respectability and advance in society, feeding the culture of materialism in the rising middle class. Industriousness and productivity were extolled virtues.

To the extent that travelers are simply avoiding burdensome and stressful responsibilities, they are not yet wise or mature. But if they keep a sense of wonder about life and a spirit of adventure that does not deplete their resources, travelers like Fred can find a satisfying balance in life. Because without some self-restraint, Scrooge's warning could come true: "What's Christmas time to you but a time for paying bills without money; a time for finding yourself a year older, but not an hour richer?"

Many holiday delights need not even show up as a line item in your budget. Watch a Christmas video or read a Christmas story as a family. Play Christmas music or go caroling. Make your own Christmas cards or bake and decorate cookies. Do some errands for an elderly neighbor.

May Fred's wise words from "A Christmas Carol" inspire us to enjoy the nonmaterial joys of this season:

"There are many things from which I might have derived good, by which I have not profited, I dare say, Christmas among the rest. But I am sure I have always thought of Christmas time, when it has come round -- apart from the veneration due to its sacred name and origin, if anything belonging to it can be apart from that -- as a good time: a kind, forgiving, charitable, pleasant time: the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys. And therefore, uncle, though it has never put a scrap of gold or silver in my pocket, I believe that it has done me good, and will do me good; and I say, God bless it!"

from http://www.emarotta.com/article.php?ID=261

by David John Marotta

When you're building wealth, saving a penny on your taxes is just as important as earning a penny in the markets. You can use both investment losses and investment gains to good tax advantage.

For example, in November some U.S. stocks experienced a significant drop. Disciplined investors use these declines to save on their taxes and rebalance their portfolios.

But most people are loss averse. Selling an investment for a loss feels like failure. So they hold on and wait for it to come back up before they sell. It doesn't matter if another investment might appreciate faster and recover the loss more quickly. Their reluctance to sell is even more pronounced when the investment was purchased recently. In taxable accounts, however, investors must overcome this loss aversion and learn to realize capital losses whenever possible.

The stock market normally appreciates over 10% each year. Any investment you hold for a few years will probably have a satisfying capital gain. The only investments you are likely to be able to sell for a loss and deduct on your taxes are recent purchases. Be quick to sell your capital losses in taxable accounts and reinvest the money at a lower cost basis going forward.

The difference between what you paid for an investment and its current worth is called a "capital gain" or a "capital loss." As long as you continue to hold the investment, the gain or loss is "unrealized." Selling the investment means "realizing" the gain or loss, which you must report on your taxes.

Realized capital gains are commonly taxed at a reduced 15%. Realized losses can offset realized gains, but you are also allowed to deduct up to $3,000 of capital losses against other types of income. If you have net losses in excess of $3,000 in one year, you can carry your losses forward to future years.

Now is a good time to review your portfolio for investments you can sell for a loss. Use software to track your investments. Even a simple spreadsheet can compute the current value minus the cost basis of each investment. Consider any significant losses for tax-loss selling.

Ask yourself, "If I did not own that security now, would I buy it at current prices?" If the answer is no, sell. If the answer is yes, sell it anyway. Then wait 31 days and buy it back. That way you "realize" the loss for tax purposes and still hold the security. And you have reduced your tax liability by sharing that loss with Uncle Sam.

Another technique is to double up. First, purchase the same number of shares you currently hold in that security. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a "wash sale," which would prevent you from taking the tax loss.

Most investments (stocks, bonds, mutual funds) are subject to the same tax rules, but owning individual stocks provides additional tax-loss selling opportunities.

Compare two millionaire investors. The first buys $1 million of a mutual fund that invests in 200 different stocks. No stock represents more than $10,000 of the investment, and the amount invested in each stock is $5,000. Although the mutual fund might have a tame 10% return for the year, one of the underlying stocks in the fund might have doubled and two others lost 50% of their value during the year. But this investor only owns shares in the mutual fund, and he cannot take advantage of any tax-loss selling.

The second millionaire buys all 200 as individual stocks. Her overall portfolio also has a tame 10% annual return, but she has additional choices that help boost her earnings even higher. She can sell the two stocks that have a 50% negative return and take the loss on her taxes. By selling the stocks with losses, she realizes their loss for tax purposes. By not selling her stocks with gains, she avoids realizing those gains and therefore is not required to pay any capital gains taxes.

Selling investments with losses can reduce your taxes, but you can also save on investments that have gone up by using appreciated assets for your charitable gifting.

Many Americans donate to charities in December. No matter what worthy organizations you support, you can contribute up to 15% more if you give appreciated investments instead of cash.

For example, if you sell $1,000 worth of appreciated stock, you most often pay capital gains tax of 15%. If most of the stock's value is appreciation, the tax burden 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. You could save up to $150 on capital gains taxes, and the gift itself reduces your taxes at your marginal rate. In total, your $1,000 gift could cost you $500 or less if you use appreciated stock!

Here's how to do it:

1. Ask your financial advisor to choose which stocks are best for charitable giving (probably those that have appreciated the most and you do not want to continue holding in your portfolio).

2. Determine the amount of each charitable contribution. To compute how many shares of stock to give to each charity, divide the current price of the stock into the amount you wish to donate. The number of shares will not work out exactly, so you may need to round up or down.

3. Call the designated charities and ask for their "stock liquidation brokerage account." Nearly every organization has one expressly for this purpose. You may like to give anonymously and without fanfare, but you only have to request this account number once.

4. Instruct your brokerage firm to transfer the correct number of shares from your account into the charity's stock liquidation account. You can fax this request directly and then send the original by mail.

5. Save these letters and account numbers for next year's charitable giving.

6. Report the gifts to your tax accountant. Stock gifting is deductible at the fair market value, that is, the amount the stock was worth at the close of the day it was transferred. The stock may change value after you have transferred the stock but before the charitable organization sells it. These changes do not affect your tax deduction, but it may mean the charity reports a different amount than you must declare on your tax return.

Giving appreciated stock is a great way both to reduce your taxes and to give more generously to worthy charities.

from http://www.emarotta.com/article.php?ID=260

by David John Marotta

If you think hiding money under your mattress is a risk-free way of building wealth, think again. Cash, it turns out, has been the riskiest investment since 2002. Many investors try to avoid risk by putting their money in a bank account or investing in CDs. But like any other investment, cash is subject to its own set of risks.

Cash is dangerous because the dollar can be devalued. When our currency decreases in value, we experience inflation and the purchasing power of the dollars we hold is compromised. Having the same amount of dollars doesn't do you any good if your dollars won't buy as much as they used to.

Since the beginning of 2002, the U.S. dollar has lost much of its purchasing power. From 2002-2007, the U.S. Dollar Index has dropped over 36% from 120 to 76.5. During that same period, the dollar has dropped over 39% against the Euro going from $0.88 to a Euro to $1.45. And the dollar has dropped over 64% against gold going from $280 to an ounce of gold to $795.

Money market's real risk is the dropping value of the dollar, not exposure to subprime lending. Cash in money market has lost over 40% of its buying power since 2002. And the US Dollar has dropped 10% just this year alone.

Interestingly enough, the consumer price index (CPI) over this same period has only registered a 15% drop in the dollar's purchasing power. While 15% is still significant, many economists believe that the federal government has been under reporting CPI since they changed the rules for computing it in 1996.

Purposefully under reporting CPI allows the government to cut the impact of cost of living increases in social programs and helps curb runaway government entitlement programs. Started under the Clinton administration and continued under Bush, these changes have rendered the official CPI numbers less meaningful.

Current CPI calculations have changed inflation numbers through tricks such as "substitutionary adjustments", "component removal" and "hedonic deprecators". This creative accounting rivals anything done by Enron. These changes were made specifically during a political debate over cutting back cost of living increases to Social security and other federal benefits. The changes have saved the Government tens of billions of dollars a year at the expense of benefit recipients whose benefits buy them much less now than they did a decade ago.

Any attentive consumer knows that cumulative price inflation since 2002 has been closer to 50% than 15%. This corresponds to the CPI being understated by about 5% a year. One study suggested that the CPI index has been understated by about 7% per year. No matter the exact amount, your bank deposits and money market funds have been the riskiest investments and have lost significant buying power to inflation. The danger of the U.S. dollar continuing to decline is aggravated if you try to be "safe" and over-expose your investments to cash and money market.

Just this year the dollar has continued its decline. Since the beginning of 2007, the U.S. Dollar Index has dropped 9% from 84.2 to 76.5. The dollar has dropped over 10% against the Euro going from $1.30 to a Euro to $1.45. And the dollar has dropped over 21% against gold going from $625 to an ounce of gold to $795.

Over half of your portfolio should be protected against the risk of a falling dollar. You can protect your portfolio against a falling dollar with investments in foreign bonds, foreign stocks, and hard asset stocks. Hard asset stocks are one of the best ways to protect yourself. As an asset class, they have also provided one of the best returns since 2002.

Hard asset investments include companies that own and produce an underlying natural resource. Examples of these natural resource stocks include companies that produce 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.

Keep in mind that investing in hard asset stocks is not the same thing as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment directly in raw commodities or their volatility. Commodities, as an asset class, generally maintain their buying power in dollar terms. Stocks, as an asset class, generally appreciate over inflation after dividends are factored in. For that reason, it may be to your benefit to invest in hard assets stocks which have an underlying commodity.

One index that tracks hard assets is the Goldman Sachs Natural Resources Index. This index is comprised of 70% energy and 11% materials. As of the end of October 2007, this index is up 34.00% year-to-date. Its three-year annualized return is 30.69% and its five-year annualized return is 30.43%.

And please don't be fooled into thinking that cash in your mattress is a safe investment.

from http://www.emarotta.com/article.php?ID=259

by David John Marotta

Medicare Medical Savings Account (MSA) Plans are one of the newest Medicare Advantage Plan options. Private companies began offering these accounts in 2007. Like Health Savings Accounts, a Medical Savings Account puts you in control of your own health care dollars.

If you are in good health and want to limit the maximum you would need to pay in a medical emergency, you may want to consider a Medicare Medical Savings Account plan during your retirement years.

When you choose a Medicare MSA plan, you are still participating in one of Medicare's plan options. A Medicare MSA plan is a "Medicare Advantage Plan," also known as Medicare Part C.

A Medicare MSA has two parts: a medical insurance plan and a savings account. The medical insurance portion is a high-deductible health care plan which covers your medical expenses only after you have met a high out-of-pocket deductible. But before you receive coverage, you'll have to pay all of your health costs until you reach your deductible. However, to help you pay the out of pocket costs, the Medicare deposits money into your savings account each year. You can use this money to pay your health care costs before you meet your deductible.

To purchase the Medicare MSA coverage, you probably won't have to pay an additional premium. In keeping with the Medicare Advantage Plan system, you'll simply have to pay the Medicare Part B premium. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay a monthly premium of $96.40 per person if they are married filing joint and reported $164,000 or less in income ($82,000 for single filers). Monthly premiums climb as high as $238.40 if you are in the highest income bracket.

With a Medicare MSA, you can keep all the money you don't spend on health costs. In fact, you may do better than break even each year. The annual amount you are given will not cover the gap until you meet your deductible. But if you spend less than the amount you are given, your account could grow in size. You may be able to accumulate enough money in your account to cover all of your health care costs up to the amount of your deductible. And like a true savings account, anything you don't spend one year carries over to the next. With an MSA, it's your money.

As an example, the Anthem MSA plan in Virginia has an annual deductible of $3,000 and an annual deposit $1,300. In short, you pay all medical costs up to $3,000. But to help you cover those costs, Medicare will deposit $1,300 at the beginning of the year into your medical savings account.

If you don't need all of your savings for medical expenses, you can spend your account on what you do need. Withdrawals for Medicare covered expenses are tax-free and count toward your deductible. Withdrawals for qualified medical expenses that are not Medicare covered (such as dental, vision and prescription drugs) are tax-free but do not count toward your deductible.

Qualified expenses may also include items which may or may not count toward your deductible. The IRS has approved a long list of qualifying expenses. In addition to doctor's visits, hospitalizations, lab tests and the like, the list also includes prescriptions, some over the counter drugs, vision and dental costs.

You can withdraw and use a portion of the money in your Medicare MSA for non-medical reasons (such as groceries and utilities) without penalty. You will still need to pay income tax on non-medical withdrawals, just as you would with a traditional IRA. The limit you can withdrawal without penalties is equal to your account balance on December 31st of the prior year minus 60% of your policy's deductible. Withdrawals above that for non-medical expenses will be taxed as income and slapped with an additional penalty.

A Medicare MSA can also be a good solution if you have very high out-of-pocket costs under your current Medicare program. Unlike the plain vanilla Medicare Part B which could leave you paying 20% of all your medical costs --with no limit, a Medicare MSA account caps your liability. Once you've met your annual deductible, your insurance plan will cover 100% of your Medicare-covered health costs.

Consumer-driven health care plans may help shape consumer behavior and keep health care costs from spiraling out of control. Contrast Medicare MSA plans with other Medicare Advantage Plans. Generally HMOs pay for medical services. Doctors dictate which services are given, and patients are the ones who actually benefit from these services. With Medicare MSA plans, consumers pay, dictate and benefit from services. They are empowered to make their own healthcare decisions.

Those covered by a Medicare MSA plan should be more likely to engage in healthy behaviors and to get annual check-ups. They should also be more likely to inquire about costs and less likely to consume health care they don't need. If this sounds like you, you may be a good candidate for a Medicare MSA.

Medical Savings Accounts offer you the opportunity to take more control of your health care spending. The money you save on your medical expenses is really yours and can be used to pay whatever bills you might have in retirement, even if those bills are not Medicare covered expenses.

Enrollment in a Medicare MSA is limited to one percent of Medicare recipients on a first come first serve basis. If you are interested, I suggest you sign up early. Open enrolment for Medicare MSA plans begin November 15th and ends December 31st every year.

from http://www.emarotta.com/article.php?ID=258

by David John Marotta and Beth Anderson Nedelisky

Many seniors look forward to saving on medical insurance costs by enrolling in Medicare at age sixty-five. However, navigating the Medicare system is not for the faint of heart. Medicare is an alphabet soup of plan choices. Currently Medicare is organized as parts A through D.

Medicare Part A provides hospital insurance to seniors. For the majority of seniors who have paid into the plan, enrolling in Part A comes at no cost. Part A covers hospital stays, home health care services, and hospice care. However, if you just need a check up, you'll need to resort to Part B or Part C to help with those costs.

Part B helps to cover doctor's services, some outpatient care, and routine preventative services. However, unlike Part A, you'll have to pay a monthly premium to buy the coverage. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay $96.40 per month if they were married filing joint and reported $164,000 or less in income. Monthly premiums climb as high as $238.40 if you report lots of income in retirement.

However, unlike Part A, Part B may require you to first pay the $135 deductible before Medicare will pick up the tab. For other services, Medicare will cover 80 percent of your medical costs, requiring you to pay the other 20 percent. Still in other cases, you'll wind up paying both the $135 deductible plus 20 percent of the remaining costs.

Don't try and save a few bucks by skipping Part B coverage. If you fail to enroll in Part B at age 65, you'll be slapped with a 10% penalty for each year you delayed enrollment.

Your Part B insurance will provide you with some free services such as a flu shot, diabetes and cancer screenings, and 'Welcome to Medicare' physical exam. If you take advantage of these services you may avoid more costly and more dangerous conditions.

Most seniors sign up for the Original Medicare plan, a combination of Parts A (hospital insurance) and B (medical insurance). However, if Uncle Sam's doesn't provide you with sufficient coverage, you may be better served by a private insurance company offering a Medicare-approved insurance plan.

Part C, also known as Medicare Advantage Plan, includes coverage for parts A and B through private insurance companies. The plans are usually offered in the form of a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). Your premiums, co-payments, coinsurance and deductibles will vary based on your specific plan benefits. And, although offered by private companies, Medicare Advantage Plans are approved by Medicare.

Choosing a Part C plan may mean you already receive prescription drug benefits. If your prescription drug coverage is deemed "creditable" by Medicare, you won't have to pay an additional premium for the Medicare prescription drug plan, also known as Part D.

Part D, the Medicare Prescription Drug Plan, is the newest of all the Medicare programs. However, Medicare does not provide the insurance directly. Instead, each state has contracted with insurance providers to offer the drug coverage. If you are a senior, you must decide if you should sign up, and then which plan you should purchase.

Most states offer at least 40 different drug plans. Premiums average $28 per month, depending on the level of coverage and the types of drugs covered by the plan. If you are enrolling in the Original Medicare or don't already have "creditable coverage", you'll need enroll in Part D, or face a penalty. If you fail to enroll at age 65 but decide to enroll at a later date, you'll pay a 1% penalty for each month you delayed enrollment.

The costs of Part D vary, and if you don't think you will need the coverage you should find the lowest cost Part D to avoid the penalties. That way, if you need the coverage later, you won't be stuck with premiums inflated by penalties. You can always change providers at a later time, if you decide different coverage suits your situation better.

If your income and assets are low enough, you may be able to save money on your Medicare costs. This assistance is done through your State Medical Assistance and is often called Medicaid. Call even if you aren't sure if you qualify. The Virginia Medicaid office can be reached at 804-786-7933. Call 1-800-MEDICARE to get the telephone number for other states.

The initial enrollment period begins three months before your sixty-fifth birthday and ends three months after your birthday. Be sure you enroll to avoid unnecessary penalties.

You can get more information by visiting Medicare on the web at <a href="http://www.medicare.gov" target=_blank>www.medicare.gov</a> or by calling 1-800-MEDICARE.

from http://www.emarotta.com/article.php?ID=257

by David John Marotta

Health Savings Accounts (HSAs) can provide inexpensive medical coverage if you maintain a healthy lifestyle. With your healthy lifestyle you may not spend anywhere near your high deductible insurance and consequently save on your medical costs. Even if you do not need to, we recommend funding your account with the maximum allowed. If your HSA builds up it may help you cover any extra medical expenses during retirement.

An HSA is a tax free savings account. As long as funds are spent on qualified medical expenses, all contributions, capital gains, and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

But to qualify for one of these tax-free savings accounts, you must have a high deductible health plan (HDHP). Now, you may be thinking your insurance plan has a high enough deductible already. However, to qualify as a high deductible health plan, your insurance deductibles must be a minimum of $1,100 for individuals and $2,200 for families in 2007.

The good news is, once you meet your out-of-pocket deductible, most HSA-eligible high-deductible plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

HSA-eligible high-deductible premiums are only a fraction of the cost of a traditional medical insurance plan. As an HSA owner you'll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg in your HSA.

Unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don't spend one year carries over to the next year. After all, it's your money. While you're on a roll, why not check out the invest options offered by your HSA bank?

Some people put only enough into their HSA each year to fund their medical expenses. This is shortsighted. We would recommend making the maximum HSA contribution each year, after covering your other financial needs.

In 2007, you can contribute $2,850 for individuals or $5,650 for families. If you are 55 or older you can make an extra $800 catch up contribution. In 2008, you can contribute $2,900 for individuals or $5,800 for families. If you are 55 or older you can make an extra $900 catch up contribution.

Once you enroll in Medicare (typically at age 65) you can't make new contributions to your HSA. But any money left in your HSA will continue to accumulate tax free. It is a good idea to over fund your HAS while you are young so that during your retirement you will have some extra tax-sheltered dollars to use for medical expenses. After enrolling in Medicare, you can't contribute to an HSA.

Any HSA withdrawals that are not for qualified medical expenses are counted as taxable income and subject to a 10% tax penalty. The tax penalty does not apply, however, if you are 65 or older, or are permanently disabled. However, the withdrawals are still taxable at ordinary income rates.

In other words, any excess contributions you make to your HSA can be withdrawn after age 65 without penalty. Just like a traditional IRA, when the funds are used for non-qualifying medical expenses you will have to pay tax on the withdrawals, which is no different than other retirement savings option.

The law is currently silent on what happens to your HSA when you reach 70 1/2. We expect that the IRS will treat your HSA like an IRA and therefore require minimum distributions, but this has not been settled.

When you die, your surviving spouse inherits your HSA and it is treated as their HSA if they are named as the beneficiary. Otherwise, your HSA ceases to be an HSA and is included in the federal gross income of your estate or the named beneficiary.

There are three strategies that you can use to grow your HSA large enough to cover your retirement years. First, make the maximum allowable deposit to your HSA each year. Second, if your medical plan includes the option, invest your HSA in mutual funds instead of keeping your account entirely in an FDIC-insured savings account. And third, delay reimbursing yourself from your HSA account as long as possible to profit from its tax sheltered compounding interest.

You can reimburse yourself for qualified medical expenses at any time, but you also have the option of leaving the money in your HSA so that it continues to grow tax free. You can save all your receipts in a shoe box for decades and then decide to withdrawal your reimbursements at any future date when you need the money. This allows the growth on these funds to continue to compound tax-free.

Once you turn 65 and enroll in Medicare you can no longer fund your HSA. Medicare will pay for the majority of your health expenses during retirement. There are some expenses, however, that Medicare will not cover that your HSA can. In retirement, your HSA can cover proactive health screenings, unconventional treatments for terminal illnesses and nursing home expenses. Your HSA can even cover long term care expenses if you decide to self insure, or pay your long-term care insurance if you decide not to. None of these expenses will be paid by Medicare.

Another option during retirement is to enroll in a Medicate Medical Savings Account. This account is similar to an HSA, but funded in retirement by Medicare contributions. If you select a Medicare MSA during retirement, you can use the funds in your HSA until you build sufficient value in your Medicare MSA.

Maximizing your contributions to an HSA may secure your health care spending for life. Even if you end up not needing it, you can pay income tax and withdraw it without penalty after age 65 just like a traditional IRA.

from http://www.emarotta.com/article.php?ID=256

Roth Conversions Can Help Build Wealth (2007-11-05)

by David John Marotta and Beth Anderson Nedelisky

If you don't have retirement savings in Roth IRAs, it's time you considered the benefit of these tax-savings accounts. The long-term tax savings opportunities are driving more Americans to rollover various retirement funds into Roth accounts. These so called "Roth conversions" can be performed on traditional IRAs. And, beginning in 2008, it will be easier to roll money from an employer plan into a Roth IRA.

But first, you may be wondering what's so great about Roth IRAs. Roth IRA contributions are always made with after-tax dollars. That's right; you won't get a tax deduction for contributing. However, the principle grows tax-free and the account holder may make tax-free withdrawals at 59 1/2. Furthermore, there are no required minimum distributions for a Roth, which makes them ideal for funding the latter years of retirement.

Conversely, a traditional IRA allows before-tax contributions to grow tax-deferred, but not tax-free. So, although you can usually deduct your contribution to a traditional IRA, you pay ordinary income tax on the withdrawals. Furthermore, the IRS will require you to take minimum distributions, whether you need the money or not.

However, Roth IRAs may not provide tax savings for everyone. Remember, contributions to Roths are made with after-tax dollars whereas traditional IRAs are made with pre-tax dollars.

Roth IRAs provide tax savings for individuals who expect to be in a higher tax bracket later in life. The tax benefits of a Roth are created by the tax disparity between your tax bracket when you put your money in versus your tax bracket in retirement. The lower your tax rate, and the longer you have until retirement, the more likely a Roth conversion will play in your favor.

Imagine John, age 60, owns two traditional IRA accounts. Each is funded with $5,000. Let's assume he keeps the $5,000 in one IRA. But with the other, he uses some of the funds to pay the taxes due and then converts it to a Roth. Assuming John remains in the same tax bracket and the accounts deliver the same return on investment, each account will generate the same spending money in retirement, after taxes are paid on the traditional IRA. If John drops into a lower tax bracket after his retirement, the traditional IRA would have been the better bet. But if John's taxes rise, the Roth IRA proves to be the better option.

Guessing your future tax rates is nearly impossible. Traditionally, it was thought your tax rate in retirement would be less than when you were working, but this is increasingly not the case. Tax rates are not adjusted for inflation, so many retired couples continue to creep into higher tax brackets. Also, tax rates are at a historic low and likely to rise if the political winds change.

If you expect to see your tax bracket increase significantly - from say, 15% to 25% - you will likely benefit from a Roth conversion. This is true for younger workers and also for new retirees. In the early retirement years, many couples dip into a lower tax bracket just after retirement but before Social Security checks start arriving.

Before you rush off to begin your Roth conversions, be sure you have enough money to cover the tax bill. During a conversion, you'll withdraw funds from your traditional IRA, report the funds as income, and roll them over to a Roth IRA account. The tax implications from the conversion will vary based on whether you took a deduction on the principal. If you deducted your IRA contributions, you'll have to pay taxes on both the principal and the earnings. If you didn't, you'll just pay taxes on the earnings. I say 'just,' but either way, this could be a big bill.

The good news is you can withdraw funds from your traditional IRA and convert them to a Roth without incurring the 10% early withdrawal penalty.

You'll also have to pass an income test. Until 2010, income limits do apply. Only joint and single filers with a modified adjusted gross income of $100,000 or less can qualify. After 2010, the income restrictions on converting funds from a traditional IRA to a Roth IRA will disappear completely.

Traditional IRAs, SEP IRAs and SARSEP IRAs are subject to the same conversion rules. Until 2010, you'll have to pass the income test to qualify.

SIMPLE IRAs can also be converted to Roth IRAs, if you participated in the plan for more than two years. SIMPLE IRA account holders are not subject to this rule if they are over 59 1/2. The income test of $100,000 or less (no requirement after beginning in 2010) still applies.

Keep in mind there are more ways than one way to get funds into a Roth IRA. Although conversions from a traditional IRA to a Roth are common, funds in employer sponsored plans  like 401k, 403b and 457 plans - can also be rolled over to a Roth.

In 2007, rollovers from an employer plan cannot go straight to a Roth IRA. Instead, you'll first have to rollover funds into a traditional IRA. Once in the IRA you can immediately do a Roth conversion. But thanks to the Pension Protection Act of 2006, it will soon be easier to convert your retirement savings to a Roth IRA. Beginning in 2008, funds from your employer sponsored plan can be directly rolled over into a Roth IRA.

However, don't confuse Roth conversions with the other Roth plans sponsored by your employer. Currently, you cannot convert a traditional 401k or 403b to its employer-sponsored Roth counterpart such as a Roth 401k, Roth 403b.

Remember, no matter when you do your conversion, it must be done before Dec. 31st of the tax year. Later, if you find you weren't eligible for the Roth conversion, you can undo the damage with a Roth recharacterization before your file your taxes.

For more information about tax planning, you are invited to attend the November NAPFA Consumer Education Foundation presentation. John G. Bowen, CPA, CFP®, AIF®, of Bowen Financial Services, LLC, will be speaking on the topic of year-end tax planning.

The seminar will be held on Saturday, November 10th from 12:00pm to 1:30pm at the Northside Library in the Albemarle Square shopping center. For more information call (434) 244-0000, or send an email to Charlottesville at NAPFAfoundation.org. To learn more about the NAPFA Foundation visit <a href="http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm" target=_blank>http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm</a>.

All presentations are free and open to the public. You are encouraged to attend and to bring your financial questions.

from http://www.emarotta.com/article.php?ID=255