just starting out ebook

Just Starting [email protected]

www.LifeFocus.com

LifeFocus.comT. Young

March 28, 2010

Table of ContentsCash Reserve ................................................................................................................................................... 11

What is a cash reserve? ...........................................................................................................................11

Why is a cash reserve necessary? .......................................................................................................... 11

Determining how large a cash reserve should be ....................................................................................11

Achieving your cash reserve goal ............................................................................................................ 12

Structuring and maintaining a cash reserve .............................................................................................13

Budgeting ..........................................................................................................................................................15

What is budgeting? .................................................................................................................................. 15

How does the budgeting process work? .................................................................................................. 15

Analyzing cash flow is little more than adding and subtracting ................................................................15

Is net worth growing or declining? ............................................................................................................15

Know where you stand, turn to the future, and set your goals .................................................................15

Create a spending plan that fits your resources and objectives ...............................................................15

Remember that it is a plan and that plans change as needed .................................................................16

Budgeting can be a temporary or a permanent habit ...............................................................................16

Establishing a Credit History .............................................................................................................................17

What is credit? ......................................................................................................................................... 17

Why is credit so important? ......................................................................................................................17

What does it mean to establish credit? .................................................................................................... 17

How do you get credit? ............................................................................................................................ 18

Debt Management ............................................................................................................................................ 23

What is debt management? ..................................................................................................................... 23

Establishing credit ....................................................................................................................................23

Borrowing options .................................................................................................................................... 23

Credit reports ........................................................................................................................................... 23

Repairing poor credit ................................................................................................................................24

Reducing the cost of debt ........................................................................................................................ 24

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March 28, 2010See disclaimer on final page

Options when you can't meet your financial obligations .......................................................................... 24

Borrowing Options: Benefits and Dangers of Borrowing ...................................................................................25

What is it? ................................................................................................................................................ 25

What are the benefits of borrowing money? ............................................................................................ 25

What are the dangers of borrowing money? ............................................................................................26

Credit Cards ......................................................................................................................................................28

The miracle of plastic ............................................................................................................................... 28

Applying for a credit card ......................................................................................................................... 28

Using a credit card properly ..................................................................................................................... 28

When it's payback time ............................................................................................................................ 29

You've got a right ..................................................................................................................................... 29

Repaying Student Loans ...................................................................................................................................30

What is it? ................................................................................................................................................ 30

Repayment options .................................................................................................................................. 30

What happens if you can't repay your student loans? ............................................................................. 30

The student loan interest deduction .........................................................................................................31

Determining the Need for Disability Income Insurance: How Much Is Enough? ..............................................32

What is it? ................................................................................................................................................ 32

Evaluate your risk .....................................................................................................................................32

Determine your income and expenses .....................................................................................................32

Determine what disability benefits you may receive if you become disabled ...........................................32

Anticipate additional expenses you might incur if you were disabled ...................................................... 33

Calculate your disability income insurance needs ................................................................................... 34

Property and Casualty and Liability Insurance ..................................................................................................36

What is it? ................................................................................................................................................ 36

Introduction to Investment Planning ..................................................................................................................38

What is investment planning? .................................................................................................................. 38

Understanding your investment personality .............................................................................................40

Designing an investment portfolio ............................................................................................................40



Selecting specific investments ................................................................................................................. 41

Managing and monitoring the portfolio .....................................................................................................41

Rebalancing or redesigning the portfolio, if needed .................................................................................41

Introduction to Retirement Planning ..................................................................................................................42

What is retirement planning? ................................................................................................................... 42

How can you determine your retirement income needs? .........................................................................42

How do you save for retirement? ............................................................................................................. 42

What should you know about distributions from IRAs and other retirement plans? .................................43

What if you are an executive or business owner? ....................................................................................43

How do Social Security and other government benefits programs impact retirement planning? .............43

Do government employees have special retirement concerns? .............................................................. 44

Introduction to Estate Planning ......................................................................................................................... 45

What is estate planning? ..........................................................................................................................45

Who needs estate planning? ....................................................................................................................45

How to do it .............................................................................................................................................. 46

How do you begin? .................................................................................................................................. 47

What other factors need to be considered? ............................................................................................. 47

What are your goals and objectives? .......................................................................................................49

What are estate planning strategies? .......................................................................................................50

Saving for Your Retirement ...............................................................................................................................51

Major considerations ................................................................................................................................51

Take full advantage of employer-sponsored retirement plans ................................................................. 51

Individual retirement accounts (IRAs) ...................................................................................................... 52

Choosing investments within your retirement plan ...................................................................................52

Evaluate nonqualified investment programs ............................................................................................ 53

Choose the right strategy to save for your retirement ..............................................................................53

Considering a New Employment Opportunity ................................................................................................... 55

What is it? ................................................................................................................................................ 55

Make sure the offer is firm before you evaluate it .................................................................................... 55



Investigate the company .......................................................................................................................... 55

Assessing the job offer .............................................................................................................................56

Consider the financial and emotional impact of taking the job .................................................................57

Should you accept the offer? ................................................................................................................... 58

Federal Income Tax Withholding ...................................................................................................................... 59

What is it? ................................................................................................................................................ 59

How to calculate the amount withheld from wages ..................................................................................59

Treatment of items other than regular wages .......................................................................................... 60

Backup withholding .................................................................................................................................. 61

Comparison of Typical Health Plans .................................................................................................................63

Steps to Estate Planning Success .................................................................................................................... 64

Getting Started: Establishing a Financial Safety Net ........................................................................................ 65

How much is enough? ..............................................................................................................................65

Building your cash reserve .......................................................................................................................65

Where to keep your cash reserve ............................................................................................................ 65

Review your cash reserve periodically .....................................................................................................66

Establishing a Budget ....................................................................................................................................... 67

Examine your financial goals ................................................................................................................... 67

Identify your current monthly income and expenses ................................................................................67

Evaluate your budget ............................................................................................................................... 67

Monitor your budget ................................................................................................................................. 67

Tips to help you stay on track .................................................................................................................. 67

Credit Traps for the Unwary ..............................................................................................................................69

Revolving credit can make it hard for you to pay off debt ........................................................................ 69

Interest and fees can add to the cost .......................................................................................................69

If you surf your debt, beware the wake .................................................................................................... 70

Protect yourself against credit fraud and identity theft ............................................................................. 70

Choosing a Credit Card .....................................................................................................................................71

Learn the lingo ......................................................................................................................................... 71



Once you can talk the talk, ask questions ................................................................................................71

A word about balance transfers ............................................................................................................... 71

Voice your concern if you're turned down ................................................................................................ 72

Speak up for your rights ...........................................................................................................................72

Investment Planning: The Basics ......................................................................................................................73

Saving versus investing ........................................................................................................................... 73

Why invest? ..............................................................................................................................................73

What is the best way to invest? ................................................................................................................73

Before you start ........................................................................................................................................74

Understand the impact of time ................................................................................................................. 74

Consider working with a financial professional ........................................................................................ 74

Review your progress .............................................................................................................................. 74

Types of Insurance ........................................................................................................................................... 75

Life insurance ...........................................................................................................................................75

Health insurance ...................................................................................................................................... 75

Auto insurance ......................................................................................................................................... 75

Homeowners insurance ........................................................................................................................... 76

Disability insurance .................................................................................................................................. 76

Long-term care insurance ........................................................................................................................ 76

Business insurance ..................................................................................................................................76

Other forms of insurance ..........................................................................................................................76

Health Insurance Made Simple .........................................................................................................................77

Not part of a group? You may have to go it alone ....................................................................................77

Know what's out there ..............................................................................................................................77

Read your contract ...................................................................................................................................78

The Fundamentals of Disability Insurance ........................................................................................................79

Why would you need disability insurance? .............................................................................................. 79

What do you need to know about disability insurance? ........................................................................... 79

Where can you get disability insurance? ..................................................................................................79



Renters Insurance .............................................................................................................................................81

Property damage coverage ......................................................................................................................81

Replacement cost vs. actual cash value ..................................................................................................82

Liability coverage ..................................................................................................................................... 82

What does it cost? ....................................................................................................................................82

Auto Insurance for 20-Somethings ....................................................................................................................83

Increase your deductible ..........................................................................................................................83

Drop collision and other-than-collision coverage altogether .................................................................... 83

Choose a safe car ....................................................................................................................................83

Live at home and drive your parents' car ................................................................................................. 83

Use multiple-policy discounts ...................................................................................................................83

Don't be pressured into buying more insurance than you can afford .......................................................83

Get married or hold out to age 25 ............................................................................................................ 84

Retirement Planning: The Basics ......................................................................................................................85

Determine your retirement income needs ................................................................................................85

Calculate the gap ..................................................................................................................................... 85

Figure out how much you'll need to save .................................................................................................85

Build your retirement fund: Save, save, save ...........................................................................................86

Understand your investment options ........................................................................................................86

Use the right savings tools .......................................................................................................................86

Taking Advantage of Employer-Sponsored Retirement Plans ..........................................................................87

Understand your employer-sponsored plan .............................................................................................87

Contribute as much as possible ...............................................................................................................87

Capture the full employer match .............................................................................................................. 88

Evaluate your investment choices carefully ............................................................................................. 88

Know your options when you leave your employer ..................................................................................88

Estate Planning: An Introduction .......................................................................................................................90

Over 18 .................................................................................................................................................... 90

Young and single ..................................................................................................................................... 90



Unmarried couples ...................................................................................................................................90

Married couples ........................................................................................................................................90

Married with children ................................................................................................................................91

Comfortable and looking forward to retirement ........................................................................................91

Wealthy and worried ................................................................................................................................ 91

Elderly or ill ...............................................................................................................................................91

Tax Planning for Income ................................................................................................................................... 92

Postpone your income to minimize your current income tax liability ........................................................92

Shift income to your family members to lower the overall family tax burden ........................................... 92

Deduction planning involves proper timing and control over your income ...............................................92

Investment tax planning uses timing strategies and focuses on your after-tax return ............................. 93

Year-end planning focuses on your marginal income tax bracket ........................................................... 93

Personal Deduction Planning ............................................................................................................................94

Deductions lower your taxable income .................................................................................................... 94

You can either take a standard deduction or itemize ...............................................................................94

The medical and dental expenses deduction: what it is, and how it involves your income level ............. 94

Proper timing of your deductions will minimize your taxes .......................................................................95

Evaluating a Job Offer ...................................................................................................................................... 96

How does the salary offer stack up? ........................................................................................................96

Bonuses and other benefits ..................................................................................................................... 96

Personal and professional consequences ............................................................................................... 96

Deciding whether to accept the job offer ..................................................................................................96

Negotiating a better offer ..........................................................................................................................96

How long should I keep copies of my tax returns? ............................................................................................98

How much money should I keep in a savings account for emergencies? .........................................................99

How can I reduce my spending? .......................................................................................................................100

Will debt consolidation hurt or help my credit rating? ........................................................................................101

How can I lower the interest rate on my credit card? ........................................................................................102

Should I pay cash for a car or finance it? ..........................................................................................................103



How much will my monthly car payment be? ....................................................................................................104

How can I get credit if I have no credit history? ................................................................................................ 105

Should I buy a home or continue renting? ........................................................................................................ 106

Should I buy or lease a car? ............................................................................................................................. 107

I get a lot of credit card offers. How can I tell which one is best? ..................................................................... 108

Are my student loan payments tax deductible? ................................................................................................ 109

How will I ever pay off my student loans? .........................................................................................................110

Can I refinance my student loan? ..................................................................................................................... 111

My friend and I share an apartment. Will her renters policy cover my possessions? ....................................... 112

How much health insurance coverage do I need? ............................................................................................113

Do I need disability insurance? ......................................................................................................................... 114

How can I reduce my auto insurance bill? ........................................................................................................ 115

What's the difference between an HMO and a PPO? .......................................................................................116

Do I need to get auto insurance before I buy a new car? ................................................................................. 117

I'm considered a "risky driver." How can I get insurance? ................................................................................ 118

How aggressive should I be when I invest for retirement? ................................................................................119

I think it's time to start planning for retirement. Where do I begin? ................................................................... 120

How can I protect myself against identity theft? ................................................................................................121

How do I stop those annoying telemarketing calls? ..........................................................................................122

Should my partner and I buy a house together even though we're not married? ............................................. 123

My radio broke two months after I bought it. What can I do to get my money back? ........................................124

What is my tax bracket? ....................................................................................................................................125

Am I having enough tax withheld from my paycheck? ......................................................................................126

What penalties and interest will I be charged for paying and filing my federal income taxes late? ...................127

Is student loan interest deductible? .................................................................................................................. 128

Do I have to file a federal income tax return? ................................................................................................... 129

Do I need to provide credit information on my auto insurance application? ......................................................130

How long am I covered under my parents' health insurance policies? ............................................................. 131

Do I need to insure a car that's worth only a few hundred dollars? .................................................................. 132



Help! I forgot to pay my auto insurance last month. Will my insurance company cancel my policy? ................133

Which is better, an HMO or a PPO? ................................................................................................................. 134

I'm going on a cruise. Do I need trip interruption insurance? ............................................................................135

Is it true that some sport utility vehicles cost more to insure than others? ........................................................136

Can I buy health insurance for my dog? ........................................................................................................... 137

I don't own a car, but occasionally I borrow my friend's. Do I need my own auto insurance policy? ................ 138

I'm buying my first car. What should I look for in an insurance company? ....................................................... 139

Is there a minimum number of quotes I should get when shopping for an auto insurance policy? ...................140

Does my auto insurance policy cover me on car trips outside the United States? ........................................... 141

How do I determine how much renters insurance I need? ................................................................................142



Cash Reserve

What is a cash reserve?

A cash reserve is a pool of funds (and sometimes credit) that you hold in a readily available form to meet emergency and other highly urgent, short-term needs. Sometimes, it is referred to as an emergency or contingency fund.

Caution: Terminology is important here because contingencies often are not emergencies. Purchasing an expensive item that suddenly goes on sale or buying stock when its price suddenly drops might lead one to tap a so-called contingency fund, but these are certainly not emergencies.

The definition used here of a cash reserve is money set aside solely to cover critical, unexpected needs, such as a sudden loss of income. Consequently, it is not a fund for meeting anticipated expenses, large or small, such as real estate taxes, tuition, or a spontaneous vacation. Instead, a cash reserve protects you, your family, and your loved ones against unexpected financial crises.

Example(s): The manufacturer of a new computer you've been thinking about buying has just announced a substantial rebate on machines purchased within the next two months. While this might be an excellent opportunity to purchase the item at a reduced cost, it is not an emergency and therefore does not justify tapping your cash reserve. Maintaining sufficient savings elsewhere eliminates the temptation to tap emergency-designated funds for nonemergency needs.

Why is a cash reserve necessary?

A sound financial plan should ensure that you are protected when financial emergencies arise. In times of crisis, you do not want to shake pennies out of a piggy bank. Also, having a cash reserve may help prevent being forced to take on additional debt precisely when another financial challenge is the last thing you need. Consequently, the first step in the financial planning process should be to establish a cash reserve.

Determining how large a cash reserve should be

The amount of your cash reserve should be based on your own personal situation. While basic guidelines do exist, you should adjust them to reflect your unique circumstances. Some factors you should consider when determining a cash reserve goal include job security, the condition of your real estate, and the health of you and your dependents. Naturally, such factors change with time, so an annual review and adjustments are important elements of the planning process.

Three to six months of routine living expenses compose a typical cash reserve, but there are exceptions

Your should generally follow the 3-6 months rule: that is, your cash reserve should equal 3 to 6 months of ordinary living expenses. Occasionally, low job security or high income volatility might suggest having a reserve of up to 12 months of expenses. The actual number of months selected should reflect these and other significant risk factors, such as the adequacy of insurance coverage and the condition of any property you own.

Using credit provides a higher-risk secondary funds source

Credit available to you can be a secondary source of funds in a time of crisis. However, because borrowed money must be paid back (often at very high interest rates), using lenders as the primary source of your cash reserve can create more long-term financial problems than it solves. Credit as part of a cash reserve functions best when it's part of a multi-tier cash reserve structure that includes multiple financial resources.



Taking stock of what you have

List the locations and amounts of your money that you can withdraw on an immediate (or nearly immediate) basis without incurring a loss. Typical sources include savings accounts, money market accounts, Treasury securities, and cash value life insurance. Be careful to exclude accounts set up to meet everyday needs or special objectives, such as education, vacations, or a new car. You can also include untapped credit resources, provided you count them separately from cash resources.

Are you missing the goal? If so, by how much?

This is almost as easy as subtracting what you have from what you need. If you elect to consider credit resources part of your cash reserve, the procedure is slightly more complex, since part of the total amount must be held as cash (noncredit) assets.

Example(s): Hal and Jane determine that their cash reserve should equal five months of living expenses, or $25,000 ($5,000 per month). Because their current cash reserve is only $15,000 in a non-tax sheltered money market account, they need to save or reallocate an additional 10,000 to meet their goal. The $15,000 amount is sufficient to cover at least three months of expenses. Therefore, they can cover the $10,000 difference partly or entirely with available credit.

Achieving your cash reserve goal

Your initial thought is probably that cutting spending and saving aggressively are the only options for establishing or increasing a cash reserve. However, you may already have assets that you could make part of your cash reserve. These could include savings bonds coming due, the cash value of a life insurance policy you plan to convert, or even an antique you no longer care about that you might sell. The discussion that follows explains methods that you can use to build your reserve fund to the desired level rapidly.

Identifying, converting, and reallocating current assets to build your cash reserve

You may be able to reposition current assets. Current or liquid assets are those that are cash or convertible to cash within a year. You can designate those already in cash form to be part of your cash reserve. Those not in cash form can be converted to cash when appropriate and added to your cash reserve.

Examples of current assets include:

• Certificates of deposit and savings bonds that will mature in 12 months (avoid paying an early redemption penalty by waiting until they mature)

• An antique, a painting, or a piece of jewelry

• Stock shares

• A valuable collection (stamps, antique dolls, rare books, etc.)

• Current savings for nonemergency contingencies, part of which might be reallocated to your cash reserve

Evaluate the approaches to systematic saving currently available to you

If you have not established a cash reserve or if the one you have falls short of your goal, there are several paths you can take to eliminate the shortfall. Automatic savings (e.g., using payroll deduction at work) is one of the best approaches. Systematic savings that are budgeted as a regular household expense ican also help. Curtailing discretionary spending is still another wise choice. Exploring the pros and cons of your alternatives will help you create a savings plan that is best for your own situation.



Develop a cash reserve savings plan to achieve your goal as rapidly as is reasonably possible

Having reviewed the available savings options, select one or a combination of approaches to achieve your cash reserve goal. Because an adequate cash reserve serves as your protection against financial chaos, you should be as aggressive as reasonably possible in achieving your goal. Combining both spending reduction and savings can help you quickly reach your goal.

Structuring and maintaining a cash reserve

The most important attribute of a cash reserve is its availability in time of sudden need. However, his does not necessarily require you to keep the entire sum in a low-interest savings account. There are several excellent alternatives, each with its own unique advantages. For those with a larger cash reserve, a multi-tier structure of sources based on timeliness of access is often desirable. Because income and personal circumstances are subject to change, periodic review of the cash reserve total and its structure is advisable.

Stash the cash: deciding where and in what form to keep a cash reserve

A federally insured savings account is considered one of the safest places to put money being reserved for emergencies, but when interest rates are in the basement, there may be better alternatives. Money market deposit accounts at a bank and various types of term deposits, such as certificates of deposit (CDs), typically offer higher interest rates with little, if any, increased risk. Term deposits are effectively a loan to the institution and not intended for withdrawal prior to the expiration or maturity date. Financial institutions generally assess a substantial penalty for early withdrawal. Laddering maturity dates provides a means of minimizing the impact of this disadvantage.

Money market mutual funds are another good choice. However, you need to understand that a money market mutual fund, whether from a bank or fund company, is not federally insured. With a money market fund, it's possible to lose money, although most money market funds will go to great lengths to avoid "breaking the buck"--that is, allowing a share's value to fall below $1, thus costing investors at least part of their principal. Be sure to obtain and read a fund's prospectus (available from the fund) so you can carefully consider its investment objectives, risks, expenses, and fees before investing.

Ladder maturities of term deposits for better accessibility and lower interest rate risk

Laddering refers to staggering the maturity dates of fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date). Certificates of deposit (CDs) and U.S. Treasury securities (T bills) are examples of savings vehicles you might consider as a second tier of your cash reserve. If so, spreading the maturity dates of such vehicles over a short time period (e.g., two to five months) assures their availability to meet sudden financial needs that may extend beyond a few months. Laddering enables you to seek as higher level of interest while preserving some accessibility and flexibility to adjust to changing financial circumstances.

Build a multi-tier cash reserve when using term deposits or credit lines

If your cash reserve includes more than two or three months of living expenses, you can consider dividing it into two or three tiers. You then have the option of using a different form of savings or credit for each tier. This method allows you to consider savings vehicles that offer higher interest rates, although such money will not be available immediately without penalty. If you choose to include credit as part of a multi-tier account structure for your cash reserve, always use it as the final tier, because payback requirements and related interest charges make it the least desirable form of emergency protection. The following table illustrates this point:

TIER DESCRIPTION ACCOUNT TYPE

1 3-4 months living expenses immediately available Ordinary or money market savings

2 4-6 months of living expenses Money market savings, CDs, or Treasury bills

3 6-12 months of living expenses CDs



4 Preapproved credit Personal credit line

Review and adjust your cash reserve annually to reflect your changing circumstances

If anything is certain, it is that the personal and financial circumstances of you, your family, and your loved ones are very likely to change within the span of a year or two. A new child comes along, an aging parent becomes more dependent, a larger home or new car brings increased expenses, or maturing offspring leave the nest. Because your cash reserve is your first line of protection in a financial crisis, it is important to review it annually. If the amount and structure of your reserve no longer matches current needs, you should make the appropriate adjustments. An overly large reserve can mean that opportunities for better returns are being overlooked. In contrast, an undersized reserve increases the risk for financial chaos and stress in a time of sudden need.



Budgeting

What is budgeting?

Budgeting is a process for tracking, planning, and controlling the inflow and outflow of income. It is a process that we all begin soon after we get our first spending money. Relying on our overloaded minds to manage such a complex process has many shortcomings. The solution is to analyze your current situation, determine your goals, and develop a written plan against which you'll measure your progress.

How does the budgeting process work?

The budgeting process begins with gathering the data that makes up your financial history. Next, you use this information to do a cash flow analysis. You will calculate your net cash flow, which tells you whether cash is coming in faster than it's going out, or vice versa. Then you will determine your net worth. Simply stated, this is the sum of everything you currently own less the sum of everything you currently owe. Having a snapshot of your present financial situation, you'll then define your financial objectives and create a spending plan to achieve them. Finally, you will periodically check your progress against the plan and make adjustments as needed.

Analyzing cash flow is little more than adding and subtracting

Add up your income, then your expenses, and subtract the latter from the former. The result is your net cash flow. If it is positive (hopefully), you're earning more than you're spending. If not, then budgeting is not really an optional process. You must do it to avoid losing more ground financially. To the extent that you can make cash flow strongly positive, you will be able to save for upcoming needs and investments.

Is net worth growing or declining?

Your net worth shouldn't be a mystery. To determine what it is, you simply add up the current value of your assets (the things you currently own), and then subtract the total of your liabilities (what you currently owe). The idea, if you haven't guessed it, is that your net worth should grow from year to year, barring unforeseen setbacks.

Know where you stand, turn to the future, and set your goals

You might have one or more major savings needs goals in mind, but now is the time to look at all your anticipated financial needs, including your cash reserve, and determine your goals. Knowing what all of your goals are enables you to create the best plan to achieve those objectives over the long term. While you may not be able to achieve all of your goals simultaneously, having a plan in place will help as you work toward your future goals.

Create a spending plan that fits your resources and objectives

Once you know where you stand financially and the goals you hope to achieve, you are in a position to design a plan that will move you expeditiously in that direction. You will know how aggressive you need to be in order to achieve the objectives you set, and therefore you can design a plan that fits both your resources and objectives.

Just as with a plan that falls short of delivering on your goals, a plan that is overly aggressive relative to your resources is likely to lead to budget frustration. Keeping goals aligned with objectives is a critical part of the process and essential to budgeting successfully.



Remember that it is a plan and that plans change as needed

Flexibility is always an important ingredient in the planning process. As life's circumstances change, as they inevitably will, you will need to adjust your spending plan accordingly. The important point is that the budgeting process keeps you abreast of how these changes are occurring and allows you to make changes as you find them appropriate to your needs and resources.

Budgeting can be a temporary or a permanent habit

It may be that your present financial situation calls for the short-term control that budgeting can provide. Alternatively, you may find that budgeting gives you a level of control over your finances that you'd prefer to maintain over the long term. If the latter is true, you should make it a lifelong habit.



Establishing a Credit History

What is credit?

When you say you want credit, you are probably asking for payment terms on a purchase. You are seeking to purchase goods or services today and forego all or a portion of the payment until a later date. You may or may not be bound by a payment plan. You may or may not be required to pay a percentage of the purchase price up front (down payment). You may or may not pay a fee (interest) in exchange for the privilege of buying now and paying later. In all cases, you are making a purchase and being trusted to make final payment at some time in the future.

Why is credit so important?

Credit provides you with financial flexibility and security

There are many reasons why you may seek credit. Here are a few examples:

• You move into your first apartment and don't want to sleep on the floor while you are saving up money to buy a bed. You need credit.

• Your blind date orders the lobster, champagne, and a chocolate dessert. You only brought $40 cash. You need credit.

• You are traveling in another country with no access to your bank account and unexpectedly find a painting that will look great in your living room. You need credit.

• You are traveling through Big City, USA, when your car engine dies. You didn't anticipate such an emergency. You need credit.

• You can't live through the summer without a kidney-shaped swimming pool just like the one the neighbors got, but your savings are tied up in certificates of deposit that won't mature for another six months. By that time, it will be winter. You need credit.

• The local piggery is running a promotion on hindquarters of pork, a free barrel of scrapple, and 2 percent financing to qualified buyers. You figure your money is making 3 percent in the bank. You can take the credit and net a gain of 1 percent. You need credit.

Whether you're unable to make immediate payment, can't get access to your cash, are faced with unexpected circumstances, or simply recognize the time value of money, credit allows you to obtain goods and services today that you will not have to pay for until a later date. Used responsibly, credit can help you improve the quality of your life, overcome financial obstacles and emergencies, and even (on rare occasions) save you money.

What does it mean to establish credit?

Establishing credit means establishing your reputation as a good credit risk

When you make a purchase on credit, you are being trusted to make final payment at some time in the future. If you pay as agreed, the lender will likely want to do business with you again. If you don't pay as agreed, the lender will likely be less willing to extend credit in the future or will charge you a higher interest rate. As time goes by, you establish a reputation. If you have paid your bills, it will be said that you are a good credit risk, that you have good credit, or that you have a good credit rating. This will enable you to obtain more credit from other lenders, in greater amounts.

If, however, you have not paid your bills, or have consistently paid them late, it will be said that you have



negative credit. You will develop a reputation as a bad credit risk. Lenders and collection agencies will label you as a no-pay, a slow-pay, a get-me-done, a deadbeat, or just plain bogus. It will become increasingly difficult to get credit, even when you need it for an emergency.

Lenders rely on credit reports to determine your reputation for creditworthiness

Usually, lenders rely on information provided by credit-reporting agencies at some stage of the credit-granting process. These agencies collect data about credit transactions and attempt to keep accurate records on all borrowers in a particular area. There are at least three major providers of such information in the United States. For a fee, and with your permission, a lender can obtain a copy of your credit report and evaluate your reputation for creditworthiness (a limited amount of information can be gathered without your permission).

A typical credit report contains information about you, your address, your job, and your income. Most importantly, it contains a history of your experience with lenders. It typically includes details about who you obtained credit from, how much you borrowed, when you obtained it, when you paid it back, whether you were late, how often you were late, whether there is any outstanding balance, whether any collection actions were taken, and whether or not you filed for bankruptcy.

Convenient access to credit is available only if you have established a favorable credit report

If you want convenient access to credit, it is almost necessary to have a favorable credit history on file with a major credit-reporting agency. Lenders typically ask you to fill out a credit application when you are seeking credit (it is usually in the fine print of this application that you grant permission for them to obtain your credit report). However, information set forth in your credit application is likely to be seriously considered only if it is consistent with information obtained from a credit-reporting agency or verified independently (an inconvenient and time-consuming process).

Without a credit report, lenders have nothing to go on. It is easy for a lender to deny you credit when you have no credit history. Without a record of your credit experience, a potential lender deems you a mystery. The lender knows nothing about you or your reputation for creditworthiness. It may be easier for a lender to deny credit than to take a risk or conduct an independent investigation. If you cannot get a credit application approved, then you won't be able to establish credit.

How do you get credit?

Get an income

If you want to establish credit, you need a regular source of income. The income can be derived from a job, trust fund dividends, an allowance from your parents, government benefits, alimony, investment dividends, or any other source. What is important is that you have some kind of continuing and predictable cash flow. Without regular income, you cannot demonstrate an ability to make regular payments. Establishing a regular source of income is your first step.

Request credit from a lender who reports to a credit bureau

All your efforts to establish a credit rating will be wasted if your lender does not report repayment information to a recognized credit-reporting agency. Lenders are not required to report. Ask about their policy before you apply for credit. If the lender reports, then ask for a credit application.

Think small at first

By thinking small, you limit the lender's exposure. Exposure is the lender's total potential loss. If you have never obtained credit before, do not make your first request a personal loan for $40,000 with no collateral. This maximizes the lender's exposure. The lender might be willing to extend you credit but not if big money is at stake. Try applying for a small loan, perhaps $500, and pay it off promptly. Then apply for another loan, perhaps a larger one. Eventually, you will have a solid credit relationship with that lender, and the credit activity will be reflected on your credit report.



Choose a credit card with a low credit limit

While thinking small, you may explore the chances of getting a credit card with a low credit limit. Major credit card companies frequently offer small lines of credit to groups such as college students or credit union members. If you are a student, look for applications in the back of campus magazines or in the school's bookstore. Check with your credit union. Your status as a group member may be enough to get you a card. Get it, use it, and pay it off promptly. The activity will be reported to a reporting agency.

Apply for a retail store charge card

If you don't belong to a special group, try the local mall. Many retail stores issue charge cards, which are similar to credit cards, but can only be used at the issuing store. Most major retailers will offer charge cards to first-time borrowers. Ask for an application at the cash register or customer service counter. The interest rates are usually high and credit limits low for first-time borrowers, but if you use the card and pay your bills promptly, you will establish a credit rating. Furthermore, the store may sell your name and address to other retailers, who will mail you invitations to apply for their charge cards.

Tip: Most retailers offer a gift or discount for your first purchase on a new card.

Make a large retail purchase and ask for credit terms

Many retail stores offer credit terms for high-ticket purchases. If you are planning to make a large purchase from a retail store, use the opportunity to establish credit. Major appliance stores, furniture stores, video/stereo stores, computer retailers, home improvement outlets, and jewelry stores (to name a few) will extend credit to first-time borrowers for the sole purpose of closing the sale. You can even find zero-interest deals when shopping in competitive markets for high-ticket merchandise, such as jewelry. Check your local paper or listen to radio advertisements for special deals.

Caution: Many of the so-called zero-interest financing deals require that you pay off the entire balance by a certain date. If you fail, you must pay interest on the outstanding balance, retroactively from the date of purchase. Make sure you understand the risks before signing on.

Obtain a gas card

Most major petroleum companies offer gas cards to first-time credit seekers. These can be used to purchase gas and services at any of the company's stations. The credit limit is low and the balance must be paid in full every month. Ask for a card at your favorite gas station, or check popular magazines devoted to travel, vacation, automobiles, or business for applications and toll-free numbers.

Apply for an overdraft line of credit on your checking account

Another way to start small is with your own bank account. Most consumer banks will provide a line of credit attached to your checking account. It is often called an overdraft account because it is designed to cover bounced checks.

Here is how it works. You have a checking account. You apply for, and are granted, an overdraft line of credit in the amount of $500. Your checking account balance is $40. You write a check for $75. When the check is presented to the bank for collection, the bank does not return it for insufficient funds. Instead, it credits your checking account in the amount of $100. Now you have a balance of $140 in your account. The bank can honor the $75 check, leaving you with $65 in the account. The bank bills you monthly for the $100. You can repay the $100 all at once, or make minimum monthly payments. You will be charged interest and perhaps a service fee. Although it may not look like a loan, it is. Activity on these accounts is regularly reported by many banks.

Join a health club

Many clubs that require annual membership fees can arrange financing. If you are planning to join a club, take the opportunity to establish credit. The club is probably not extending credit itself. It is probably working with a local bank or finance company that is willing to be permissive about approving club members' applications for



credit. Find out who is extending the credit and whether they report payment activity.

Get help from someone with a good credit rating

Reducing exposure is one way to make lenders more comfortable with your credit application. Reducing risk is another. Risk is the degree of likelihood that a loss will result. You can minimize the risk to a lender by providing a comaker, cosigner, or guarantor for your loan.

You may be able to reduce risk by having a parent or other relative cosign on a loan or credit card for you (most lenders require the cosigner to be related in some way). Cosigners should be aware that they are liable for any unpaid balances and that credit activity will be reported on their credit report, as well as yours. Generally, if your cosigner has a good credit rating, lenders will be satisfied that risk is minimized and will extend credit. You may be able to borrow enough for a car or even a home.

Caution: If you are getting help from parents to establish credit using a credit card account, make sure you are a joint cardholder and not just an authorized user. If you are merely listed on their account as an authorized user, then you are not legally liable for the debts. Using the card will not help you to acquire a credit history because it will not be included on your credit report.

Get the government to guarantee your loan

If you are a full-time student at an institution for higher learning, you probably qualify for one or more government-guaranteed loans. Most government-guaranteed student loans are available even if you do not have a credit history. Lenders are willing to extend enormous amounts of credit under these plans because the government agrees to repay the loan if you don't.

Caution: Your failure to pay will be reported to the credit bureaus, and the federal government will pursue you for the unpaid balance.

Caution: It takes a long time to establish a credit history with student loans. If you are a freshman in college, your first-year loans may not become due and payable until six or nine months after you graduate. Until you start making payments on the loan, account activity will not be reported to a credit bureau. It could take years to establish a credit record in this manner.

Secure your credit with collateral

When you secure credit, you give the lender collateral to back your loan. The risk is reduced for the lender. If you do not pay, the lender can use the value of the collateral to satisfy the debt. Collateral can be anything of value, but usually takes the form of cars or real estate. If you have something of value, but no credit rating, you may be able to acquire credit by offering to post your valuables as collateral.

Caution: Many large banks sell their secured loans to investors and cannot customize loan documents if unconventional collateral is involved.

Get a secured credit card

Many credit issuers offer secured credit cards. A secured credit card provides you with an open line of credit secured by a cash deposit. These types of cards typically come with a high interest rate. Here is how a secured credit card works. You give the credit card issuer a cash deposit. The credit issuer gives you a credit card with a credit limit equal to the cash deposit. You can charge up to the credit limit using the card, and then make monthly payments on the balance. If you fail to make the payments, the credit card issuer uses your cash deposit to cover the unpaid balance. If you make your payments as agreed, you will eventually establish credit and qualify for an unsecured credit card. The secured credit card issuer will return your deposit, less any unpaid balance due, when you cancel the account.

Make large down payments

If you have not established credit, you can still obtain financing for major purchases (such as a new car) if you can afford to make a large down payment. A large down payment reduces the lender's exposure by reducing the



loan amount. With a smaller outstanding balance, there is less at stake for the lender. The large down payment also makes your monthly payments lower and shows the lender that you are committed to making the purchase. Even if you have no credit history, you should be able to get financing for a reasonably priced car if you are willing to make a down payment of 20 to 50 percent of the purchase price. You will also need income sufficient to make monthly payments on the balance.

Consider insuring your credit

Some automobile dealerships can arrange financing for people with no credit history by using repossession insurance. Here is how repossession insurance works. You make a standard down payment and agree to make payments on the balance of the purchase price. You also agree to pay premiums to an insurance company that will cover the lender's loss if you fail to make payments and the car is repossessed. Repossession insurance (sometimes referred to as repo-insurance) is expensive, but it is one way to obtain a loan and begin establishing credit.

Increase your credit validation score

Some lenders use scoring methods to determine your creditworthiness. They examine your credit application and, using a scoring sheet, determine a score that corresponds to the information you provide. If your score is over a certain number, you get a loan. The scoring system is based on statistics and historical data. Different lenders use different systems, and the points may change. The following list is a sampling of questions that could appear on a credit validation scoring sheet:

a. Does the applicant have a checking account? 3 points

b. Does the applicant have a savings account? 3 points

c. How old is the applicant?

Under 20 0 points

20 to 30 2 points

30 to 40 3 points

41 and over 5 points

d. Is there a phone in the applicant's house?

Listed? 5 points

Unlisted 2 points

e. Does the applicant own a home?

If so 5 points

Rent unfurnished 3 points

Rent furnished 1 point

f. How long has the applicant lived at his or her present address?

More than two years? 3 points

More than five years? 5 points

g. Does the applicant have adequate income?



Yes 5 points

No 0 points

h. How long has the applicant been receiving income from his or her present source of income?

More than two years? 3 points

More than five years? 5 points

i. Applicant's education?

High School Graduate 2 points

College Degree 3 points

Masters degree 4 points

Pequivalent 5 points

j. Ratio of expenses to income?

Over 95% 0 points

90-95% 1 point

80-90% 2 points

Below 80% 3 points

These questions are only samples. Different lenders use different factors and assign varying levels of importance to each. However, once you have a general idea of what lenders are looking for, you may be able to manipulate some of the factors to maximize your potential score, get a loan, and begin to establish a credit rating. For example, according to this sample, you can increase your credit validation score by 11 points if you just obtain a telephone number and open a joint checking and savings account.



Debt Management

What is debt management?

As a modern consumer, you need credit. When you were growing up, you may have heard your parents or grandparents say, "If you can't pay for it with cash, then you can't afford to buy it." That may have been sound advice 40 or even 20 years ago, but such attitudes about credit are outdated and unrealistic for most adults working and living in modern times. The average cost of a car, house, or college education has skyrocketed when compared to the average household income, so typical consumers need to borrow money if they want to buy a home, drive a car, or educate themselves or their children. Throw in a handful of charge accounts and credit cards, and it is no wonder that the average consumer is carrying more debt than ever before. With greater credit needs comes a greater need for debt management.

Good debt management ensures that you will have credit when you need it, make wise borrowing decisions, and avoid disaster if you become overextended. You can ensure that loans are available when you need them by establishing and maintaining a positive credit record. You can benefit from many specialized loan programs if you are aware of your borrowing options. You can save money by taking steps to reduce the cost of debt and save yourself from disaster if you know what to do when you can no longer meet your financial obligations.

Establishing credit

You must first establish a credit record if you want to have ready access to loans when you need them. You establish a credit record by borrowing money from a lender who reports to a credit bureau. So, what's the problem? The problem is that few lenders will loan you money if you don't have an established credit record. That is the catch-22 of building credit. However, if you have no credit experience, there are several ways to get started.

Thinking small and taking advantage of special credit deals is one way to establish that first credit relationship. Increasing lender confidence with a large down payment, or posting collateral, is another. Insured credit, guaranteed credit, and secured credit help many borrowers get started. If you pay your obligations as agreed, you will be surprised at how many lenders will offer you credit once the ball is rolling.

Borrowing options

You wouldn't try to buy a house using proceeds from a student loan, nor would you try to finance your college education with a credit card. However, you might use a home equity loan or line of credit to finance your child's college education. Knowing what borrowing options are available to you is important when shopping for credit. Some types of loans carry lower interest rates, some have tax-deductible interest, some are subsidized by government entities, and still others have special repayment terms designed to serve the needs of a special class of borrower.

Whenever you have the need to finance an expense, it is worth your time and effort to educate yourself about your borrowing options. Lenders today are enormously competitive, and there are more than just interest rates to consider when comparing one loan package to another. Find the loan that best suits your needs, and be sure you have examined all your choices.

Credit reports

Part of what makes it possible for you to shop for credit is your credit report, which is a record of your past credit relationships. As mentioned previously, establishing and maintaining a good credit record makes you an attractive customer for lenders. You will get the best deals and have access to the largest number of credit options if your good credit record is maintained.



The first step in maintaining a good credit record is to pay your obligations as agreed. However, merely paying your bills is not enough. Many credit reports contain errors that are clerical in nature or caused by misidentification (e.g., someone else's bad credit gets put on your report). Although these errors are not your fault, they can cause delay or rejection when applying for a loan. To avoid such complications and delays, you need to obtain copies of your credit reports from the various national credit reporting agencies. Once done, you need to interpret the information and determine whether errors have been made. If there are problems with your report, you have specific rights that you can exercise and a procedure for correcting errors. You can force the credit reporting agencies to investigate errors and either correct, confirm, or delete the information, usually within 30 days.

Repairing poor credit

If the information on your credit report is correct but bad, you face a more difficult task. However, a poor credit record can be improved. Adding good credit to your report is helpful. It shows that your period of financial difficulty is over and that you are once again making good on your debts. You can also go back to creditors that reported bad information and negotiate a deal in which you agree to pay off the account, or make additional payments on the account, if the lender will agree to upgrade your credit status.

Your report may contain bad credit because of a dispute with a creditor. Perhaps you purchased a defective appliance on credit, the merchant failed to repair or replace it, you refused to make payments, and the merchant reported you as delinquent. You can add a consumer statement to your credit report to tell your side of the story. If all else fails in your attempt to repair credit, you may have to simply wait out your credit problems. Even bankruptcies disappear from your report in time.

Reducing the cost of debt

It is good to periodically evaluate your debt situation and determine whether you can reduce the cost of debt. It makes no sense to be paying more money for interest if you can be paying less. There are several ways to reduce the cost of debt: You can refinance loans to get lower interest rates, use the equity in your home to pay off high interest loans and credit card balances, or transfer your credit card balances to cards with lower rates.

Other options include prepaying debts and liquidating assets to pay off loans and to avoid further interest charges. You may also seek to reduce or eliminate noninterest costs related to borrowing, such as private mortgage insurance (PMI). If you have kept your mortgage payments current and built up sufficient equity in your house, you may be able to cancel your PMI coverage. Many of these options have tradeoffs. For more information, see a financial professional.

Options when you can't meet your financial obligations

Ideally, you should never incur more debt than you can afford. If that plan fails, then your next task is to recognize when you are financially overextended and do something about it. Doing nothing is the worst possible choice. The longer you wait to take action, the more severe your financial troubles are likely to become.

Increasing your income stream may be an option. If not, there are things you can do to reduce your monthly obligations. Reducing the cost of debt, or negotiating directly with your creditors may enable you to lower monthly payments. If you need professional advice, you can hire a credit counselor or contact one of the many nonprofit credit counseling services, such as Consumer Credit Counseling Services, which can often arrange an affordable repayment plan for you. If things are really out of control, you may want to consult an attorney about bankruptcy and determine whether you would benefit from a self-help support program such as Debtors Anonymous. You should face up to your financial difficulties and take steps to resolve them.



Borrowing Options: Benefits and Dangers of Borrowing

What is it?

There are people in the United States today who have never taken out a loan, made a purchase on credit, or owned a credit card. They believe that if you can't pay cash, you can't afford it and shouldn't buy it. One thing is certain: Bill collectors will never bother these people. What these people know is that you can get into financial difficulty if you borrow too much, too frequently. However, what these people seem to misunderstand is this: It is frequently beneficial, or at least convenient, to make purchases using someone else's money. If you are thinking about borrowing money, and you are new to the world of credit, you should know about some of the benefits and dangers of borrowing.

What are the benefits of borrowing money?

Successful borrowing can help you create a positive credit history

A positive credit history is important for many reasons. Even if you do not believe in making purchases on credit, it is good to have the ability to do so. In the event of an emergency, it is good to have access to emergency funds. Unless you have adequate liquid savings, you will need to borrow money to handle an emergency. To do so, you will need a positive credit history.

Credit is also desirable when making major purchases. Saving up the money to buy a house may take many years, and you will have to pay rent while waiting. If you have a positive credit history, you can obtain a mortgage loan, buy the house, pay off the mortgage over 30 years, and live in the house while you're doing it.

If you wish to use credit to help yourself in these situations, then you must establish a good credit history. You do so by borrowing. Only by borrowing, and paying off your loans as agreed, do you establish a good credit rating and make the easy acquisition of credit possible.

Leverage can be used to increase the return on your investments

If you can borrow money, you can use leverage to increase the return on your investments. This is possible because you can own and control more property with less of your own money. The following illustrates how you can increase the return on your investment using leverage:

Example(s): Hal had $50,000 that he wanted to invest in real estate. He found a house that cost $150,000. He convinced Frank and Bob to invest $50,000 each in the same house. They purchased the house and each owned one-third. The value of the house increased to $180,000 and was sold. Frank, Hal, and Bob shared a $30,000 profit. Each realized a $10,000 gain, or a 20 percent return, on their investment.

Example(s): Hal, being a thinking man, decided to invest in more real estate. However, this time he decided to use leverage to increase the return on his investment. He made a $50,000 down payment on a $150,000 house and took out a mortgage for $100,000. By borrowing in this manner, he was able to own and control the entire asset, rather than just one-third. When the house increased in value to $180,000, he sold it, paid off the mortgage, and realized a $30,000 gain, or a 60 percent return, on his investment.

The example is simplified and does not take into consideration taxes, interest, or rental income, but it illustrates the notion that by using leverage, you can control more assets using less of your own money.

Caution: The problem with leverage is that it can work both ways. Assume that the two parcels of real estate in the previous example dropped in value to $120,000. In the first transaction, Hal would have lost $10,000, for a 20 percent loss on his investment. In the leveraged transaction, Hal would



have lost $30,000, for a 60 percent loss on his investment.

Borrowing is a convenient way to make purchases

Without considering all the financial variables, borrowing is just plain convenient. Credit cards are the most convenient form of borrowing. You can buy your lunch, buy a movie ticket and popcorn, buy stamps at the post office, make a long-distance phone call from a pay phone, buy groceries, get gasoline, book a trip to Aruba, get your teeth cleaned at the dentist, and order a CD, all without going to the bank, writing a check, or digging in your pockets for change. Credit cards are so widely accepted that it seems only a matter of time before they will replace cash entirely. If you carry a no-annual-fee credit card, and you pay the card off in full every month, then you pay no interest on the borrowing. The convenience is free.

Interest on some forms of borrowing is tax deductible

If you have equity in your home and the ability to borrow, you may be able to benefit from tax-deductible interest. If you have major expenses or other high-interest debt, you can take out a home equity loan or line of credit and pay off or refinance the debt. In most cases, the interest on such loans is tax deductible, making the cost of funds cheaper.

What are the dangers of borrowing money?

Overspending is a risk when credit is readily available

When credit cards and home equity lines of credit are readily available, it is easy to overspend. A shopping trip can quickly turn into a no-holds-barred, bare-fisted spending spree, leaving your credit cards and equity lines tapped out. This may not be a problem if you can afford to pay the bill at the end of the month. All too often, however, consumers don't realize how much they have actually spent until they get the bill in the mail.

Borrowing can increase the cost of goods purchased

If you make purchases on credit and pay them off over time, you end up paying the original purchase price plus a fee (interest) for the extension of credit. This means the cost of acquiring the goods is greater. In other words, it isn't really a sale if you buy that suit at 10 percent off using an 18 percent credit card.

For example:

Suit $300

10% off ($30)

Sale price $270

Credit card balance $270

Paid off at $15 per month

Total of all monthly payments $317

Total interest paid $47

Of course, total interest paid would be less if you made larger monthly payments and paid off the balance earlier. However, many consumers underestimate their ability to do so and end up increasing the cost of everything they purchase by paying excessive interest.

Caution: In addition to the excessive interest, there are annual fees and late payment charges that can further increase the cost of borrowing.



Insolvency results from excessive borrowing

Insolvency is commonly defined in two ways. Insolvency is the condition of being unable to pay your debts as they come due. Insolvency is also defined as the condition of having more liabilities than assets. If you own a home, a car, and a house full of furniture, you may think you have plenty of assets. However, if you borrowed to acquire your belongings, you may be closer to insolvency than you think.

Example(s): Archie owns a house, his furniture, and a car. His house has a market value of $150,000. His mortgage balance is $100,000. The balance on his home equity loan is $40,000. He owes about $10,000 on the car he bought last year. It has a blue book value of about $10,500. Archie owns his furniture free and clear. A junk dealer said that used furniture did not have much value and offered a yard sale price of $1,000 for the whole bunch. In addition to his mortgage and car payment, Archie owes about $8,000 in credit card bills and $4,000 in back taxes. Archie has no savings to speak of and no personal belongings of any real value. Archie can't afford to make payments on his tax debt and still keep up with the other bills.

Example(s): Is Archie insolvent? Yes, Archie is insolvent. He cannot make payments on his tax debt without leaving other creditors unpaid. Further, he has more liabilities than assets.

Many consumers carry high credit card balances. Many homeowners have mortgaged all the equity in their homes to pay college, medical, or other expenses. Given this situation and no other significant assets, you can easily find yourself insolvent and unable to pay your current bills, while interest, late fees, and penalties accrue daily. Always evaluate your financial situation prior to taking on new debt.



Credit Cards

The miracle of plastic

It's so convenient. Pull out a plastic card and you can purchase a designer suit at that new boutique, dinner at your favorite restaurant, groceries at the supermarket--or all three. Need cash? Use the card at a nearby automated teller machine (ATM) and walk off with a fistful of dollars. Want to get away from it all? Book the flight, provide your account number, and you're on your way.

Buy now, pay later

That innocuous piece of plastic unlocks access to a revolving line of credit, one that allows you to make purchases (or get cash advances) now and pay for them later. When you apply for the account, the card issuer determines a credit limit, which is the maximum balance you may carry. As you make purchases (or incur finance charges and/or other creditor fees), your remaining available credit decreases. If you attempt to make a purchase (or take a cash advance) that will cause your account to exceed your credit limit, your transaction will be denied unless you agree to allow it (and accept the over-the-limit fee that comes with it). As you make payments against your outstanding principal balance, your available credit increases.

And pay and pay

You'll be expected to pay for the purchases (or cash advances) that you make, as well as for the use of the lender's money. The normal finance charges on credit cards can be high, even in times of low interest rates. In addition, if you're late making payments, the lender may start charging you an interest rate higher than the standard rate (to offset the repayment risk you pose) and/or other fees that can make using your card even more expensive. If you make only minimum monthly payments on your account, you may find the card's convenience coming at a high price.

Applying for a credit card

Credit cards are available from banks, credit unions, retail stores, and even oil companies. If you have reasonably good credit, all you'll need to do to apply for a credit card is sort through the offers stuffing your mailbox. You may even be "pre-approved" for a card. This means only that the creditor making the offer has decided, based on its general criteria for eligibility, that you're a good candidate for credit. Actual acceptance will come only when you've completed the credit application and the creditor is satisfied with a review of your personal information and credit history. In most cases, you can complete an application for a credit card by providing information about yourself on paper, over the telephone, or via the Internet. Once the creditor has your information, you'll probably receive a reply within hours; if you're approved, you'll have your card within a few days.

Even if you have a blemished credit history, it's likely you'll still receive a credit card. However, the greater the risk the creditor perceives you to be, the higher the interest rate you'll be charged when you "charge it." Before you accept a credit card, be sure you understand the specific terms and conditions of its use. The basics of these terms and conditions are usually spelled out in the application material, and detailed information is included in the cardholder agreement you receive with the card itself.

Using a credit card properly

Used properly, credit cards can offer you financial leverage you might not otherwise enjoy. If you pay off your balance in full each month, your credit card account acts as a short-term, interest-free loan. This can help alleviate cash flow problems. You can also use a credit card to make large purchases sooner than you could have otherwise, and to buy items when they're on sale.

The convenience offered by credit cards can often lead to overspending, however. Monitor your card usage and balances. Understanding how to read your monthly credit card statements can help you do both. Make sure your



monthly payments fit comfortably within your budget. Learn the signs of credit abuse, and how to avoid becoming an abuser. You'll also want to take certain steps to reduce the likelihood of becoming a victim of credit fraud.

When it's payback time

The outstanding balance due on your credit card account is the total amount you owe the creditor at any given moment. It includes any unpaid balance carried over from your previous month's statement, plus any new purchases, accrued interest, and other charges (such as late and over-the-limit fees), less any payments you've made or reversed charges (e.g., returned merchandise refunds) that have not yet been posted to your account.

There are several approaches you might take to paying off your outstanding credit card balance. These include:

• Paying the balance in full each month

• Making the minimum monthly payment

• Transferring the balance to a credit card with a lower interest rate

• Refinancing the debt as an unsecured personal loan

• (If you are a homeowner) refinancing the debt with an equity line of credit

Each strategy has its costs and benefits, and you should weigh them carefully before you decide what approach you may want to take in managing your debt. If you become overwhelmed with credit card debt, there are companies that will help you calculate a repayment strategy to rid yourself of your burden.

You've got a right

Your consumer rights related to credit cards are protected by various federal laws. The Fair Credit Reporting Act (FCRA) helps make sure that the credit-reporting agencies, or credit bureaus, furnish correct information about you to those evaluating your application for credit. The Equal Credit Opportunity Act (ECOA) ensures that, when you apply for a credit card, you won't be discriminated against because of your gender, race, marital status or age. The Credit Card Accountability Responsibility and Disclosure Act (the Credit CARD Act) limits when credit card issuers may increase interest rates and bans certain billing and payment practices. The Fair Credit Billing Act (FCBA) limits your liability for unauthorized purchases, offers protection against billing errors, and may help you reverse the purchase of inferior goods or services charged to your credit card. If you run into difficulty repaying your debts, the Fair Debt Collection Practices Act (FDCPA) spells out what practices collection agents may and may not use to collect them. But you must also know your responsibilities and what steps you must take to exercise these rights.



Repaying Student Loans

What is it?

When you take out a loan to pay for college or graduate school, you must repay that loan at some future date. If you find yourself in the position of having to budget every month for a student loan payment after graduation, you are not alone. A majority of students now borrow at least some money to help finance their education. Yet excessive student loan debt can have negative ramifications. For example, student loan debt may affect decisions to buy a home, a car, or to have children. Because student debt levels are likely to continue to increase as the cost of college and graduate school continues to outpace inflation, it is important to know how to manage student loan debt.

Repayment options

Because of the increasing number of students who now require student loans to finance their education and the increasing amount of their outstanding debt, many lenders have created flexible repayment options to help students successfully manage this large financial responsibility.

Along with the standard 10-year repayment plan, many lenders now offer graduated plans (your monthly payments start out low and increase over time), extended plans (you extend the time you have to repay for up to 30 years), income-sensitive plans (your payments are tied to your monthly income), and consolidation plans (you combine several loans into one loan with a lower monthly payment).

To learn which of these repayment options are available to you, you must first know who holds your student loans. Unfortunately, the world of student loans can be a tangled web involving money-lending institutions (such as banks, savings and loan associations, and credit unions), finance companies, collection agencies, guarantee agencies, student loan service organizations, colleges, state agencies, and, of course, the federal government.

When you know your repayment options, your next step is to determine, using a monthly budget, the amount of discretionary income you have available each month to put toward your student loan.

What happens if you can't repay your student loans?

Rare is the individual who hasn't run into difficulties at one time or another in repaying a student loan. If you do run into difficulty in repaying a student loan, perhaps you can take advantage of certain options offered by most lenders to help you out of your cash flow jam.

The primary way to postpone the repayment of your student loan is to request a deferment or forbearance from your lender. This is a temporary postponement based on well-established criteria, such as unemployment or a full-time return to graduate school. Alternatively, in some cases, you may be able to obtain a cancellation of your loan, which means you do not have to repay your loan at all. An example where a cancellation is generally granted is if you become totally disabled.

If you are unable to obtain a deferment or forbearance from your lender and you do not meet the requirements for cancellation, yet you are still unable to repay your student loans, then you will be in default. When you are in default on your student loans, your loan will likely be passed on to a collection agency. A collection agency is authorized to engage in some serious collection efforts to try and get you to pay, including letters, phone calls, wage garnishment, and tax refund interceptions.

As a last resort, you may decide to file for bankruptcy. However, be aware that there are special rules governing bankruptcy and student loans; not all student loans can be discharged in bankruptcy.



The student loan interest deduction

You can deduct up to $2,500 of the interest you pay on qualified student loans each year, provided you meet the income limits. For single filers, a full student loan interest deduction is available with a modified adjusted gross income (MAGI) up to $60,000 and a partial deduction is available with a MAGI between $60,000 and $75,000. For joint filers, a full deduction is available with a MAGI up to $120,000 and a partial deduction is available with a MAGI between $120,000 and $150,000.



Determining the Need for Disability Income Insurance: How Much Is Enough?

What is it?

Most people believe that they are adequately insured against disability because they think they have coverage through their employer or through the government. That's probably why 80 percent of Americans don't own private disability income insurance coverage. However, assuming that you're covered against disability through your employer or through the government is a mistake. Although 50 percent of employers cover short-term disability, only 40 percent cover long-term disability. Government programs, such as Social Security and workers' compensation, may pay you benefits, but you qualify for benefits only if you meet a strict definition of disability.

Example(s): Chris worked for a major electronics company and was severely injured in a motorcycle accident on his way to work. He assumed that he was covered for disability under workers' compensation, but his employer told him that because his accident wasn't directly work-related, he wouldn't be eligible for workers' compensation disability benefits. His employer did tell him, though, that he was covered for short-term disability under the employer's group plan, and he received those benefits for a year. At the end of that year, however, his benefits expired. Unfortunately, Chris still was not able to work and was left without income to pay his mortgage or his bills.

Evaluate your risk

Statistically, your risk of being disabled is great. It is estimated that every year, one in eight people become disabled. If you are age 45 right now, you have a 50 percent chance of suffering a disability that lasts more than 90 days sometime before you turn 65. Of course, statistics can be misleading. You might never become disabled, especially if you're healthy and work in a low-risk occupation. But then again, how many people do you know who have had cancer or suffered a heart attack? How many of your friends and family members have been in car accidents or have had back problems? Illness, as well as injury, is disabling. If you were hurt or got sick, how would you support yourself or your family?

Determine your income and expenses

When you purchase disability insurance, the insurance company will determine the maximum amount of disability insurance you can buy by looking at your present income. It may also ask you to submit your financial records for the last three years to document your income. It's hard to know exactly how much income you'll need after you suffer a disability, but you'll probably need more than you think. Most of your fixed expenses won't change, and you may save money on work-related expenses such as clothing, automobile costs, and lunches out. However, you'll also spend more on other items, such as health-care expenses. Taking an honest look at your current and post-disability income needs is an important step in planning for disability.

Determine what disability benefits you may receive if you become disabled

Through government programs and group insurance, you may already be covered by some disability insurance. However, relying on these types of insurance can be dangerous; government plans often pay benefits under strict definitions of disability, and group insurance may not be comprehensive, offering only short-term or long-term benefits. Both types of insurance may pay you only a small portion of your current salary. Review the forms of coverage available to you, take a look at the specifics of any group disability policies you already are covered by, then decide whether you need more disability coverage.

Example(s): After reviewing his disability insurance coverage, Ichabod decided to buy a private



disability income insurance policy. Although he was covered for short-term disability under a plan sponsored by his employer, he had no way of supporting himself if he was disabled for more than a year. Even if he qualified for Social Security disability benefits, he knew that they would only replace a portion of his average lifetime earnings, not his current salary. To protect himself against a lifetime of disability, he bought a policy that guaranteed to pay Ichabod benefits up to age 65. Good thing, too. A few months later, after seeing a headless horseman, Ichabod filed a claim for benefits because he was unable to work due to a psychiatric condition.

Social Security disability benefits

Although you shouldn't overlook the disability benefits you may be eligible to receive from Social Security, you shouldn't rely on them either. Social Security denies more than 50 percent of the claims submitted, in part due to a strict definition of disability. If you are deemed eligible for benefits, you still won't begin receiving them until at least six months after you become disabled because of the waiting period that applies. In addition, your benefit may replace only a fraction of your pre-disability income.

Example(s): Vinnie was hurt in a skydiving accident and applied for Social Security disability benefits. His claim was approved, but he didn't begin receiving benefits until six months after his accident. Although he was earning $3,000 a month at the time of his accident, his Social Security benefit was only $1,100 a month because it was based on his average lifetime earnings, not on his current earnings.

Workers' compensation insurance

If you are injured at work or get sick from job-related causes, you will likely receive some disability benefits from workers' compensation insurance. How much you will receive depends on the state that you live in. When reviewing your disability insurance needs, remember that workers' compensation only pays benefits if your disability is work-related, so it offers only limited disability protection. Some states also cover only the diseases or disabilities outlined in the state's workers' compensation laws.

Example(s): Corrine fell down a flight of stairs at home. Her back injury kept her bed-ridden for months. She thought she had disability protection through her job because she was covered by workers' compensation. However, since her injury occurred at home, workers' compensation did not pay her disability claim.

Pension benefits

Some government and private pension plans pay disability benefits. Often these plans pay benefits based on total, permanent disability, or your retirement benefit may be reduced in proportion to what you already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers' compensation, so your benefit may be less than you expect if you also receive disability income from other government sources.

For more information, see Integrating Social Security with Other Retirement Plans.

Benefits from group disability insurance

If you work, you may have purchased (or your employer may have supplied) disability insurance. However, don't assume that because you own a group policy your income will be protected if you become disabled. Often, benefits from a group plan are short-term and may be restricted to specific types of disabilities. If you purchased group insurance through a trade association, you may have been able to add on riders or other options that make your plan more flexible. At this point, you should carefully review any group disability coverage you may already own and decide whether it offers you adequate protection. How much benefit will you receive? When will benefits begin? How long will they last? How do you qualify for benefits?

Anticipate additional expenses you might incur if you were disabled



Medical expenses

Unfortunately, when you are disabled, your monthly expenses often increase, even though you expect them to decrease. You can expect your medical expenses to rise when you suffer a disability. Assuming you have health insurance, you'll probably have to satisfy a deductible as well as an out-of-pocket maximum, which may increase your expenses immediately after your disability occurs. In addition, if you suffer a long-term disability and are forced to quit your job, your group medical insurance coverage may be terminated. Of course, you can elect to continue coverage through Consolidated Omnibus Budget Reconciliation Act (COBRA) and conversion coverage may also be available, but you'll have to pay the premium yourself. This can add hundreds of dollars to your budget. You may also need to buy medical equipment or supplies or even renovate your house to accommodate your disability.

Living expenses

What if you can't drive, clean your apartment or house, mow the lawn, or cook for yourself after you become disabled? Will you need to hire household help to take care of day-to-day activities that you can no longer do? Hiring help can be a substantial, unexpected expense you incur when you become disabled.

Example(s): Sam developed a heart condition and was no longer able to do yard work. For a few months, his friends and family helped him out, mowing his lawn, raking leaves, and shoveling snow. But soon, they tired of helping him, and Sam had to hire a lawn maintenance service that charged him $150 a month to do the work.

Child-care expenses

If you have young children and you and your spouse both work, you know how expensive child care is. Could you afford to pay for it if you or your spouse was disabled and no longer employed? The disabled partner may be able to care for the children at home but not if his or her disability is too limiting. If, on the other hand, you currently stay at home with your children, you may be forced to return to work if your spouse is disabled, and you may have to contend with an unforeseen additional expense.

Example(s): Nancy stayed at home with her two sons, ages one and three. When her husband developed a lung disorder and couldn't work, Nancy decided to resume her teaching career. Although she was able to earn as much monthly income as her husband had been bringing home at the time he was disabled ($3,600), she had to pay $1,200 for child care. As a result, their monthly income was reduced by 33 percent.

Calculate your disability income insurance needs

Once you've collected information, you can estimate how much income you will need to replace if you become disabled. To estimate your post-disability income needs, use the Disability Income Needs Worksheet (see example below). Once you complete the document, talk to your financial advisor or insurance professional about purchasing disability insurance. The following example illustrates how to fill out the Disability Income Needs Worksheet:

Example(s): Ozzie and his wife, Martha, are considering buying private disability insurance. Ozzie earns $2,800 a month (net income), whereas Martha earns $3,600 a month (net income). She also receives $300 a month in child support from her former husband. They add up their monthly expenses and include in that figure payments they make for housing, utilities, groceries, clothing, child care, insurance, autos, credit cards, and loans. Their monthly expenses total $4,800. They contribute a total of $400 a month to their 401(k) plans and save $100 a month toward their children's college education. They also put $500 a month into a money market account. They filled out their Disability Income Needs Worksheet this way:

Disability Income Needs Worksheet



Current Income

Ozzie's current monthly net income.................................. $2,800

Martha's current monthly net income................................. 3,600

Other miscellaneous income............................................ 300

Current Expenses

Their current living expenses............................................ 4,800

Their current contributions to investments......................... 1,000

Analysis

Total Current Income........................................................ 6,700

Total Current Expenses and Investments........................... 5,800

Excess Income................................................................ 900

Income Available After Disability

Ozzie's monthly net income from salary.............................. 2,800

Martha's monthly net income from salary if she was disabled........................................................................

0

Monthly income expected from an association disability insurance policy.............................................................

1,000

Other income.................................................................. 300

Anticipated Expenses After Disability

Ozzie and Martha's current living expenses......................... 4,800

Anticipated additional expenses due to disability................ 300

Amount they want to continue investing............................... 1,000

Analysis

Total Anticipated Expenses After Disability......................... 6,100

Total Income Available After Disability............................... 4,100

Income Deficit or Excess.............................................. $2,000

Example(s): Ozzie and Martha considered what they could do to eliminate the income deficit they would face if Martha became disabled. They decided that they could stop saving for their retirement and their children's education and withdraw money from their savings account every month. But then, Martha had second thoughts. They could afford to do this for a few months, but what if she was permanently disabled? Unless Ozzie got a substantial raise or they found a way to dramatically reduce their expenses, eventually their savings would run out. So, after evaluating their income needs, Ozzie and Martha decided to plan for disability by purchasing a disability income insurance policy that would protect Martha's income and allow them to continue saving money.



Property and Casualty and Liability Insurance

What is it?

We all share a common interest in protecting our property and guarding against financial loss. Moreover, most of us have a natural aversion to the kind of risk that comes with leaving ourselves and our property exposed. This combination of factors creates a market for various types of property and casualty and liability insurance that minimize the risk of loss. Property/casualty/liability is a general term for insurance that may serve either or both of these basic purposes: (1) it covers you for loss of, or damage to, your personal property caused by one or more insured perils, and (2) it covers you when your negligent acts or omissions damage or destroy another party's property, or cause bodily injury to another party. In effect, when you purchase policies that fall under the umbrella of property and casualty and liability insurance, you may have peace of mind as well as financial protection.

While the broad category of property/casualty/liability encompasses numerous lines of insurance available to you, it can be broken down into the most common types of policies.

Homeowners insurance

If you are like many Americans, your most valuable and functional piece of property is your home, whether it be a single-family house, an apartment, or a condominium. It only makes sense that you want to protect your most prized possession, and its contents and inhabitants, from loss or damage. You can easily achieve the protection you desire through one of the most widely used kinds of insurance: homeowners insurance. A typical homeowners policy covers both individuals and property. That is, the policy provides coverage against your property being destroyed or damaged by various perils, as well as coverage for the liability exposure of yourself and other residents of your household. The perils against which most of us want to protect our homes and other property include theft, vandalism, floods, and earthquakes, among others. You may be able to obtain all the coverage you desire under a single comprehensive policy, or you may have to purchase multiple separate policies.

The most important considerations when evaluating and comparing homeowners policies are the cost of each policy, the range of coverage offered (in terms of what perils as well as what types of property are covered), and the coverage limit(s) (the amount(s) your insurance company will pay in claims).

Personal liability insurance

In terms of liability exposure, many homeowners policies will cover you when another party suffers harm at the hands of yourself, a family member, or a pet while on your property. However, some do not, and many do not provide the range of liability coverage you might want, in which case you would need to take out separate personal liability insurance.

Personal liability insurance provides coverage in the event that someone has a claim against you because of bodily injury and/or property damage he or she suffered as a result of your acts or negligence. Besides yourself, a personal liability policy may also cover your spouse, other relatives, pets, and any persons under age 21 in your care. The most comprehensive policies will provide coverage for the injured person's medical expenses as well as any property damage up to certain amounts (sometimes regardless of who is legally liable) for a wide range of causes. Moreover, most will cover you whether the incident and/or negligence occurs on or off your property. However, there are various policy types with different costs, provisions, terms of coverage, and coverage limitations. As with homeowners insurance, you need to do the work of evaluating and comparing personal liability policies in order to get the best value for your money.

Automobile insurance

After your home, your automobile may be your most valuable piece of property. It also may be your second most important. This is because most of us rely heavily on our cars to get us from one place to another as we go about our daily lives. The demands of work and family, among other things, force many of us to create busy schedules,



and we take it for granted that the car will always be there when we need it. However, with more and more cars on the road and with people driving more frequently, the risk of bodily injury or property damage (usually to a car) while driving is greater than the risk of anything happening to your home.

For this reason, automobile insurance is probably at least as essential to have as homeowners insurance. Aside from the fact that most states require drivers to have auto insurance, it's a matter of common sense. Every time you get behind the wheel of a car, there is a chance that an accident will occur. Auto insurance provides coverage if you (or someone else driving your car) are held legally liable for bodily injury or property damage. The bodily injury may be suffered by you or by another person involved in the accident, and the damage may be to your car or someone else's. When evaluating and comparing auto insurance policies, you should weigh the cost of each policy against the coverage it provides. Specific considerations will include, among other things, the amounts of liability coverage, medical payment coverage, and physical damage coverage.



Introduction to Investment Planning

What is investment planning?

The investment planning process

If you're fortunate enough to have money left over after paying the costs of living, you may be able to make that extra money go to work for you by investing it to earn a financial return. Investment planning involves deciding how best to put your money--your capital--to work to achieve your financial goals.

First things first; secure a strong financial foundation

Before you begin investing, you need to secure a strong financial foundation. Be sure these basic steps have been taken:

• Create a "rainy day" reserve: Set aside enough cash to get you through an unexpected period of illness or unemployment--two months' worth of living expenses is generally recommended. Put the cash in a relatively stable and liquid investment that can earn money but still lets you access the funds easily.

• Pay off your debts: It makes more sense to pay off high-interest-rate debt (e.g., credit card debt) than to put money into investments that involve an uncertain return.

• Get insured: Having adequate insurance is your best protection against financial loss, so review your home, auto, health, disability, life, and other policies, and increase your coverage, if needed.

• Max out your IRA, 401(k), Keogh, or other tax-deferred retirement plan: Putting money in these accounts defers income taxes, leaving you more money to put toward your financial goals. Take full advantage of them if they are available to you.

Getting educated

Once you've decided to become an investor, you should "stick your toe in the water" and get a feel for the environment. The investment world is unique and has its own language, resources, markets, and so forth. Don't dive in until you're at least somewhat familiar with this new territory. Here are some ways to do this:

• Talk directly with a professional financial advisor

• Talk to other, more experienced investors

• Do online research--many websites provide glossaries and other educational information

• Subscribe to financial newspapers and periodicals, or visit a library that has such subscriptions

• Buy books or software on investing (but select carefully--there are some bad ones out there)

Here are some elementary investment terms and concepts you should know:

• Time horizon: How long you will remain invested

• Risk: The probability that you will make or lose money with an investment

• Risk tolerance: Your capacity to absorb financial loss and your emotional feelings about losing money

• Investment portfolio: A collection of investments



• Diversification or asset allocation: Spreading dollars across a variety of investments to try to reduce risk (although diversification alone can't guarantee a profit or ensure against a loss)

• Liquidity: The ability to quickly convert investments into cash

• Securities: Generally, stocks, bonds and other investment instruments

• Index: A group of securities that represent a specific market or segment of a market

• Exchange: Facility (physical or electronic) for the trading of securities

• Yield: Generally, the return on an investment

• Bear market: Occurs when securities are declining in value

• Bull market: Occurs when securities are rising in value

A seven-step process

It may be helpful to think of investment planning as a six-step process:

1. Setting investment goals

2. Understanding your investment personality

3. Designing an investment portfolio

4. Selecting specific investments

5. Managing and monitoring the portfolio

6. Rebalancing or redesigning the portfolio, if needed

The following discussion presents a brief introduction to some issues typically involved in this process.

Setting your investment goals

The first step is simply taking stock of your particular circumstances. Your current financial condition and future expectations are the basis for all further investment decisions. Who you are as an investor (i.e., your investor profile) will determine which investment strategy or strategies you should implement. For example, you may be saving part of your weekly wages for your 2-year-old child's college education or your own retirement in 30 years. Or, perhaps you want to invest a lump sum for a short period, and then use the money to buy a new house.

To help evaluate your situation, here are a few questions you might consider when setting investment goals:

• How much money do you have available to invest?

• What are your sources of investment money? Do you have a lump sum, or will you be investing regularly and systematically?

• How much profit do you need the investments to generate?

• What is your current income tax bracket?

• What is your age?

• For what purpose will you use the profits?

• What is your current income?



• What do you expect your income to be in the near future? In the distant future?

• What are your current expenses?

• Do you need current income?

• When will you need the money?

• Are you more focused on earning a high return or minimizing the possibility of loss?

Understanding your investment personality

Understanding risk is a key part of the investment planning process. A smart investor needs to fully comprehend how risk is measured and its potential ramifications. You also need to determine your own risk tolerance. Remember, no investment plan is likely to be successful if it doesn't fit your temperament and your individual financial situation.

Designing an investment portfolio

You have reached step three in the investment planning process: designing and managing an investment portfolio. So far, you have done some research, data gathering, and a lot of thinking. Now you need to actually make some concrete decisions--matching your investment goals and personality to a combination of various investment categories, whether they be simple investments, such as CDs, or more complex investments, such as stocks or real estate. The process of determining how much of your assets to put into each of various categories of investments is known as asset allocation.

No one asset allocation strategy is appropriate for everyone. For long-term investors who want high growth and don't need current income, an aggressive plan--one that focuses primarily on potential growth--might be established. For example, an aggressive investment plan might include 40 percent large company stocks, 25 percent small company stocks, 30 percent international stocks, and 5 percent cash alternatives. By comparison, for investors who put a higher priority on current income and stability than growth, a more conservative plan might be established; for example, it might consist of 15 percent large company stocks, 5 percent international stocks, 55 percent bond funds, and 25 percent cash alternatives. Any combination is possible; these are only hypothetical examples. The plan that suits you best depends on your own investor profile.

The major categories of investments available for inclusion in an asset allocation strategy are shown in the following table:

Investment Category Examples of Investment

Cash alternatives (liquid assets) Bank CDs, U.S. savings bonds, Treasury bills

Debt instruments Bonds, mortgage-related securities

Treasury securities Issued by agencies of the U.S. government

Equity investments Stocks

Insurance-based investment products Annuities, cash value life insurance

Real estate Direct investments and via trusts

Collectibles Art, antiques, gems, and collectibles

Alternative assets Metals, commodities, warrants, options

Tip: Asset allocation is extremely important. Seeking the advice of an experienced financial professional is recommended at this stage.



You'll also need to understand the various financial markets well enough to select individual investments, which can be a daunting (and time-consuming) task. If you do not have the time or inclination to evaluate markets and investments, you can seek the advice of a money manager or financial advisor whom you trust. For the do-it-yourself investor, a wise investment decision involves some knowledge of the capital markets, investment theory, how stocks and bonds are traded, how the stock market functions, and how securities are priced, among other things. With a little education, you will soon be able to determine what rate of return you can reasonably expect to earn from a particular investment and how much risk you'll need to take to pursue that return.

Caution: Always get professional help if you are dealing with a complicated or unusual issue.

Selecting specific investments

You have a plan, you have a list, and now you need to actually begin investing your money. It's time to set up your investment account, select specific investments, and otherwise begin building your portfolio in a way that's consistent with your goals and selected strategies.

Managing and monitoring the portfolio

Once your investment plan is set in motion, your portfolio needs ongoing management. You should review your plan regularly to make sure it's on track. As your circumstances or the investment landscape change, your portfolio may need some adjusting. That review can occur, monthly, quarterly, semiannually, or annually, depending on the types of investments you own and your own need and desire to monitor your investments.

Rebalancing or redesigning the portfolio, if needed

During your periodic reviews of your portfolio, you may find you need to make changes if it is not performing as expected. For example, you may need to rebalance or redesign your portfolio. Rebalancing means adjusting the amount invested in various categories to return to the original asset allocation; redesigning your portfolio would involve adjusting it to take into account significant changes in the market or your personal situation.



Introduction to Retirement Planning

What is retirement planning?

Retirement planning involves an analysis of the various choices you can make today to help provide for your financial future. To make appropriate choices, you need to predict--as well as you can--your future economic circumstances. You'll also need to establish your post-retirement goals. When you've determined how much of an income stream you'll probably require in the future, you'll be in a position to make wise choices now about income, saving, investments, and employer-sponsored or other retirement plans.

Of course, you need to tailor your retirement planning to your own unique circumstances--planning methods may be different for employees and executives than for business owners. And no matter who you are, you'll probably want to gain some familiarity with the Social Security system, with post-retirement health care insurance coverage, including Medicare and long-term care (LTC) insurance. For some people, retirement may be an eagerly anticipated event, an opportunity to enjoy so many things that working may have precluded--travel, hobbies, and more family time. For other people, even the word "retirement" may conjure up feelings of fear or dread, particularly for those employees who work without the benefit of pension or other retirement plans. And newspaper stories predicting the collapse of the Social Security system can certainly compound anxiety. Whether you are financially comfortable or are of limited means, however, retirement planning is possible and can help you take control of your own future.

How can you determine your retirement income needs?

To determine your retirement income needs, you'll want to evaluate your present circumstances--your income, your expenses, your assets, and your debts. Next, you'll need to think about your future circumstances. There are four main sources for your retirement income: Social Security, pensions or other retirement vehicles, your investment portfolio, and savings. If you predict that your current income will not provide you with your desired retirement lifestyle, there are certain steps you can take now to help change your circumstances.

You'll want to think about your future sources of income, but also about where you'll live. Will you continue to live in your current home, for instance, or will you move to a condominium or retirement community? And if your employer typically provides early retirement packages to its employees, you'll need to know how to evaluate such packages from a number of perspectives. For information about the above, see Determining Your Retirement Income Needs. See also Personal Residence Issues in Retirement and Considering an Offer to Retire Early--Should You Take It?

How do you save for retirement?

Learning how to save for retirement is imperative. There are a number of retirement vehicles available, including traditional and Roth IRAs, employer-sponsored retirement plans, nonqualified deferred compensation plans, stock plans, and commercial annuities. Proper retirement planning requires an understanding of the workings of these tools.

In addition, your personal investment planning can help you on the road toward your retirement goals. The sooner you start, the longer you'll have to accumulate funds for retirement.

You'll want to understand the taxation of your retirement and investment vehicles. This is especially important since the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act). The 2003 Tax Act reduced the capital gains tax rates and the tax rates of certain dividends, making the decision to allocate assets inside or outside a retirement plan more crucial.

Finally, you may want to learn strategies for handling the competing demands of educating your children and retiring. For information on all of the above, see Saving for Your Retirement.



What should you know about distributions from IRAs and other retirement plans?

Effective retirement planning involves not only an awareness of the types of savings vehicles available, but also an understanding of taking distributions from these vehicles. In particular, you should be familiar with the income tax ramifications of distributions (including a possible 10 percent premature distribution penalty tax for distributions made prior to age 59 ½). You may be interested in knowing whether you can borrow money from your retirement plan, whether it is better to receive your retirement money in one lump sum or in monthly checks, and whether you can roll your retirement plan balance into an IRA.

In addition, you may be concerned about naming one or more beneficiaries for your IRA or employer-sponsored retirement plan. What are the tax implications? What about required minimum distributions from the plan after you reach age 70½? For information about these and many other related topics, see IRA and Retirement Plan Distributions.

What if you are an executive or business owner?

A number of additional retirement planning tools are often available for executives, such as nonqualified deferred compensation plans offered by employers to their key employees. If you're an executive, you should realize that nonqualified plans and stock plans can be valuable tools for retirement planning. You should understand the mechanics of the special benefits afforded by your employer, including the tax implications for you.

If you are a business owner, on the other hand, you have some special retirement planning concerns of your own. In particular, you may want to plan for the succession of your business to family members or to others. You may also want to know which retirement plans are best suited to your form of business. For information about these and related topics, see Special Planning Considerations for Executives, or Planning for a Succession of a Business Interest, or Retirement Planning Options for Business Owners.

How do Social Security and other government benefits programs impact retirement planning?

If you're planning for retirement, you should also consider the Social Security income (if any) you'll be receiving in the future. In fact, it is possible for you to estimate your Social Security benefits ahead of time. You may want to check your Social Security record periodically to ensure that you have met the eligibility requirements and that your information is accurate and complete.

You'll also want to become familiar with ways to optimize your Social Security benefits and minimize their taxation. The timing of your receipt of benefits can be important, as can the impact of post-retirement employment. For more information, see Social Security. Other governmental programs should also be considered when planning for retirement.

In particular, you should review the topics of Medicare and Medicaid. You should know what Medicare does and does not cover and what other health care options are available to you. How expensive are these governmental and supplemental health programs? What are the eligibility requirements? Medicaid planning can be particularly important for people of modest means. You should know the Medicaid eligibility requirements, the penalties for transferring assets inappropriately, and the various strategies available for protecting assets. In addition, you should become familiar with the specific methods of protecting your personal residence and the extent to which your state can impose liens on your property and pursue recovery remedies after your death. If you are planning for your post-retirement years, you should also gain some familiarity with long-term care insurance, nursing homes, retirement communities, assisted living, and other housing options for elders. For information on all of the above, see Health Care in Retirement.



Do government employees have special retirement concerns?

If you work for the federal government, a state government, a railroad, or if you are in the military, your retirement benefits may be subject to special rules. You should know how your retirement plan works, what distribution rules apply, how your survivors can benefit, how your plan may be integrated with Social Security, and what tax rules apply.

For more information, see Retirement Programs for Federal and State Employees, or Military Benefits, or Railroad Retirement System.



Introduction to Estate Planning

What is estate planning?

Simply stated, estate planning is a method for determining how to distribute your property during your life and at your death. It is the process of developing and implementing a master plan that facilitates the distribution of your property after your death and according to your goals and objectives.

At your death, you leave behind the people that you love and all your worldly goods. Without advance planning, you have no say about who gets what, and more of your property may go to others, like the federal government, instead of your loved ones. If you care about (1) how and to whom your property is distributed, and (2) ensuring that your property is preserved for your loved ones, you need to know more about estate planning.

As a process, estate planning requires a little effort on your part. First, you'll want to come to terms with dying, at least to a degree that you can deal with the necessary planning. Understandably, your death can be a very uncomfortable subject, but unfortunately, the discussions in this area are full of references to your death, so it really can't be avoided. Some statements may seem too businesslike and unfeeling, but tiptoeing around the subject of dying will only make the planning process more difficult. You will understand the process more easily and implement a more successful master plan if you approach it in a straightforward manner.

Who needs estate planning?

Not just for the wealthy

Estate planning may be important to individuals with a wide range of financial situations. In fact, it may be more important if you have a smaller estate because the final expenses will have a much greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from a lack of financial resources.

Your master plan can consist of strategies that are simple and inexpensive to implement (e.g., a will or life insurance). If your estate is larger, the estate planning process can be more complex and expensive.

Implementing most strategies will probably require you to hire professional help of some kind, an attorney, an accountant, a trust officer, or an insurance agent, for example. If your estate is large or complex, you should consult with an estate planning expert such as a tax attorney or financial planner for advice before the implementation stage.

In deciding on your course of action, you should always consider whether the benefit of the strategy outweighs the cost of its implementation.

May be especially needed under certain circumstances

You may need to plan your estate especially if:

• Your estate is valued at more than the federal estate tax applicable exclusion amount (formerly known as the unified credit) (see tip below) or your state's death death exclusion amount

• Your income tax bracket is in excess of 10 percent

• You have children who are minors or who have special needs

• Your spouse is uncomfortable with or incapable of handling financial matters

• You're a business owner



• You have property in more than one state

• You intend to contribute to charity

• You have special property, such as artwork or collectibles

• You have strong feelings about health-care decisions You have privacy concerns or want to avoid probate

Tip: The federal estate tax is repealed for 2010, unless Congress acts to reinstate the tax retroactively. In 2011 the tax will return with an applicable exclusion amount of $1 million. So, estates over $1 million may actually want to make appropriate plans to be on the safe side.

How to do it

Designing a plan is a process that is unique to each estate owner. Don't be intimidated or overwhelmed at the prospect. Even the most complex plan can be achieved if you proceed step by step. Remember, the peace of mind that comes with developing a successful estate plan is worth the time, trouble, and expense.

Understand your particular circumstances

Begin the estate planning process by understanding your particular circumstances, such as your age, health, wealth, etc.

Understand the factors that will affect your estate

You will also need to have some understanding of the factors that may affect the distribution of your estate, such as taxes, probate, liquidity, and incapacity.

Clarify your goals and objectives

When your particular circumstances and the factors that may affect your estate are clear, your goals and objectives should come into focus.

Understand the strategies that are available

With these goals and objectives now clear, you can begin to consider the different estate planning strategies that are available to you.

Seek professional help

Seeking professional help (an attorney or financial advisor) will help you understand the strategies that are available and formulate and implement your master plan.

Formulate and implement a plan

Finally, after following these steps, you can formulate and implement a plan that works for you. Here are a few basic tips: (1) make sure you understand your plan, (2) rely on people you trust, and (3) keep your documents and information organized and within easy reach.

Perform periodic reviews

When you have implemented your master plan, be sure to perform a periodic review and, if necessary, make revisions that reflect any changing circumstances and tax laws.



How do you begin?

There are many estate planning strategies, including some that are implemented inter vivos (during life), such as making gifts, and others post-mortem (after death), such as disclaimers. Before you choose which strategies are right for you, you need to understand your particular circumstances.

Gather and analyze the facts

Understanding your particular circumstances results from gathering and analyzing the facts. The following questions may help you to accomplish this. If they are not easy to answer, you may have to make some estimates based on reasonable assumptions and expectations.

Information regarding your financial condition

• What is your current income?

• What is your income likely to be in the future?

• How much do you spend each year?

• What are your expenses likely to be in the future?

• What are your current assets and debts?

• Are your assets currently owned solely or jointly?

• What estate planning strategies have you already implemented?

Family information

• Who are the family members you intend to benefit?

• What are the needs of each family member?

What other factors need to be considered?

Decide what your goals and objectives are in light of your particular circumstances and in light of the factors that may affect your estate. The primary factors that may affect your estate are your beneficiaries, taxes, probate, liquidity, and incapacity.

Taxes

One of the largest potential expenses your estate may have to pay is taxes, which may include federal transfer taxes, state death taxes, and federal income taxes.

Federal transfer taxes--The federal transfer taxes include (1) the federal gift tax and federal estate tax and (2) the federal generation-skipping transfer tax (GSTT).

• Federal gift tax--Gift tax is imposed on property you transfer to others while you are living. You need a basic understanding of how the gift tax system works to minimize gift tax liability. Under the gift tax system, you are allowed a $1 million lifetime gift tax applicable exclusion amount that reduces your gift tax liability (any gift tax applicable exclusion amount you use during life effectively reduces the applicable exclusion amount that will be available at your death). Also, you are currently allowed to give $13,000 per donee gift tax free under the annual gift tax exclusion. Further, certain other types of transfers can be made gift tax free. You need to understand what these types of transfer are and how they work to take full advantage of them.



• Federal estate tax--Generally speaking, estate tax is imposed on property you transfer to others at the time of your death. You need a basic understanding of how the estate tax system works for several reasons:Saving your property for your beneficiaries--Estate tax rates could reach as high as 55 percent in 2011, which means that an enormous chunk of your estate may go to the federal government instead of your beneficiaries. If you want to preserve your estate for your beneficiaries, you'll need to know how to minimize estate tax with respect to your property.

• Reducing estate tax liability--Under the estate tax system, you are allowed an applicable exclusion amount (formerly referred to as the unified credit) that reduces your estate tax liability. Also, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate tax free. You need to understand what these exclusions, deductions, and credits are and how they work to take full advantage of them.

• Providing for the payment of estate tax--Generally, estate tax must be paid within nine months after your death. To avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. In addition, these assets should be sufficiently liquid to pay these expenses when they are due.

• Planning for estate tax expense--Although calculating estate tax can be complex, you should estimate what the amount of your estate tax may be (if any), so that you can arrange to replace that wealth.

• GSTT--Another federal transfer you need to understand is the federal generation-skipping transfer tax (GSTT). The GSTT is imposed on property you transfer to an individual who is two or more generations below you (e.g., a grandchild or great-nephew). Not surprisingly, the IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep individuals from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax then in effect is imposed on every generation-skipping transfer you make over a certain amount. Currently, some states also impose their own GSTT. Check with an attorney or your state to find out what may be subject to your state's GSTT, and how and when to file a state GSTT return.

State death taxes--States also impose their own death taxes. You should be aware of what the death tax laws are in your state and how they may affect your estate. There are three types of state death taxes: (1) estate tax, (2) inheritance tax, and (3) credit estate tax (also called a sponge tax or pickup tax). Some states also impose their own gift tax and/or generation skipping transfer tax.

• Estate tax--State estate tax is imposed on property you transfer to others at your death, much like federal estate tax. The state estate tax calculation for most states is similar to the federal calculation.

• Inheritance tax--Unlike estate tax, the inheritance tax is imposed on your beneficiary's right to receive your property. Tax is due on each beneficiary's share of your estate. Beneficiaries are grouped into classes (generally based upon their familial relationship to you) and are taxed accordingly. Although inheritance tax is due on each heir's share of your estate, it's your personal representative who writes the check from your estate to pay it.

• Credit estate tax--Some states impose a credit estate tax (also referred to as a sponge tax or pickup tax).

Tip: Most states that imposed a credit estate tax have "decoupled" from the federal system (i.e., they're imposing some form of stand-alone estate tax.)

Tip: The federal system allows a deduction for state death taxes for the estates of persons dying in 2005 through 2009. Prior to 2005, a credit was available, which will be reinstated in 2011.

Federal income taxes--In the estate planning context, you should be aware of three federal income tax considerations:

1. Income taxation of trusts --If your estate plan includes the use of a trust, you need to know that a trust may be an income tax-paying entity. The trustee may be required to file an annual return and



pay income taxes on trust income.

2. Decedent's final income tax return --Your personal representative or surviving spouse has the duty of filing your last income tax return that covers the tax year ending on the date of your death.

3. Income taxation of your estate --Your estate is considered a separate income taxpaying entity. Your personal representative must file and pay income taxes on any income your estate receives (e.g., interest from bonds, or dividends from stock).

Probate

Probate is the court-supervised process of proving, allowing, and administering your will. The probate process can be time-consuming, expensive, and open to public scrutiny. Avoiding probate may be one of your most important goals. To develop a successful avoidance strategy, you'll need to understand how the probate process works, how to estimate probate costs, and what is subject to probate.

Liquidity

Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death from cash and cash alternatives. If your property is mostly nonliquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due. This could result in an economic loss, or your family selling assets that you intended for them to keep. Therefore, planning for estate liquidity should be one of your most important estate planning objectives.

Incapacity

Planning for incapacity is a vital yet often overlooked aspect of estate planning. Who will manage your property and make health-care decisions for you when you can no longer handle these responsibilities? You need to ask and answer this question because the consequences of being unprepared may have a devastating effect on your estate and loved ones. You should include plans for incapacity as a part of your overall estate plan.

What are your goals and objectives?

Your goals and objectives are personal, but you can't formulate a successful plan without a clear and precise understanding of what they are. They can be based on your particular circumstances and the factors that may affect your estate, as discussed earlier, but your feelings and desires are just as important. The following are some goals and objectives you might consider:

• Provide financial security for your family

• Ensure that your property is preserved and passed on to your beneficiaries

• Avoid disputes among family members, business owners, or with third parties (such as the IRS)

• Provide for your children's or grandchildren's education

• Provide for your favorite charity

• Maintain control over or ensure the competent management of your property in case of incapacity

• Minimize estate taxes and other costs

• Avoid probate

• Provide adequate liquidity for the settlement of your estate

• Transfer ownership of your business to your beneficiaries



What are estate planning strategies?

An estate planning strategy is any method that facilitates the distribution of your assets and the settlement of your estate according to your wishes. There are several estate planning strategies available to you.

Intestate succession

Intestate succession is a strategy by default and is a means of transferring your property to your heirs if you have failed to make other plans such as a will or trust. State law controls how and to whom your property is distributed, who administers your estate, and who takes care of your minor children. Without directions, your opinions and feelings are not considered. Indeed, one of your primary goals in planning your estate may be to avoid intestate succession.

Last will and testament

A will is a legal document that lets you state how you want your property distributed after you die, who shall administer your estate, and who will care for your minor children. This is probably the most important tool available to you. Anyone with property or minor children should have a will.

Will substitutes

A will substitute, for example, Totten Trust and payable on death bank accounts, allows you to designate a beneficiary of certain property that will automatically pass to that beneficiary after you die and avoids passing through probate.

Trusts

A trust is a separate legal entity that holds your assets that are then used for the benefit of one or more people (e.g., you, your spouse, or your children). There are different types of trusts, each serving a different purpose, and include marital trusts and charitable trusts. You will need an attorney to create a trust.

Joint ownership

Joint ownership is holding property in concert with one or more persons or entities. There are different types of joint ownership, such as tenancy in common and community property, each with different legal definitions, requirements, and consequences.

Life insurance

Life insurance is a contract under which proceeds are paid to a designated beneficiary at your death. Life insurance plays a part in most estate plans.

Gifts

A gift is a transfer of property, not a bona fide sale, that you make during your life to family, friends, or charity. Making gifts can be personally gratifying as well as an effective estate planning tool.

Tax exclusions, deductions, and credits

There are several important estate planning tools you can use that are offered by the federal government. These include the annual gift tax exclusion, the applicable exclusion amount, the unlimited marital deduction, split gifts, and the charitable deduction.



Saving for Your Retirement

Major considerations

How much will you need in retirement?

When do you plan to retire? What kind of lifestyle do you desire? How much do you have right now that you can count on for your retirement? What about Social Security; do you know what kind of benefits you can expect? These are all factors you will need to consider when you determine how much you'll need.

Know how much you have

Take an honest look at your present net worth. If you're like most people, you've got a long way to go before you can afford to retire. Knowing how much you currently have earmarked for retirement will assist you in saving for your retirement.

Implement a savings plan

Take an honest look at your current spending. Just as in planning for other financial goals, you need to implement a savings plan. Think about establishing a long-term systematic savings plan to put aside funds for retirement. If you haven't already done so, consider the benefits of establishing and sticking to a spending plan.

Decide where to put your dollars

You've freed up some cash, and you want to put it where it will do the most good. You need to consider some options:

• Take advantage of employer-sponsored retirement plans

• Utilize IRAs

• Evaluate other investment alternatives

Take full advantage of employer-sponsored retirement plans

Taking advantage of retirement plans in general

Does your employer offer a retirement plan? If so, be sure that you're taking full advantage of it. If your employer has a defined benefit plan (a traditional pension plan, with pension benefits typically based on the number of years you work and your level of compensation), make yourself familiar with the details of the plan. Although most aspects of such a plan are beyond your control (e.g., you can't make contributions), you should know how your plan works. How long do you have to work before you have rights under the plan (the plan's vesting schedule)? When are you entitled to a full pension? This information is vital if you're considering leaving your employment.

If your employer offers a defined contribution plan (such as a 401(k) plan, to which contributions can be made by employer and/or employee), much depends upon the specific type of plan. The one feature that these plans have in common is that the contributed funds grow tax deferred. This is significant, because investments in these plans can grow more rapidly than identical investments that don't grow tax deferred. Depending upon the type of plan that you have, you may be able to make voluntary contributions.



Maximize employer-matching contributions

Some retirement savings plans, such as 401(k) plans, 403(b) plans (tax-sheltered annuity plans for employees of public schools and certain tax-exempt organizations), and thrift savings plans (plans to which you generally make after-tax contributions), allow employers to match contributions that you make up to a specified level. Since this is basically free money (once you're vested in those employer dollars), consider taking advantage of it. Contribute enough to the plan so that your employer contributes the maximum matching amount. For more information, refer to the specific plan in which you participate.

Self-employed individuals should consider establishing their own retirement plans

If you're self-employed, seriously consider establishing a retirement plan for yourself. For example, a simplified employee pension (SEP) plan is relatively easy to implement (it's really not much more than a big IRA), and it allows you to save significant funds for retirement or you might consider an individual 401(k) plan. If you're a business owner with employees, you should think about setting up an employer-sponsored retirement plan. There are a variety of retirement plans that are appropriate for sole proprietors and partnerships, corporations, and tax-exempt organizations.

If you do contract work for a tax-exempt organization or a state or local government

If you perform services as an independent contractor for a state or local government or a tax-exempt organization that sponsors a Section 457(b) plan (a specific type of deferred compensation plan), you may be able to participate in that plan. If you can participate, you can defer a significant portion of your compensation to the plan.

Individual retirement accounts (IRAs)

Contribute to an IRA each year

IRAs offer significant tax incentives to encourage you to save money for retirement. You can contribute up to $5,000 to your IRA in 2010 (and 2009) ($6,000 if you're age 50 or older), as long as you have at least that amount in compensation for the year. The types of IRAs that you can use (and the corresponding tax advantages) depend upon your income level, filing status, and whether or not you're covered by an employer-sponsored retirement plan.

If your spouse does not have compensation, contribute to an IRA for your spouse

You may be able to set up and contribute to an IRA for your spouse, even if he or she received little or no compensation for the year. To contribute to a spousal IRA, you must meet the following four conditions:

1. You must be married at the end of the tax year

2. You must file a joint federal tax return for the tax year

3. You must have taxable compensation for the year

4. Your spouse's taxable compensation for the year must be less than yours

Choosing investments within your retirement plan

It's important to understand that the earnings potential offered by a retirement plan (e.g., 401(k) or IRA) is not generated by the plan per se, but by the investments held by the plan (e.g., stocks, bonds, mutual funds). Choosing the right mix of investments within your plan is just as important as choosing the right plan itself. When making your choices, many factors should be considered including your time horizon, your tolerance for risk, and the tax implications. For example, it may not make sense to hold tax-exempt securities within a plan that is tax deferred.



The Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act) complicates matters further. The 2003 Tax Act reduces capital gains tax rates and the tax rates on qualifying dividends. However, investments held in retirement plans will not benefit from these lower tax rates. Thus, holding investments that generate income subject to these lower rates in a tax-deferred plan is now less appealing. This does not mean that such investments are inappropriate for retirement plans, only that you should consider carefully your overall investment portfolio in deciding what investments to hold within, and outside of, a retirement plan.

Evaluate nonqualified investment programs

Annuities and retirement

Annuities, which are funded with after-tax dollars, grow tax deferred. When you retire, if you're over age 59½, you may make withdrawals or begin taking payments that will continue as long as you live. The tax-deferred earnings portion of these withdrawals or payments will then be taxed as ordinary income. Keep in mind that, as with IRAs, if you withdraw any money from an annuity before you're 59½, you'll generally have to pay an additional 10 percent penalty tax.)

Life insurance and retirement

Some life insurance has certain tax advantages, such as the tax-deferred growth of the cash value of permanent life insurance. This type of life insurance can be a supplementary source of retirement income, in addition to providing financial protection to your beneficiaries.

Review other investments

You should consider carefully your current investment portfolio. Are you putting your money in appropriate investments?

Other considerations

Does your employer offer or are you in a position to take advantage of any of the following?

• Nonqualified deferred compensation plans

• Stock plans

• Other employee benefits

Choose the right strategy to save for your retirement

You know that you should be taking advantage of employer-sponsored retirement plans, making yearly contributions to IRAs, and considering all of your other options, but how do you decide which to do first? If you have the cash, you should probably be doing all three. If not, conventional wisdom says you should always consider taking advantage of any employer-matching contributions within an employer-sponsored retirement plan. Contribute at least enough to capture the full match offered by your employer.

Beyond that level of savings, you have to think about whether it's better to make additional voluntary contributions to your employer-sponsored retirement plan or put those dollars into an IRA or elsewhere. Annuities and life insurance, for example, play an important role in many peoples' retirement planning.

Certainly, if you have not reached the pretax contribution limit at work, funneling more dollars into your 401(k) or other employer-sponsored plan probably makes the most sense. The ability to make systematic contributions straight from your paycheck is a huge practical plus for most individuals, and the power of tax-deferred savings can be great. Although the traditional IRA also provides tax-deferred growth, the ability to deduct contributions is phased out for high- and middle-income taxpayers also participating in qualified retirement plans. If you earn too much to make a deductible IRA contribution, you should probably fully fund your employer-sponsored retirement plan before making nondeductible contributions to a traditional IRA.



The Roth IRA and Roth 401(k) /403(b) offer yet more options. With these arrangements, you invest after-tax dollars, but you don't pay income tax on the earnings for qualified withdrawals. Tax-free earnings are even better than tax-deferred earnings because tax-deferred earnings will eventually be taxed when you start taking distributions. In deciding between a Roth IRA and a traditional IRA or other alternative, or between pre-tax and Roth 401(k)/403(b) contributions, you should consult a financial professional who can make some planning assumptions and crunch the numbers to see what makes the most sense.



Considering a New Employment Opportunity

What is it?

In the past, workers stayed with the same company for years and years, working their way up in the company. However, times have changed. Businesses facing hard economic times restructure, forcing employees to look for new jobs. It's also become common for workers to change jobs several times throughout their careers as they seek higher salaries and new professional opportunities. Whether you're forced to seek a new employment opportunity or are willingly doing so, you'll eventually be faced with an important decision: When you're offered a job, should you take it?

Make sure the offer is firm before you evaluate it

Although it may be useful to explore an employment opportunity, don't waste time dreaming about your new position until you have gone through the interview process, gathered data on the company, and received a firm offer of employment. Only then should you take time to compare the offer you've received against the job you already have or a job offer you've received from another company. You'll have the facts, and you can make a more informed, unemotional decision.

Investigate the company

Where to look for information

Gather some data that can help you evaluate what kind of future you can look forward to with the company you're investigating. It's a good idea to do some research on the company before you have an interview so you'll know what questions to ask and be able to fairly judge the answers you receive. There are many ways to get background information on a company. Here are a few:

• Check your local public or university library--Many references are available through public or university libraries that can help you obtain information about a company or an occupation. Following are references that can give you general information about the company (including some financial data): Dun & Bradstreet's Million Dollar Directory

• Standard & Poor's Register of Corporations

• Ward's Business Directory

• Thomas' Register of American Manufacturers

• You should also look for information on a business in consumer or trade magazines and/or newspapers. Magazines and newspapers may contain up-to-date information about the company's future, its products and services, and its successes and failures. You may also be able to find out something about the company's key executives and philosophy. Rather than check the magazines individually, check one or more of the following indexes: Business Periodicals Index

• Readers' Guide to Periodical Literature

• Wall Street Journal Index

• Look for information via the Internet--If you have Internet access, you can use it to find information on a company without leaving your home or office. Many excellent resources exist, including the following: American City Business Journals, www.bizjournals.com --This site will search the archives of many weekly U.S. business journals, looking for the name of the company or organization you are researching. As a result, you may be able to access articles, press releases, and snippets of



information about the company.

• Dun & Bradstreet, www.dnb.com --At the Dun & Bradstreet site, you can find information (including financial) about millions of companies. If you want a detailed report, however, you'll have to pay. You may want to do this once you are seriously considering a job offer.

Tip: Whatever research method you choose, it's often easier to find information about public rather than private companies and well-established companies rather than new ones. To get hard-to-find information, you may want to contact the public relations liaison in the company and ask for general information and/or an annual report. You may also be able to get information by asking individuals who do business with the company or who have worked there in the past or by asking about the company at your local chamber of commerce.

What kind of information to look for

As you research a company or organization, try to find answers to some or all of the following questions:

• How strong is the company financially?

• Will the company be taken over by another in the near future?

• Is the company planning to expand?

• How many employees does the company have?

• How long has the company been in business?

• Is the company privately or publicly held and by whom?

• What successes and failures has the company experienced?

• What is the company's philosophy?

• Is the company a part of a growing industry?

Answering these questions can enable you to determine whether the company or organization is a good match for you and help you decide whether the company has a strong track record and an exciting future. Supplement the information you get via your own research by asking questions during your interview to fill in the gaps or to expand your understanding of the company. If possible, try to talk to one or more employees who currently work there to get a handle on the company environment and future.

Assessing the job offer

Salary and bonuses

You probably have some idea of what you want to earn, and the salary offered by the company you are evaluating may or may not match your expectations. Obviously, if the company offers you more than you expect, you have no problem. But what if the company offers you less? First, find out how frequently you can expect a pay review and/or a raise, and try to determine how much the pay increase is likely to be and on what is it based (e.g., merit, cost of living). In general, you should expect the company to increase your salary at least annually. Next, ask about bonuses, commissions, and profit sharing that can add a lot to your income. To fully evaluate the salary you're being offered, try to find out about the average pay for that job in your area. You can do this by talking to others who hold similar jobs, by calling a recruiter (i.e., headhunter), or by doing library or Internet research. The following resources can help you:

• Bureau of Labor Statistics, Office of Compensation and Working Conditions Phone: (202) 606-6225 Internet: www.bls.gov



• Bureau of Labor Statistics, Office of Employment and Unemployment Statistics Phone: (202) 606-6400

• JobStar Salary Info Internet: www.jobstar.org

Many salary surveys are available on the Internet that you can use to research salaries in your profession.

Benefits

Never overlook the value of good employee benefits. Benefits can add thousands of dollars to your base pay, and some benefits (including group health insurance and disability insurance) can be difficult to obtain privately at a reasonable price. Although many companies offer them, the type and quality of benefits vary widely from company to company. Find out what benefits the company offers and how much of the cost the employee must bear.

Future opportunities with the company

You'll want to find out what opportunities exist for you to move up in the company. This includes determining what the company's goals are and the type of employee the company values. Will you get to use skills you already have? Will you need more training and education? Is your philosophy regarding work in line with the company's? (If not, you may have trouble getting promoted or may end up leaving the company.) In addition, make sure the company has a future at all. If it's a new company, it may be at risk for folding in the near or distant future, so take time to evaluate the company's structure and plans and, if possible, to find out some information about the financial soundness of the organization. If the company is well established, determine if it is in a growth industry and try to find out (possibly by checking annual reports or articles about the company) what plans it has for the future.

Working environment

You may be getting paid well and the company may offer great benefits, but you still may not be happy working there if the working environment does not suit you. To evaluate the working environment, pay attention if you get a chance to tour the company's offices. Do employees seem extremely busy? Do they look happy? Bored? Is the office space cold or inviting? Do people seem relaxed and friendly? Tense? In addition, try to meet the individuals you will be working with closely. Do they seem like people you would be comfortable working with? Do you sense any hostility? Do they say they like their jobs? Finally, consider how much time you must spend at your job. Are the hours suitable? Will you work a lot of overtime? Will you have to punch a clock, or is the scheduling somewhat flexible?

Consider the financial and emotional impact of taking the job

Professional and personal consequences

To evaluate the professional and personal consequences of taking the job, consider the following questions:

• How will taking this job positively or negatively affect your finances? Consider increases or decreases in salary, cost and availability of benefits, and related costs of taking this job, including relocation, spouse potentially losing his or her job, and the cost of transportation.

• How will this job indirectly affect your finances? For instance, will taking this job lead to better opportunities in the future? Does taking this job mean taking on additional financial risk (e.g., if the job doesn't work out or the company downsizes or goes out of business)?

• Will taking this job make you happier? Aside from the financial implications of accepting the job, consider the emotional consequences, both personal and professional. Will you be happier than you are now? Will your family be happy with your choice? Will you work longer hours or have more time to relax? Will you be better respected or be able to expand your professional horizons?



Ramifications of golden handcuffs

Sometimes employers use nonqualified deferred compensation plans as golden handcuffs to make sure that key employees stay with the company for a specified period of time. If you are a highly compensated or key employee and participate in such a plan, you may lose certain benefits if you leave the company prematurely under the terms of the plan. Since your monetary loss may be significant, consider this before changing jobs.

Should you accept the offer?

Despite the time and energy you spend researching and evaluating, the hardest part is yet to come: deciding whether to accept the offer. Begin by assembling the facts, data, and information you have gathered. Think back to the interview, paying close attention to your feelings and intuition about the company and/or the position. Consider not only the salary offered to you but also what future you can expect with the company, and think about whether you believe you would be happy and excited working there. If you're having trouble making a decision, try writing down the pros and cons of accepting the job; it may then become clear whether the positives outweigh the negatives. Sometimes, you may really want the job, but you're unhappy with the salary or the benefits offered to you. If so, it's time for negotiation.

Making the job offer acceptable through negotiation

Some people are afraid to negotiate a job offer because they really want the job and are afraid that the company will rescind the offer or respond badly if they attempt to negotiate. However, if you truly want the job but find the salary, benefits, or hours unacceptable, it's better to face rejection than turn down what otherwise would be a great opportunity. The first step in negotiating is to tell your potential employer what it is that you want. Make it clear that you are immediately willing and able to accept the offer if this aspect of the offer could be changed. Be specific. Name the amount of money it would take or the exact hours you would like to work. However, don't threaten the company, and if you really want the job, don't imply that you'll walk if the offer remains unacceptable. Stay neutral.

What will happen? The company may refuse your request, either because company policy does not allow negotiation or because the company is not willing to move from its original offer. Or, the company may make you a second offer, perhaps offering you more money but not as much as you requested or offering to make up to you in benefits what they can't give you in salary.

In either case, the ball is back in your court. If the offer is still unacceptable, you may have to turn the job down. However, if the offer is better but not exactly what you want, ask for a day or two to think about it.

It's also possible that the company will accept your counteroffer outright, especially if you have unique talents or experience. At this point, there isn't much else to say except, "Thank you, I look forward to working here."



Federal Income Tax Withholding

What is it?

An employer is required to withhold federal income tax from employee wages in almost all cases. Anything paid as compensation for services counts as wages, including the following:

• Salaries

• Bonuses

• Sales commissions

• Taxable fringe benefits

• Pensions

• Vacation pay

• Sick pay

A key issue is whether the individual receiving the wages is an employee or an independent contractor. If you are an employee, your employer will withhold from your paychecks. If you are an independent contractor, the person or organization paying you won't withhold.

Tip: The key determining factor in determining whether an employer-employee relationship exists is the degree of control over the worker's activities. The IRS has a 20-factor test that provides helpful guidance on this issue of control.

In addition to wages, certain other payments are subject to withholding, including the following:

• Gambling winnings

• Unemployment compensation

• Some federal payments, such as railroad retirement benefits

How to calculate the amount withheld from wages

Two factors determine how much is withheld:

• The amount you earn

• The information you supply on Form W-4

Your employer uses the information you provide, along with your wage amount, to figure out how much to withhold. There are several methods by which an employer can make these calculations.

If events occur during the year that affect the amount you should have withheld, you may need to submit a revised Form W-4 to your employer. In some cases, you are required to file a new W-4. In other cases, it is optional.



Treatment of items other than regular wages

Supplemental wages

Your employer has the option of withholding from supplemental wages at either a flat rate of at least 25 percent or employing the same method used for your regular wages. However, supplemental wages in excess of $1 million are subject to withholding at the highest income tax rate, currently 35 percent. Overtime pay, bonuses, and commissions are the major types of supplemental wages.

Tips

Although your employer doesn't pay you tips and, thus, doesn't withhold tax from tips, it nevertheless includes the tips you report when calculating how much to withhold from your paycheck. You are required to report tips to your employer whenever you receive at least $20 in tips a month. The employer includes this tip income as part of your monthly income and calculates withholding on that basis. It can use one of two methods for figuring the withholding:

• It can withhold your regular pay and reported tips at the regular rate

• It can withhold your regular pay at the regular rate and your reported tips at 25 percent

Caution: It is possible that your regular pay may not be large enough for your employer to cover the withholding necessary for all the taxes (including Social Security, railroad retirement, and Medicare tax) on your pay plus tips. You are most likely to run into this situation when tips make up a substantial part of your earnings.

You have two options in this situation. You can give money to your employer to cover the shortfall, or you can let your employer withhold as much Social Security, railroad retirement, and Medicare tax as possible and then withhold income tax up to the full amount of your pay. You then will need to make estimated tax payments to cover any additional income tax not fully covered by the withholding. Further, even though you don't have to report tips for months in which you earn less than $20 in tips, you still must report all your annual tips on your tax return. Therefore, you need to have enough tax withheld to account for all of your tip income.

Taxable fringe benefits

Your employer has to withhold tax from certain noncash fringe benefits that are considered part of your regular pay. It has flexibility as to when it considers the benefits paid. It can treat a benefit as paid by the pay period, the quarter, or according to some other basis that is at least once a year. In most cases, your employer can treat benefits it actually pays in November and December as being paid in the following year. It has two options for the rate at which it withholds tax:

• It can withhold tax from the benefits (along with your regular pay) at the regular rate

• It can withhold 25 percent of the benefits' value

Technical Note: Your employer has the option not to withhold based on the value of your personal use of a company car, truck, or other vehicle. However, it must notify you if it has made this choice.

Pensions and annuities

Income tax is normally withheld from the following types of pension or annuity distributions, unless you direct otherwise:

• Certain IRAs

• An endowment, annuity, or life insurance distribution



• A pension, annuity, or profit-sharing plan

• A stock bonus plan

• Any other deferred compensation plan

Note that the part of your pension or annuity that constitutes a return on your investment (i.e., what you paid into the plan) isn't taxable. The rest is, though. The amount of the taxable portion that your employer withholds depends on the nature of your payments:

• Periodic payments--Periodic payments are much like your regular wages. You fill out a Form W-4P or equivalent that is similar to the W-4 you complete for wages. If you don't fill out a Form W-4P, your payer will withhold tax on the basis of your being married and claiming three withholding allowances. You have the option of not having any tax withheld from periodic payments.

• Nonperiodic payments--With nonperiodic payments, the payer withholds at a flat 10 percent of the payments you receive. You don't need to fill out a Form W-4P unless you want or need additional tax withheld. You have the option of not having any tax withheld from nonperiodic payments.

• Eligible rollover distributions (ERDs)--The general rule is that a distribution eligible to be rolled over into a qualified retirement or annuity plan is subject to withholding at a 20 percent rate. You can avoid withholding, though, if you directly roll over the distribution from the employer's plan to another qualified plan or IRA. Note that unlike periodic or nonperiodic payments, you can't opt to have no income tax withheld.

Gambling winnings

Certain gambling winnings of more than $5,000 require the withholding of 25 percent of the actual proceeds paid. The actual proceeds are the difference between the winnings and the amount you placed as a bet. To be subject to withholding, the winnings need to come from a sweepstakes, wagering pool, lottery, or a wager with proceeds at least 300 times the amount of the bet. Winnings subject to withholding can be cash payments, property, or an annuity. Note that gambling winnings from bingo, keno, and slot machines aren't subject to withholding.

Caution: Although you may receive gambling winnings that don't require withholding, you may still need to pay estimated tax. Further, if you fail to give your Social Security number to the payer of your gambling winnings, your winnings may be subject to backup withholding at 28 percent. This rule applies to keno winnings of more than $1,500, bingo and slot machine winnings of more than $1,200, and certain other gambling winnings of more than $600. For more information on backup withholding, see below.

Unemployment compensation

You can choose to receive unemployment compensation with or without withholding for income tax. You make this election on Form W-4V or an equivalent form supplied by the state agency. The amount withheld is 10 percent of each unemployment payment. Since unemployment compensation is taxable, you may need to make estimated tax payments if you don't have any income tax withheld. Otherwise, you could face a penalty.

Federal payments

You can elect to have income tax withheld from federal payments, such as Tier 1 railroad retirement benefits, commodity credit loans, and certain agricultural disaster payments. You need to fill out Form W-4V or an equivalent form. Withholding rates may be based on any of the lowest income tax brackets applicable to single individuals. If you opt for no withholding, you may have to make estimated tax payments in order to avoid a penalty.

Backup withholding

Backup withholding at a flat 28 percent rate applies to certain situations in which you receive payments from



banks or other businesses reported on a Form 1099 that aren't normally subject to withholding. You face backup withholding in the following situations:

• You fail to provide your payer with your taxpayer identification number (TIN) on a Form W-9 or similar form

• The IRS notifies the payer that you gave an incorrect TIN

• With accounts or investments earning interest or dividends, you fail to certify that you aren't subject to backup withholding

• You have underreported interest or dividends on your income tax return and have received four notices over at least a 120-day period

Types of payments that may be subject to backup withholding include the following:

• Interest payments

• Dividends

• Patronage dividends

• Rents, profits, or other gains

• Payments by brokers

• Royalty payments

• Certain gambling winnings



Comparison of Typical Health Plans

Health maintenance organizations (HMOs)

Point of service (POS) plans

Preferred provider organizations (PPOs)

Traditional insurers

Free choice of physician?

No. Treatment by physicians outside of the network is not covered.

Yes, but treatment by physicians outside of the network is covered at a lower level.

Yes, but treatment by physicians outside of the network is covered at a lower level.

Yes

Co-payment or coinsurance required?

Minimal Yes. Typically higher for non-network care.

Yes. Typically higher for non-network care.

Yes. Generally 20% for medical and hospital services.

Deductible required?

No No deductible for network care.

Yes. Typically higher for non-network care.

Yes. Some plans offer a choice of a higher deductible for a lower premium, or vice versa.

Required to consult a primary care physician (PCP) before seeing a specialist?

Yes PCP must be consulted before seeing specialists within the network; no PCP for non-network care.

No No

Emergency care covered?

Emergency care by non-network physicians may be covered. Definition of "emergency" is often very strict.

Varies from plan to plan.

Generally provides the best coverage for emergency care by non-network physicians.

Yes

Limit on out-of-pocket costs?

Usually no, but you are typically responsible only for co-payments.

Usually yes, your out-of-pocket costs include deductible and coinsurance amounts.





Steps to Estate Planning Success



Getting Started: Establishing a Financial Safety Net

In times of crisis, you don't want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you're protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.

How much is enough?

Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child's orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.

Building your cash reserve

If you haven't established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:

• Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses

• Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)

• Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)

• Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)

• Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)

A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn't consider lenders as a primary source for your cash reserve.

Where to keep your cash reserve

You'll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn't your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.

Don't confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Note:When considering a money market mutual fund, be sure to obtain and read the fund's prospectus, which is available from the fund or your financial advisor, and outlines the fund's investment objectives, risks, fees, expenses. Carefully consider those factors before investing.

It's important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal



plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you're going to use fixed-term investments as part of your cash reserve, you'll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.

Review your cash reserve periodically

Your personal and financial circumstances change often--a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.



Establishing a Budget

Do you ever wonder where your money goes each month? Does it seem like you're never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.

Examine your financial goals

Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child's college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses

To develop a budget that is appropriate for your lifestyle, you'll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you're not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget

Once you've added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you're on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you'll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don't worry! All it will take is some determination and a little self-discipline, and you'll eventually get it right.

Monitor your budget

You'll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don't have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track

• Involve the entire family: Agree on a budget up front and meet regularly to check your progress

• Stay disciplined: Try to make budgeting a part of your daily routine

• Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the



beginning of the year, as opposed to right before the holidays)

• Find a budgeting system that fits your needs (e.g., budgeting software)

• Distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are "needs" (e.g., groceries)

• Build rewards into your budget (e.g., eat out every other week)

• Avoid using credit cards to pay for everyday expenses: It may seem like you're spending less, but your credit card debt will continue to increase



Credit Traps for the Unwary

It's hard to imagine functioning in today's society without access to credit. However, you need to be careful not to fall victim to some of the pitfalls associated with it.

Revolving credit can make it hard for you to pay off debt

Credit cards allow you to spend money you don't currently have, and to repay what you've spent over time instead of all at once. When you use a card, the balance you owe increases, and your remaining available credit decreases. As you make your payments to reduce your outstanding balance, your available credit once again increases. Thus, your credit revolves around for you to use again.

Since you can spend more than you currently have, you can easily spend more than you can afford. As your balance increases, your minimum monthly payments also increase, and soon you'll find yourself in over your head--especially if interest rates and a variety of fees are high.

Interest and fees can add to the cost

Credit card debt generally carries a high interest rate. Your minimum monthly payment--a percentage (often as low as 2 to 4 percent) of the total balance due--may cover little more than the monthly interest charge. Consequently, your minimum payment may only minimally decrease what you already owe. If possible, increase your monthly payment above the minimum required. The higher you can make the payment, the faster you will pay off the debt.

When opening a new account, always check to see how the finance charge is calculated. Here are some of the methods used:

• Adjusted balance method: Balance due at the beginning of the billing cycle less any payments made during the cycle; excludes new purchases made during the cycle

• Previous balance method: Balance due at the beginning of the billing cycle

• Average daily balance method: Total of the balances due each day in the billing cycle divided by the number of days in the cycle; payments made are subtracted as posted to determine daily balances; new purchases may or may not be added in

The amount of your finance charge can vary widely from method to method.

In an effort to attract your business, many lenders offer very low introductory rates--3.9 percent annually or less. However, these rates generally last no more than three to six months and increase to the current market rate thereafter. Moreover, the introductory rates may apply only to balances you transfer from other cards. They may not apply to new purchases and rarely if ever to cash advances. Finally, if your monthly payment is late, the interest rate may be raised to the current market rate--and sometimes beyond.

A credit card issuer may increase the interest rate you're charged under specific circumstances. These circumstances are (1) the index on which the rate is based changes, (2) it is a promotional rate that has expired, (3) you have failed to comply with a hardship workout plan, or (4) your account falls 60 days past due. If your rate is increased because the account falls 60 days past due, you must be informed that the rate increase will be terminated (and the rate restored to what it was before the increase) once you have made timely minimum payments for six months. However, in this case, it's doubtful the rate would be restored to the original low introductory rate.

If you have two different interest rates on one account (e.g., a lower rate for purchases, a higher one for cash advances), the creditor will post the minimum payment toward the lower interest rate balance, not the higher.



However, a credit card company must apply any payment overthe minimum payment due toward the portion of an existing balance with the highest interest rate.

You may also incur a wide variety of fees. Creditors may charge you an annual fee to maintain the account. These fees can range from $25 to $50 or more each year. They may also charge fees to transfer balances from other cards. Generally, these processing fees equal 2 to 4 percent of the amount you transfer. Many banks levy a similar surcharge on transactions involving conversions from foreign currencies. If you're late with your monthly payment, you may be charged a late payment fee that can be as much as $39 each month you're overdue. If you authorize the creditor to complete a transaction that sends your balance over your approved credit limit, you will be assessed an overlimit fee.

When these fees add up, you may find that making your minimum monthly payment won't bring your balances down. In fact, your balance will increase if your monthly payment isn't greater than the accumulated interest and fees due, since these unpaid charges become a part of the principal you owe. Moreover, your account may then be considered past due and reported as such to the credit bureaus.

If you surf your debt, beware the wake

You may periodically transfer your balance from one introductory offer to the next. This is known as surfing. Done successfully, surfing lets you avoid the higher interest charges that your debt would incur when the original card offer expires. By the time the interest rate on the original card increases, you've surfed over to a new offer at another low rate.

Although surfing helps keep your interest charges to a minimum, it's not without pitfalls. You may be offered a low rate only on balance transfers; if new purchases and cash advances are billed at a higher interest rate, these charges could offset the savings you would otherwise enjoy. Moreover, as creditors move to counteract the surfing trend, many stipulate that if you transfer balances to another card within a certain time after opening your account, you'll be retroactively charged a higher rate of interest on the amount you transfer. Thus, surfing before this time period is up eliminates the savings.

Finally, if you transfer balances to a new card, close the original account as soon as you've paid it off. Write the creditor a letter (keep a copy for your records) asking it to inform the credit bureaus that the account was closed at your request. This prevents new potential creditors from denying you credit when they see too many open lines of credit, and it also deters anyone else from fraudulently using an inactive account.

Protect yourself against credit fraud and identity theft

Credit fraud (the illegal use of your accounts) and identity theft (opening new credit using information about you) are two of the fastest-growing crimes today. In many cases, you may not know you've been victimized until it's too late. Here are some indicators of these crimes:

• A creditor informs you that it received an application in your name

• You've been approved for or denied credit you didn't apply for

• You no longer get your credit card statements in the mail

• Your credit card statements include purchases or cash advances you never made

To minimize the chances of being victimized, take precautions to safeguard your credit account information. Don't carry credit cards you don't use often. Be sure to sign your cards, and never sign a blank charge slip. When you use the card, try to keep it within your sight. Save your receipts, and obtain and destroy any carbons. Don't allow a sales clerk to write your credit card number on a check "for identification." Finally, never give out your account number over the telephone unless you initiated the call and know the organization to be reputable.



Choosing a Credit Card

Like dandelions in a spring lawn, credit card offers pop up everywhere--stuffing your mailbox, flashing on the Internet, even falling from the magazines in your doctor's waiting room. And they all sound so attractive. "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!" You're thinking of applying for a card, but how do you decide which offer is best for you?

Learn the lingo

In order to evaluate credit card offers, you'll need to learn the language they use. Here are some of the more important terms.

• Annual percentage rate (APR): the cost of credit as indicated by a yearly (fixed or variable) interest rate. This rate and the periodic rate (the APR expressed as a daily or monthly factor) must be disclosed to you before you become obligated on the card.

• Balance computation method: the formula used to determine the outstanding balance on which you're charged interest for the billing period.

• Finance charge: the cost of credit for the billing cycle, expressed as a dollar amount and determined by multiplying the outstanding balance by the periodic rate.

• Fees: charges (other than the finance charge) that may be levied against your account. Common examples include an annual fee, cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees.

• Grace period: the length of time prior to your payment due date during which you may pay off your account without incurring any finance charge.

Once you can talk the talk, ask questions

Any credit card will cost you something, but depending on the terms and conditions, some are more costly than others. When evaluating a credit card offer, here are some points to consider:

• What's the interest rate? Is it fixed or variable? If variable, how is it calculated?

• Will you be charged different interest rates for purchases, balance transfers, and cash advances?

• What method determines the outstanding balance used to calculate the finance charge?

• Is there an annual fee, and what other fees may be charged?

• What's the length of the grace period (if any)?

What you should look for depends in part on how you'll use the card. If you intend to pay off the balance each month and won't incur any finance charges, obtaining a low interest rate is less important than finding a card with no annual fee, minimal transaction fees, and a long grace period. If you'll carry a balance from month to month, you'll want a low interest rate and a balance calculation method that minimizes your finance charges.

A word about balance transfers

Perhaps you're not currently using your credit card, but you want to minimize the finance charge on your existing balance. One way to do so is to transfer your balance periodically to a new card with a low introductory "teaser" rate of interest. If you choose to "surf" in this fashion, be cautious. Watch out for:



• A low interest rate on new purchases, but a higher interest rate on balance transfers

• A low introductory interest rate that applies only for a very short period of time

• Balance transfer fees, particularly uncapped amounts calculated as a percentage of the balance transferred

• Termination fees and retroactive interest charges levied if you decide to surf the next wave and close the account or transfer the balance to another card before a specified time period has elapsed

When you transfer a balance from an existing card to a new one, it's a good idea to close the account you're leaving. By doing so, you won't be tempted to use the card again (at a higher rate of interest once the introductory offer period has expired), and you'll minimize the potential for fraudulent use or identity theft. What's more, if you don't close such accounts and later try to transfer your balance again, a new card issuer might turn down your application, afraid you'll incur too much debt by running up new balances on dormant, but open, credit card accounts.

Voice your concern if you're turned down

If you're turned down for a credit card, the issuer must inform you specifically why you were turned down or tell you how to get this information. When the rejection is based even in part on information contained in your credit report, you're entitled to a free copy of the report from the credit bureau that issued it. Get the report and review it; if you discover incorrect notations on it, dispute them. Then contact the card issuer to plead your case, informing the issuer of any corrections made to your credit report. With persistence, you may be able to convince the issuer to approve your credit application.

Speak up for your rights

Your consumer rights related to credit cards are protected by various federal laws.

• The Fair Credit Reporting Act (FCRA) protects your right to know what's in your credit file and sets up procedures to ensure that credit reporting agencies or credit bureaus furnish correct information about you

• The Fair and Accurate Credit Transactions Act of 2003 (FACTA) amends and strengthens the FCRA, provides protections against identity theft, improves resolution of consumer disputes, improves the accuracy of consumer records, and makes improvements in the use of and consumer access to creditor information

• The Equal Credit Opportunity Act (ECOA) ensures that when you apply for credit, you won't be discriminated against because of your gender, race, marital status, or age

• The Fair Credit Billing Act (FCBA) offers protection against billing errors (including limiting your liability for unauthorized purchases) and may help you reverse the purchase of inferior goods or services charged to your credit card

• The Fair Debt Collection Practices Act (FDCPA) spells out what practices collection agents may and may not use to collect a debt

If you feel your rights have been violated and you can't resolve the issue with the creditor, you may file a complaint with one of the federal agencies responsible for enforcing consumer credit laws, including the Federal Trade Commission (FTC), or you can contact your state's attorney general.



Investment Planning: The Basics

Why do so many people never obtain the financial independence that they desire? Often it's because they just don't take that first step--getting started. Besides procrastination, other excuses people make are that investing is too risky, too complicated, too time consuming, and only for the rich.

The fact is, there's nothing complicated about common investing techniques, and it usually doesn't take much time to understand the basics. The biggest risk you face is not educating yourself about which investments may be able to help you achieve your financial goals and how to approach the investing process.

Saving versus investing

Both saving and investing have a place in your finances. However, don't confuse the two. With savings, your principal typically remains constant and earns interest or dividends. Savings are kept in certificates of deposit (CDs), checking accounts, and savings accounts. By comparison, investments can go up or down in value and may or may not pay interest or dividends. Examples of investments include stocks, bonds, mutual funds, collectibles, precious metals, and real estate.

Why invest?

You invest for the future, and the future is expensive. For example, college expenses are increasing more rapidly than the rate of overall inflation. And because people are living longer, retirement costs are often higher than many people expect.

You have to take responsibility for your own finances, even if you need expert help to do so. Government programs such as Social Security will probably play a less significant role for you than they did for previous generations. Corporations are switching from guaranteed pensions to plans that require you to make contributions and choose investments. The better you manage your dollars, the more likely it is that you'll have the money to make the future what you want it to be.

Because everyone has different goals and expectations, everyone has different reasons for investing. Understanding how to match those reasons with your investments is simply one aspect of managing your money to provide a comfortable life and financial security for you and your family.

What is the best way to invest?

• Get in the habit of saving. Set aside a portion of your income regularly.

• Invest in financial markets so your money can grow at a meaningful rate.

• Don't put all your eggs in one basket. Though it doesn't guarantee a profit or ensure against the possibility of loss, having multiple types of investments may help reduce the impact of a loss on any single investment.

• Focus on long-term potential rather than short-term price fluctuations.

• Ask questions and become educated before making any investment.

• Invest with your head, not with your stomach or heart. Avoid the urge to invest based on how you feel about an investment.



Before you start

Organize your finances to help manage your money more efficiently. Remember, investing is just one component of your overall financial plan. Get a clear picture of where you are today.

What's your net worth? Compare your assets with your liabilities. Look at your cash flow. Be clear on where your income is going each month. List your expenses. You can typically identify enough expenses to account for at least 95 percent of your income. If not, go back and look again. You could use those lost dollars for investing. Are you drowning in credit card debt? If so, pay it off as quickly as possible before you start investing. Every dollar that you save in interest charges is one more dollar that you can invest for your future.

Establish a solid financial base: Make sure you have an adequate emergency fund, sufficient insurance coverage, and a realistic budget. Also, take full advantage of benefits and retirement plans that your employer offers.

Understand the impact of time

Take advantage of the power of compounding. Compounding is the earning of interest on interest, or the reinvestment of income. For instance, if you invest $1,000 and get a return of 8 percent, you will earn $80. By reinvesting the earnings and assuming the same rate of return, the following year you will earn $86.40 on your $1,080 investment. The following year, $1,166.40 will earn $93.31. (This hypothetical example is intended as an illustration and does not reflect the performance of a specific investment).

Use the Rule of 72 to judge an investment's potential. Divide the projected return into 72. The answer is the number of years that it will take for the investment to double in value. For example, an investment that earns 8 percent per year will double in 9 years.

Consider working with a financial professional

Whether you need a financial professional depends on your own comfort level. If you have the time and energy to educate yourself, you may not feel you need assistance. However, don't underestimate the value of the experience and knowledge that a financial professional can offer in helping you define your goals and objectives, creating a net worth statement and spending plan, determining the level and type of risk that's right for you, and working with you to create a comprehensive financial plan. For many, working with a professional is the single most important investment that they make.

Review your progress

Financial management is an ongoing process. Keep good records and recalculate your net worth annually. This will help you for tax purposes, and show you how your investments are doing over time. Once you take that first step of getting started, you will be better able to manage your money to pay for today's needs and pursue tomorrow's goals.



Types of Insurance

Each day, you face a variety of risks--risks to your life, your health, and your property. Although you can't eliminate many of these risks, you can take steps to guard against resulting financial losses. That's where insurance comes in. If your coverage is sufficient, insurance can provide both peace of mind and financial security to you and your loved ones. Many types of insurance coverage are available--here's a brief overview of what's out there.

Life insurance

Life insurance provides funds for your surviving loved ones when you die. Your family can use the proceeds to meet a variety of goals. For example, they can use them to replace income lost as a result of your death, to meet periodic expenses, to pay debts you've left behind, to help with college tuition and retirement, and to pay for your final expenses and estate taxes. The proceeds are typically paid as a lump sum but may also be paid in installments.

You can obtain life insurance coverage through work, through another organization (e.g., a club or association to which you belong that sponsors a group policy), or by purchasing an individual policy directly from an insurance company. The two basic types of life insurance are term life and permanent (cash value) life. Term life provides life insurance coverage for a specified period of time, while permanent insurance provides protection for your entire life. Permanent life insurance can be further broken down into several types, including whole life, variable life, and variable universal life.

Note: Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Health insurance

Health insurance can safeguard your assets from the high costs of health care. Most people lack the financial resources needed to pay medical expenses associated with a health crisis (e.g., life-threatening illness or significant injury). In addition, the costs of physical exams, prescription drugs, hospital stays, pregnancy, and routine medical conditions can add up and cause you to suffer financial hardship if you must pay for them entirely on your own.

Health insurance pays for all or a portion of specified medical costs. The cost and range of protection that your health insurance provides will depend on your insurance company and the particular policy you purchase. You may be able to obtain health insurance coverage through your employer; through an association, club, or other organization; or on your own by purchasing a policy directly from an insurance company.

Auto insurance

Car ownership involves several risks. In a car accident, people may be injured and vehicles or other property damaged. Liability claims against you can put your assets at risk. Loss can also occur through theft, vandalism, or natural disasters. Auto insurance protects you against these risks. A personal auto policy is a contract between you and your insurer that specifies each party's rights and obligations. State law and/or your lender may require you to purchase at least a minimum amount of auto insurance coverage. Depending on your circumstances, you may wish to purchase additional protection. You can compare auto insurance policies in terms of price, coverage, exclusions, and reputation of insurer.



Homeowners insurance

Homeowners insurance provides coverage if your home is damaged or destroyed. It can also cover your possessions and provide you with compensation for liability claims, medical expenses, and other expenditures that result from property damage and bodily injury suffered by you or others. If you have a mortgage on your home, your lender may require homeowners insurance. Even if you own your home outright, though, you'll still need homeowners insurance to protect your interests and safeguard your assets. The cost of homeowners insurance depends on several factors, including the amount of your coverage, any endorsements you add to the policy, and policy deductibles.

Condominium and co-op insurance, although similar, differ in some respects from standard homeowners insurance. And if you rent your home, you may want to look into renters insurance.

Disability insurance

The threat of a major disability poses one of the greatest risks to your income. A serious illness or injury can put you out of work for a prolonged period or even permanently. If you had to stop working, how would you meet your expenses? Disability insurance policies pay you a benefit that replaces part of your earned income (usually 50 to 70 percent) when you can't work. You may be able to obtain short-term or long-term disability coverage, or both. In general, disability insurance can be split into three types: private insurance (individual policies bought from an insurance company), group policies typically provided through your employer, and government insurance (social insurance provided through state or local governments).

Long-term care insurance

Your chances of requiring some sort of long-term care increase as you get older. Will you have the financial resources to fund a prolonged nursing home stay for yourself or a loved one? Long-term care insurance pays a selected dollar amount per day (for a set period) for the type of long-term care outlined in your policy. Depending on your policy, care can be provided in a variety of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes. Most policies provide that certain physical and/or mental impairments trigger benefits. The cost of a policy depends on many factors, including the types of benefits, your health, and your age when you purchase the policy.

Business insurance

No matter how careful you are in running your business, accidents happen. If you're a business owner, you'll need to plan for these and other risks. You may be interested in several different types of insurance coverage--property and casualty insurance, liability insurance, and group health, life, and disability insurance coverage for your employees. You can buy various types of insurance protection separately, or you can purchase one package that covers many potential hazards. You can also use insurance to protect your business against the loss of a key employee or to transfer a business interest at your death or disability.

Other forms of insurance

There are many other types of insurance, including flood insurance, travel and accident insurance, insurance for your boat or other watercraft, umbrella liability insurance, and even pet insurance. Speak with an insurance professional to learn more about the products available to you.



Health Insurance Made Simple

Let's face it--in today's world, health insurance is a necessity. The cost of medical care is soaring higher every year, and it's becoming increasingly difficult (and in some cases, impossible) to pay medical costs out of pocket. Whether you already have health insurance or want to get it, here's some basic information to help you understand it.

Not part of a group? You may have to go it alone

You may have group health insurance or be able to buy it through your employer. Group insurance is most commonly offered through employers. It is also offered through some civic groups and other organizations (e.g., auto clubs, chambers of commerce). A single policy covers the medical expenses of a group of people. All eligible members of the group can be covered by a group policy regardless of age or physical condition. The premium for group insurance is calculated based on characteristics of the group as a whole, such as average age and degree of occupational hazard. It's generally less expensive than individual insurance.

If you can't join a group, consider buying individual insurance. Unlike group insurance, individual insurance is purchased directly from an insurance company or agent. When you apply, you are evaluated in terms of how much risk you present to the insurance company. Your risk potential will determine whether you qualify for insurance and how much it will cost, depending on state laws. You must pay the full premiums yourself.

Know what's out there

The cost and range of protection that your health insurance provides will depend on your insurance provider and the particular policy you purchase. You may have comprehensive health insurance that involves several types of coverage, or basic coverage that includes hospital, surgical, and physicians' expenses. In addition, major medical coverage is necessary in the event of a catastrophic accident or illness. Many plans also cover prescriptions, mental health services, and other health-related activities (e.g., health-club memberships).

When it comes to health insurance, HMO, PPO, and POS are more than just letters. You need to know the types of health plans available so that you can make an informed decision. You can obtain health insurance through traditional insurers like Blue Cross/Blue Shield, health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service (POS) plans, and exclusive provider organizations (EPOs).

• Traditional insurers: These plans usually allow you flexibility regarding choice of doctors and other health-care providers. Some policies reimburse you for covered expenses, while others make payments directly to medical providers. You will pay a deductible and a percentage of each bill, known as coinsurance.

• HMOs: Health maintenance organizations cover only medical treatment provided by physicians and facilities within their networks. You must choose a primary care physician, who will either approve or deny any requests to see a specialist. You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).

• PPOs: Preferred provider organizations do not require members to seek care from PPO physicians and hospitals, but there is usually strong financial incentive to do so (in terms of percentage of reimbursement). You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).

• POSs: Point of service plans combine characteristics of the HMO and PPO. You must choose a primary care physician to be responsible for all of your referrals within the POS network. Although you can choose to go outside the network with this type of plan, your health care will be covered at a lower level.



• EPOs: Exclusive provider organizations are basically PPOs with one important difference: EPOs provide no coverage for non-network care.

Read your contract

You should have a basic understanding of what your policy does and does not cover. This may help you prevent an unexpected medical bill from arriving in your mailbox, because you'll know ahead of time, for instance, whether or not liposuction is covered. You must read your policy carefully, particularly the section on limitations and exclusions. The specifics will vary from policy to policy. In general, though, most policies will at least mention the following:

• Pre-existing conditions: An illness or injury that began or occurred before you obtained coverage under the policy. These conditions are often excluded from coverage for a time period, depending on state laws.

• Nonduplication of benefits: Benefits will not be paid for amounts reimbursed by other insurance companies.

Your health insurance policy should also address the following issues:

• Deductible: The amount that you must pay before insurance coverage begins (usually an annual figure

•• Coinsurance: The portion of each medical bill for which you are responsible

• Co-payment: The fixed fee that you pay for each doctor visit or prescription

• Family coverage: Many group plans allow you to cover your spouse and dependents for an increased premium

• Out-of-pocket maximum: This provision is designed to limit your liability for medical expenses in the calendar year; you won't have to make coinsurance payments in excess of this figure

• Benefit ceiling: The maximum lifetime payout under the insurance policy, usually at least $1 million



The Fundamentals of Disability Insurance

Disability insurance pays benefits when you are unable to earn a living because you are sick or injured. Most disability policies pay you a benefit that replaces a percentage of your earned income when you can't work.

Why would you need disability insurance?

Your chances of being disabled for longer than three months are much greater than your chances of dying prematurely, due in part to medicine that has made many fatal illnesses treatable. (Source: 1985 Commissioner's Individual Disability Table A--most recent data available.) Although this is good news, it increases your need to protect your income with disability insurance.

Consider what might happen if you suffered an injury or illness and couldn't work for days, months, or even years. If you're single, do you have other means of support? If you're married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse's income support your whole family? In addition, remember that you don't have to be working in a hazardous position to need disability insurance. Accidents happen not only on the job but also at home, and illness can strike anyone.

If you own a business, disability insurance can help protect you in several ways. First, you can purchase an individual policy that will protect your own income. You can also purchase key person insurance designed to protect you from the impact that losing an important employee would have on your business. Finally, you can purchase a disability insurance policy that will enable you to buy your partner's business interest in the event that he or she becomes disabled.

What do you need to know about disability insurance?

Once you become disabled and apply for benefits, you have to wait for a certain amount of time after the onset of your disability before you receive benefits. If you are applying for benefits under a private insurance policy, this amount of time (known as the elimination period) ranges from 30 to 365 days, although the most common period is 90 days. Group insurance policies through your employer will generally have a waiting period of no more than 8 days for short-term policies that pay benefits for up to six months, and 90 days for long-term policies that pay benefits up to age 65.

You can purchase private disability income insurance policies that offer lifetime coverage, but they are very expensive. Most people buy policies that pay benefits up until age 65; however, two- and five-year benefit periods are also available. Because many injuries or illnesses do not totally disable you, many policies will offer a rider that will pay you a partial benefit if you can work part time and earn some income.

Where can you get disability insurance?

In general, disability insurance can be split into two types: private insurance (individual or group policies purchased from an insurance company), and government insurance (social insurance provided through state or federal governments).

Private disability insurance refers to disability insurance that you purchase through an insurance company. Many types of private disability insurance exist, including individual disability income policies, group policies, group association policies, and riders attached to life insurance policies. Depending on the type of policy chosen, private disability policies usually offer more comprehensive benefits to insured individuals than social insurance. Individually owned disability income policies may offer the most coverage (at a greater cost), followed by group policies offered by an employer or association. Check with your employer or professional association to see if you are eligible to participate in a group plan. If not, contact your insurance broker to look into individual coverage.

Workers' compensation and Social Security are two well-known government disability insurance programs. In



addition, five states (California, Hawaii, New Jersey, New York, and Rhode Island) have mandatory disability insurance programs that provide disability benefits to residents. If you are a civil service worker, a military servicemember, or other federal, state, or local government employee, many disability programs are set up to benefit you. In general, however, government disability insurance programs are designed to provide limited benefits under restrictive terms, and you should not rely on them (as many people mistakenly do) as your main source of income if you are disabled.



Renters Insurance

If you rent a house or an apartment, you might think you don't need insurance because you don't own the building. After all, your landlord probably has coverage. But your landlord's insurance covers only the building, not the contents. Without insurance of your own, you could be left with nothing in the event of a fire or burglary.

That's why you need renters insurance (HO-4), a special kind of homeowners insurance. It provides no coverage for the building itself. Instead, it covers your personal possessions and protects you against liability claims if you rent a house or apartment.

Property damage coverage

Renters insurance policies cover only losses that result from any of 17 named perils. If your property is lost or damaged as a result of one of these perils, your insurance company will compensate you for your loss. The covered perils are:

• Fire or lightning

• Windstorm or hail

• Explosion

• Riot or civil disturbance

• Aircraft

• Vehicles

• Smoke

• Vandalism or malicious mischief

• Theft

• Broken glass

• Volcanic eruption

• Falling objects

• Weight of ice, snow, or sleet

• Accidental discharge or overflow of water

• Sudden and accidental tearing apart

• Freezing

• Artificially generated electrical charge

Keep in mind that most renters insurance policies specifically exclude certain perils (e.g., earthquakes, flooding). As a result, you may need to purchase a separate policy to insure your possessions against damage caused by these hazards.

Property coverage levels typically start somewhere around $15,000 and go up from there. As you increase your



coverage level, your premiums increase as well. An insurance professional can help you determine the amount of coverage that you need. Or, you can visit one of the many insurance websites for more information.

Replacement cost vs. actual cash value

These may sound like highly technical terms, but they are actually very important in determining how much money you will get if you ever have to file a claim. When you get a quote from your insurance agent, make sure you know which type of coverage is being described.

Actual cash value coverage reimburses you for only the amount that your property was worth at the time it was stolen, damaged, or destroyed. This means that if all of your clothes suffer smoke damage in a fire, your insurance company probably will pay as much as you could've made at a yard sale--not the $4,000 you spent over the last couple of years to create the perfect wardrobe.

Replacement cost coverage, by comparison, reimburses you for the amount that it will cost to replace your property. If you bought a $400 television two years ago, you'll receive enough money to go out and buy another television just like the old one. You will probably have to replace the lost property with your own money and submit the receipt before you receive compensation. Nevertheless, replacement cost coverage typically pays significantly more than actual cash value coverage.

Liability coverage

Renters insurance also provides liability coverage. A typical renters insurance policy covers you for accidents and injuries that occur in your home, as well as accidents outside of your home that are caused by you or your property. (This does not include automobile accidents.) This liability coverage includes legal defense costs, if you are taken to court over such an accident. Standard levels of liability coverage are $100,000, $300,000, and $500,000. The amount of liability coverage that you need depends on your individual circumstances.

What does it cost?

The cost of renters insurance varies greatly depending on where you live, the construction of the building, your deductible, and how much insurance coverage you need. But renters insurance is much less expensive than homeowners insurance. On average, you will pay somewhere between $100 and $300 annually for a basic policy providing about $30,000 worth of coverage for your property. Replacement cost coverage is somewhat more expensive than actual cash value coverage, but it is usually worth the extra money.



Auto Insurance for 20-Somethings

You're shopping for your first car and looking for deals. Unfortunately, there's one thing you probably won't be able to get a deal on--your auto insurance. That's because single drivers under age 25 are in the highest risk category of all drivers under age 70, and consequently, they pay the highest premiums. Although you can't change your age, you might be able to take certain steps to make your premiums more affordable.

Increase your deductible

The collision and other-than-collision (comprehensive) coverages in your auto policy have deductibles, which is the amount of money you'll need to pay upfront before your insurance kicks in. If you raise your deductibles, your premiums should come down. However, before you agree to this, make sure you'll be able to pay a higher share of the repair bill. Keep in mind that the deductibles may differ for collision and other-than-collision coverage. For example, there is often no deductible for glass breakage under other-than-collision losses.

Drop collision and other-than-collision coverage altogether

If you're driving an older car, paying for physical damage coverage (collision and other than collision) may be a waste of money. For example, assume your car's current value is $1,000, the same as your current deductible. If your car is stolen, the insurance company will reimburse you for the value of the car, minus your deductible--in other words, nothing. And in an accident, you'll be responsible for all repairs up to $1,000, and the insurance company will reimburse you for any repairs over $1,000, up to the value of the car--again, nothing. By dropping your physical damage coverage, you can save some money on premiums. Run the numbers yourself, or get help from your agent.

Choose a safe car

A four-cylinder sedan with automatic seat belts, air bags, and antilock brakes is almost always less expensive to insure than an eight-cylinder sports coupe with no safety features, even if the cars are the same year and similarly priced. If insurance costs are an issue, resist the urge to buy that shiny hot rod. Instead, select a car with more safety features that's in a lower risk category. Ask your agent for specific recommendations.

Live at home and drive your parents' car

If you live at home with your parents and continue to drive their car, you'll be eligible to remain a named insured on their auto policy. If your parents have safe-driver and multiple-car discounts, they'll probably get a better rate than you could if you owned your own car and purchased your own policy (though their total cost will depend in part on the cars they own and your driving record). However, in some cases, your parents may enjoy a significant drop in their policy premiums once you're taken off their policy. If so, your family might do better by setting you up with an older model car and an individual policy without physical damage coverage.

Use multiple-policy discounts

Some insurers will give you a break on your auto insurance if you elect to buy your homeowners insurance or renters insurance from them. In no-fault states, some companies will allow you to waive personal injury protection in exchange for a discounted premium, assuming you have health insurance with the insurer. Ask your agent whether you are eligible for any multiple-policy discounts.

Don't be pressured into buying more insurance than you can afford

If you're like most 20-somethings, you might have a few bucks in the bank, your car, and some other personal



possessions, but you don't have significant assets that could be seized if you were sued after a car accident. In this case, the minimum auto insurance coverage that your state's laws or your lender requires is probably sufficient to protect you in the event of an accident. Statistics show that the vast majority of accident claims fall within those coverage amounts.

If you do find yourself in the situation of owing a large sum of money as a result of an auto accident, you will be basically "judgment proof" because you'll have no real assets for anyone to take. Accordingly, you may wish to avoid paying high premiums for high levels of coverage when there's little or no potential benefit. However, if you're a 20-something who has significant assets, you should seriously consider coverage that will minimize your personal exposure and protect you, your family, and your assets. Your agent can give you guidance.

Get married or hold out to age 25

Although no one gets married just to save money on car insurance, you should know that when you do make your vows, you and your spouse will, for the most part, be considered less risky drivers than single individuals. As a result, your insurance company will send you a wedding present in the form of lower premiums.

Also, when you reach age 25, you hit a milestone in the eyes of most auto insurers and step into a new, slightly lower risk category. Everything else being equal, that means a lower rate.



Retirement Planning: The Basics

You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs

It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap

Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save

By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

• At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.

• What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.

• What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.

• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.



Build your retirement fund: Save, save, save

When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options

You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon.

Use the right savings tools

The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. Both 401(k) and 403(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company).

Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).



Taking Advantage of Employer-Sponsored Retirement Plans

Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. If your employer offers such a plan and you're not participating in it, you should be. Once you're participating in a plan, try to take full advantage of it.

Understand your employer-sponsored plan

Before you can take advantage of your employer's plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer's benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

• Your employer automatically deducts your contributions from your paycheck. You may never even miss the money--out of sight, out of mind.

• You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year.

• With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pretax basis. Your contributions come off the top of your salary before your employer withholds income taxes.

•• Your 401(k) or 403(b) plan may let you make after-tax Roth contributions--there's no up-front tax

benefit but qualified distributions are entirely tax free.

• Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.

• Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.

• You'll pay income taxes and possibly an early withdrawal penalty if you withdraw your money from the plan.

• You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.

• Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit. If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer's plan instead of somewhere else? One reason is that your pretax contributions to your employer's plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan--a big advantage if you're in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you'll pay income taxes on $90,000 instead of $100,000. (Roth contributions don't lower your current taxable income but qualified distributions of your contributions and earnings--that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die--are tax free.)



Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren't taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer's plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, you participate in your employer's tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 8 percent per year. You're in the 28 percent tax bracket and contribute $10,000 to each account at the end of every year. You pay the yearly income taxes on Account B's earnings using funds from that same account. At the end of 30 years, Account A is worth $1,132,832, while Account B is worth only $757,970. That's a difference of over $370,000. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can't max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you're vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer's match, you'll be surprised how much faster your balance grows. If you don't take advantage of your employer's generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6 percent of your salary. Each year, you contribute 6 percent of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer's plan could be one of your keys to a comfortable retirement. That's because over the long term, varying rates of return can make a big difference in the size of your balance.

Research the investments available to you. How have they performed over the long term? Have they held their own during down markets? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Finally, you may be able to change your investment allocations or move money between the plan's investments on specific dates during the year (e.g., at the start of every month or every quarter).

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer's retirement plan is yours to keep. You have several options at that point, including:

• Taking a lump-sum distribution. This is often a bad idea, because you'll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you're giving up continued tax-deferred growth.

• Leaving your funds in the old plan, growing tax deferred (your old plan may not permit this if your balance is less than $5,000, or if you've reached the plan's normal retirement age--typically age 65). This may be a good idea if you're happy with the plan's investments or you need time to decide what to do with your money.

• Rolling your funds over to an IRA or a new employer's plan if the plan accepts rollovers. This is often a smart move because there will be no income taxes or penalties if you do the rollover properly (your old



plan will withhold 20 percent for income taxes if you receive the funds before rolling them over). Plus, your funds will keep growing tax deferred in the IRA or new plan.



Estate Planning: An Introduction

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.

• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples

Married couples have unique estate planning challenges and opportunities. On the one hand, you can transfer your entire estate to your spouse gift and estate tax free under the unlimited marital deduction. This will postpone taxation until the death of the surviving spouse. While this may be a good outcome for couples with smaller estates, couples with combined assets in excess of the estate tax exemption amount ($3.5 million per person in 2009) may wind up paying more in estate taxes than is necessary because they've wasted the exemption of the first spouse to die. Couples in this situation need to plan in advance to avoid this result (perhaps by using a "credit shelter" or "bypass" trust, or some combination of marital trusts, often referred as an "A/B or A/B/C trust arrangement").

Note: Funding a bypass trust with funds from a retirement plan could have adverse income tax consequences.



Note: In the states that have "decoupled" their death tax systems from the federal system, using a formula provision to fund a bypass trust may increase the chance of having to pay state death taxes.

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (although a $133,000 annual exclusion, for 2009, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time.

Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement

If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried

Depending on the size of your estate when you die, you may need to be concerned about estate taxes.

Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent.

There is uncertainty about the exact form the federal estate tax system will take in future years. However, it appears that individuals with estates valued at under $1 million need not worry too much about federal estate taxes, those with estates between $1 million and $3.5 million should have some flexibility built into their plans, and those with over $3.5 million need to implement plans now to avoid having to pay federal estate tax.

TWhether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.



Tax Planning for Income

The goal of income tax planning is to minimize your federal income tax liability. You can achieve this in different ways. Typically, though, you'd look at ways to reduce your taxable income, perhaps by deferring your income or shifting income to family members. You should also consider deduction planning, investment tax planning, and year-end planning strategies to lower your overall income tax burden.

Postpone your income to minimize your current income tax liability

By deferring (postponing) income to a later year, you may be able to minimize your current income tax liability and invest the money that you'd otherwise use to pay income taxes. And when you eventually report the income, you may be in a lower income tax bracket.

Certain retirement plans can help you to postpone the payment of taxes on your earned income. With a 401(k) plan, for example, you contribute part of your salary into the plan, paying income tax only when you withdraw money from the plan (withdrawals before age 59½ may be subject to a 10 percent penalty). This allows you to postpone the taxation of part of your salary and take advantage of the tax-deferred growth in your investment earnings.

There are many other ways to postpone your taxable income. For instance, you can contribute to a traditional IRA, buy permanent life insurance (the cash value part grows tax deferred), or invest in certain savings bonds. You may want to speak with a tax professional about your tax planning options.

Shift income to your family members to lower the overall family tax burden

You can also minimize your federal income taxes by shifting income to family members who are in a lower tax bracket. For example, if you own stock that produces a great deal of dividend income, consider gifting the stock to your children. After you've made the gift, the dividends will represent income to them rather than to you. This may lower your tax burden. Keep in mind that you can make a tax-free gift of up to $13,000 per year per recipient without incurring federal gift tax.

However, look out for the kiddie tax rules. Under these rules, for children (1) under age 18, or (2) under age 19 or full-time students under age 24 who don't earn more than one-half of their financial support, any unearned income over $1,900 is taxed at the parent's marginal tax rate. Also, be sure to check the laws of your state before giving securities to minors.

Other ways of shifting income include hiring a family member for the family business and creating a family limited partnership. Investigate all of your options before making a decision.

Deduction planning involves proper timing and control over your income

Lowering your federal income tax liability through deductions is the goal of deduction planning. You should take all deductions to which you are entitled, and time them in the most efficient manner.

As a starting point, you'll have to decide whether to itemize your deductions or take the standard deduction. Generally, you'll choose whichever method lowers your taxes the most. If you itemize, be aware that some of your deductions may be disallowed if your adjusted gross income (AGI) reaches a certain threshold figure. If you expect that your AGI might limit your itemized deductions, try to lower your AGI. To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans.

Because you can sometimes control whether a deductible expense falls into the current tax year or the next, you may have some control over the timing of your deduction. If you're in a higher federal income tax bracket this year than you expect to be in next year, you'll want to accelerate your deductions into the current year. You can



accelerate deductions by paying deductible expenses and making charitable contributions this year instead of waiting until next.

Investment tax planning uses timing strategies and focuses on your after-tax return

Investment tax planning seeks to minimize your overall income tax burden through tax-conscious investment choices. Several potential strategies may be considered. These include the possible use of tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit.

Although income is generally taxable, certain investments generate income that's exempt from tax at the federal or state level. For example, if you meet specific requirements and income limits, the interest on certain Series EE bonds (these may also be called Patriot bonds) used for education may be exempt from federal, state, and local income taxes. Also, you can exclude the interest on certain municipal bonds from your federal income (tax-exempt status applies to income generated from the bond; a capital gain or loss realized on the sale of a municipal bond is treated like gain or loss from any other bond for federal tax purposes). And if you earn interest on tax-exempt bonds issued in your home state, the interest will generally be exempt from state and local tax as well. Keep in mind that although the interest on municipal bonds is generally tax exempt, certain municipal bond income may be subject to the federal alternative minimum tax. When comparing taxable and tax-exempt investment options, you'll want to focus on those choices that maximize your after-tax return.

In most cases, long-term capital gain tax rates are lower than ordinary income tax rates. That means that the amount of time you hold an asset before selling it can make a big tax difference. Since long-term capital gain rates generally apply when an asset has been held for more than a year, you may find it makes good tax-sense to hold off a little longer on selling an asset that you've held for only 11 months. Timing the sale of a capital asset (such as stock) can help in other ways as well. For example, if you expect to be in a lower income tax bracket next year, you might consider waiting until then to sell your stock. You might want to accelerate income into this year by selling assets, though, if you have capital losses this year that you can use to offset the resulting gain.

Note:You should not decide which investment options are appropriate for you based on tax considerations alone. Nor should you decide when (or if) to sell an asset solely based on the tax consequence. A financial or tax professional can help you decide what choices are right for your specific situation.

Year-end planning focuses on your marginal income tax bracket

Year-end tax planning, as you might expect, typically takes place in October, November, and December. At its most basic level, year-end tax planning generally looks at ways to time income and deductions to give you the best possible tax result. This may mean trying to postpone income to the following year (thus postponing the payment of tax on that income) and accelerate deductions into the current year. For example, assume it's December and you know that you're in a higher tax bracket this year than you will be in next year. If you're able to postpone the receipt of income until the following year, you may be able to pay less overall tax on that income. Similarly, if you have major dental work scheduled for the beginning of next year, you might consider trying to reschedule for December to take advantage of the deduction this year. The right year-end tax planning moves for you will depend on your individual circumstances.



Personal Deduction Planning

Taxes, like death, are inevitable. But why pay more than you have to? The trick to minimizing your federal income tax liability is to understand the rules and make the most of your tax planning opportunities. Personal deduction planning is one aspect of tax planning. Here, your goals are to use your deductions in the most efficient manner and take all deductions to which you're entitled.

Deductions lower your taxable income

Your first step is to understand how deductions work. You subtract certain deductions from your total income to arrive at your adjusted gross income (AGI). Then, you subtract other deductions and exemptions from your AGI to determine your taxable income. Your tax liability is calculated based on your taxable income. Generally speaking, therefore, the higher your deduction level, the lower your tax liability.

You can either take a standard deduction or itemize

After you've computed your AGI, you'll want to subtract the greater of either the standard deduction or the total of your itemized deductions. The standard deduction is a fixed dollar amount, indexed for inflation yearly, that is determined according to your filing status (e.g., married filing jointly, single) and certain circumstances. Itemized deductions are various deductions that are reported on Schedule A of your federal tax return (Form 1040). They involve certain personal expenses, such as medical expenses, mortgage interest, state taxes, charitable contributions, theft losses, and miscellaneous itemized deductions. If you have enough of these types of expenses, your itemized deductions may exceed your standard deduction. In that case, it would be to your advantage to itemize.

When filling out your tax return, how do you know whether to take the standard deduction or itemize? You should calculate your taxes using both methods, and go with the one that lowers your tax liability the most. Be aware that there are some limitations regarding who can use the standard deduction and who can itemize. Also, certain itemized deductions are available to you only if your expenses exceed a particular percentage of your AGI. For example, miscellaneous itemized deductions are allowed only to the extent that they (when totaled) exceed 2 percent of your AGI. So, if your AGI is $100,000, your first $2,000 of miscellaneous itemized deductions won't count toward your total itemized deductions. Your medical expense deduction may also be limited by your AGI.

The medical and dental expenses deduction: what it is, and how it involves your income level

The medical and dental expenses deduction is an itemized deduction that you may take (within certain limits) for unreimbursed medical and dental expenses you paid during the year for yourself, your spouse, and your dependents. You may be surprised to learn which medical and dental expenses are deductible and which are not; the line is sometimes blurry. For example, you can't deduct your expenses for nicotine gum, but you can deduct your fee for a smoking cessation program. Many expenses qualify for this deduction, including acupuncture treatments, crutches, eyeglasses, and prescription drugs. You should obtain IRS Publication 502, Medical and Dental Expenses, for an authoritative list of eligible and nondeductible expenses. If you don't review this list, you may miss out on some important tax-saving opportunities.

You can take this deduction only to the extent that your unreimbursed medical expenses exceed 7.5 percent of your AGI. That might sound complicated, but here's how it works. First, add up your eligible medical expenses. You can deduct only part of that total on Schedule A of your federal income tax return. The schedule will actually lead you through this calculation. On that form, you'll multiply your AGI by 7.5 percent (.075). The figure you come up with will represent the amount of your medical expenses that you cannot deduct. Subtract this figure from your total eligible medical expenses. The remaining amount is your medical deduction.



Proper timing of your deductions will minimize your taxes

For most people, income is reported in the year that it's received, while deductions are generally taken for the year in which expenses are paid. In many cases, you can control whether you incur an expense this year or next. That means that you can control the timing of your itemized deductions to some extent. If you're in a higher income tax bracket this year than you expect to be in next year, you may want to accelerate your deductions into the current year to minimize your tax liability. You can do this by paying deductible expenses before year-end and making charitable contributions before year-end. For example, if you have major dental work scheduled for January of next year, you can reschedule for December to take advantage of the deduction this year. Here are some tips:

• If you pay a deductible expense by check, make sure it's dated and mailed before year-end. It needn't clear the bank by year-end, however.

• If you pay by credit card, the expense is deductible in the year the charge is incurred, not when the credit card bill is paid.

• A mere pledge or promise to make a charitable contribution is not deductible.

• Along with your cash contributions to a charity, remember to deduct noncash contributions like clothes. You can also deduct mileage if you use your car for charitable purposes.



Evaluating a Job Offer

If you're considering changing jobs, you're not alone. Today, few people stay with one employer until retirement. It's likely that at some point during your career, you'll be looking for a new job. You may be looking to make more money or seeking greater career opportunities. Or, you may be forced to look for new employment if your company restructures. Whatever the reason, you'll eventually be faced with an important decision: When you receive an offer, should you take it? You can find the job that's right for you by following a few sensible steps.

How does the salary offer stack up?

What if the salary you've been offered is less than you expected? First, find out how frequently you can expect performance reviews and/or pay increases. Expect the company to increase your salary at least annually. To fully evaluate the salary being offered, compare it with the average pay of other professionals working in the same field. You can do this by talking to others who hold similar jobs, calling a recruiter (i.e., a headhunter), or doing research at your local library or on the Internet. The Bureau of Labor Statistics is a good source for this information.

Bonuses and other benefits

Next, ask about bonuses, commissions, and profit-sharing plans that can increase your total income. Find out what benefits the company offers and how much of the cost you'll bear as an employee. Don't overlook the value of good employee benefits. They can add the equivalent of thousands of dollars to your base pay. Ask to look over the benefits package available to new employees. Also, find out what opportunities exist for you to move up in the company. This includes determining what the company's goals are and the type of employee that the company values.

Personal and professional consequences

Will you be better off financially if you take the job? Will you work a lot of overtime, and is the scheduling somewhat flexible? Must you travel extensively? Consider the related costs of taking the job, including the cost of transportation, new clothes, a cell phone, increased day-care expenses, and the cost of your spouse leaving his or her job if you are required to relocate. Also, take a look at the company's work environment. You may be getting a good salary and great benefits, but you may still be unhappy if the work environment doesn't suit you. Try to meet the individuals you will be closely working with. It may also be helpful to find out something about the company's key executives and to read a copy of the mission statement.

Deciding whether to accept the job offer

You've spent a lot of time and energy researching and evaluating a potential job, but the hardest part is yet to come: Now that you have received a job offer, you must decide whether to accept it. Review the information you've gathered. Think back to the interview, paying close attention to your feelings and intuition about the company, the position, and the people you came in contact with. Consider not only the salary and benefits you've been offered, but also the future opportunities you might expect with the company. How strong is the company financially, and is it part of a growing industry? Decide if you would be happy and excited working there. If you're having trouble making a decision, make a list of the pros and cons. It may soon become clear whether the positives outweigh the negatives, or vice versa.

Negotiating a better offer

Sometimes you really want the job you've been offered, but you find the salary, benefits, or hours unfavorable. In this case, it's time to negotiate. You may be reluctant to negotiate because you fear that the company will rescind the offer or respond negatively. However, if you truly want the job but find the offer unacceptable, you may as well



negotiate for a better offer rather than walk away from a great opportunity without trying. The first step in negotiating is to tell your potential employer specifically what it is that you want. State the amount of money you want or the exact hours you wish to work. Make it clear that if the company accepts your terms, you are willing and able to accept its offer immediately.

What happens next? It's possible that the company will accept your counteroffer. Or, the company may reject it, because either company policy does not allow negotiation or the company is unwilling to move from its original offer. The company may make you a second offer, typically a compromise between its first offer and your counteroffer. In either case, the ball is back in your court. If you still can't decide whether to take the job, ask for a day or two to think about it. Take your time. Accepting a new job is a big step.



How long should I keep copies of my tax returns?

Question:

How long should I keep copies of my tax returns?

Answer:

Generally, you should keep your tax returns and supporting information (i.e., receipts, W-2 forms, bank statements) for six to seven years. The IRS has three years to audit a return, or two years after you have paid the tax, whichever is later. However, if income was underreported by at least 25 percent, the IRS can look back six years, and there is no time limit for fraudulent tax returns.



How much money should I keep in a savings account for emergencies?

Question:

How much money should I keep in a savings account for emergencies?

Answer:

Many financial professionals suggest that you put away three to six months' worth of living expenses for emergencies. If you lose your job, or become disabled and don't have adequate disability insurance, you'll need that money to pay your regular monthly expenses, such as mortgage payments, insurance premiums, groceries, and car payments, until you can find another job. Without such an emergency fund, a period of unemployment could put your assets at risk. Similarly, if your car breaks down or your spouse has a medical emergency, you'll want to have the necessary cash to pay the bills. You don't want to be faced with an immediate need for cash, only to discover that you don't have any.

You may have already set up an emergency fund. Did you put the cash in a five-year certificate of deposit (CD) or other long-term investment? In an emergency, you will need to get at those funds immediately. You can certainly pull your money out of the CD early, but you'll pay a penalty. It's better to keep some funds more liquid, in a traditional savings account, a money market deposit account, or a six-month CD, for example. That way, the cash will be readily available when you need it.

Finally, keep your emergency fund separate from your everyday accounts. You might even want to use a different bank. Unless you are extremely disciplined, you'll be tempted to spend those extra funds if you keep them in your checking account. Remember, if you can put off an expense until next week, it is probably not an emergency.



How can I reduce my spending?

Question:

How can I reduce my spending?

Answer:

To reduce your spending, you first need to know where your money goes. Start out by keeping track of all of your expenses for a month. None are too small or insignificant: the daily newspaper, coffee on the way to work, an extra gallon of milk, that burger at the fast-food outlet. Next, categorize the expenses so you can see what you spend and where you spend it. Be sure to factor into your monthly expenses a prorated portion of the annual cost of your irregular expenses (e.g., clothes, gifts, car maintenance, insurance premiums).

Expenses generally fall into two categories. Essential expenses are ones you can't avoid (e.g., rent, utilities, groceries, car insurance). Discretionary expenses are ones you choose to incur (e.g., eating out, entertainment, gifts, cigarettes, videos). Discretionary expenses are the ones over which you will have the most control. Do you buy a lot of books? Try the library instead. Take coffee or lunch to work rather than buy it once you get there. Limit eating out to once a week rather than twice. Quit smoking, or at least begin to cut back on the number of packs you smoke each week.

Although essential expenses are fixed, there may be ways to reduce them. Make sure you shut off the lights and TV when you leave the room. E-mail your distant friends and relatives rather than call them long-distance. Change the oil in your car on a regular basis to avoid more costly repairs due to neglect. Review your insurance policies: Can you save on your premiums by taking a nonsmoker discount or increasing your deductibles? Clip the grocery store coupons, always shop from a list, and avoid the impulse items at the end of the aisles.

Pick a realistic goal for your monthly spending reduction and try not to make too many changes all at once. To see how big a difference this can make, do the math. If you start by committing to reduce your spending by $2 a day, that's $730 a year! Set the saved money aside, perhaps in a savings account for your planned vacation, or use it for a specific purpose, such as reducing debt faster.



Will debt consolidation hurt or help my credit rating?

Question:

Will debt consolidation hurt or help my credit rating?

Answer:

Debt consolidation can lead to an improvement in your credit rating by making your debt easier to manage. Sometimes, debt consolidation means taking a loan at a lower interest rate to pay off several smaller loans at higher interest rates. Making one payment instead of many may help you keep your debt under better control, make it easier for you to make timely payments, and thus improve your credit rating.

Although managing your debt will improve your credit record in the long run, consolidation can have a more immediate impact. For example, if you have 10 accounts in default on your credit report, your lenders will consider you a bad credit risk. But if you can pay off those accounts with a consolidation loan, you have eliminated the problem. Your new credit report will now show that you cured the defaults and retired the debts. And you have only one open account--your consolidation loan. As long as you stay current on the consolidation loan payments, your credit rating will be viewed more favorably than before.

Remember, your goal is to manage your debt by making your payments more affordable. You can do this by lowering your interest rate or increasing the number of months you have to pay off the debt. There is no point in consolidating if you don't achieve one or both of these goals--you'll want to be sure you can afford the consolidation loan and make the payments. Otherwise, you'll end up back where you started.

Although debt consolidation has its advantages, you must recognize that by extending the time to pay off your debt, you will ultimately be paying more in interest charges. Also, once you get a consolidation loan, you should consider closing some of your credit card accounts so that you can't simply run up your bills again.



How can I lower the interest rate on my credit card?

Question:

How can I lower the interest rate on my credit card?

Answer:

One way is to call your existing lender and try to negotiate a lower rate. Often, the threat of losing a customer and the associated income from your finance charges can inspire a card company to accept a lower interest rate and keep the relationship. Negotiation is most effective if you have a stable payment history with the company.

If your present card company won't negotiate, you can transfer your existing balance to a new lender with a lower rate. Be careful, however, that it isn't a teaser rate that's offered for a few months and then will be raised higher than your existing rate. Ask for a clear accounting of what the rate applies to (e.g., balance transfers, new purchases, cash advances), as well as all other card limitations and penalties. Find out if there is a transaction fee before you agree to the transfer.

Keep in mind that lenders are making it increasingly difficult to continuously "surf" for low credit card rates. Some card companies now restrict balance transfers during a set time (e.g., a year) after you sign up. If you try to transfer to another card during that period, you may be retroactively charged a higher rate.



Should I pay cash for a car or finance it?

Question:

Should I pay cash for a car or finance it?

Answer:

The least expensive way to buy a car is to pay cash for it, because with cash, you can buy only what you can afford, and you avoid paying the finance charges associated with a car loan. Nonetheless, the reality is that you may not be able to afford to pay cash for a new car. If you buy a used car with your cash, you may be saving the purchase price and the interest payments. However, you run the risk of the potentially higher cost of repairs, and you could also be buying someone else's car problems.

Conversely, financing your car allows you to pay off other debts with your cash. For example, suppose you have credit card debts charging interest at the rate of 18 percent and you can get a car loan at the rate of 10 percent. Here, it makes good financial sense to use your cash to pay off the debt with the highest interest rate and then take out a car loan at a lower interest rate.



How much will my monthly car payment be?

Question:

How much will my monthly car payment be?

Answer:

If you're financing all or some part of your new car's cost, and you want to calculate your monthly payment in advance, you will need to know the amount you are financing, the interest rate, and the loan term (i.e., the number of months to full repayment). If you have these three numbers, an inexpensive financial calculator can give you the amount of your payments. You can also get the information from the automobile dealer or your own bank. You can even search the Internet for any of the websites that feature automobile payment calculators.

It is important to remember that the amount you are financing may include taxes, title and registration fees, delivery charges, and add-ons such as extended warranties, service agreements, and credit life insurance. The simplest ways to minimize the amount you are financing are to increase your down payment, shop around for a lower interest rate, or waive optional add-ons. Minimizing the amount you are financing will also minimize your monthly payment. However, be aware that extended terms of up to 72 months are often available when larger amounts are financed, whereas you may only qualify for 48-month financing with a smaller loan. You will usually pay a higher interest rate to get extended terms, but the additional months should lower your payment. Consider this carefully. Six years of payments may outlast the value of your car, and you will pay an additional two years of interest charges.

If you decide to lease a car, your monthly payment may be lower than if you purchased the same vehicle with a minimal down payment. With a lease, you aren't buying the car--you're paying only for the depreciation of the car's value over the period that you plan to use it (plus a lease fee). It is a little more difficult to estimate the monthly payment for a lease because it's based on the car's expected depreciation over the lease term. That amount varies, depending on the make and model of the automobile. However, several Internet sites provide lease calculators to estimate your lease payments. You can also ask the car dealership (or lease company) to quote you a payment amount.



How can I get credit if I have no credit history?

Question:

How can I get credit if I have no credit history?

Answer:

It's the old catch-22. You cannot establish a credit history without having credit, and you cannot get credit without a credit history. But if you work at it, this problem can be overcome. While you create a history, be sure your efforts will be reported to the credit bureaus.

Use the credit history of a family member or friend to leverage yourself into credit in your own name. If you are added as a joint party or authorized user to another person's credit card, the lender may report the account's payment history on your credit report.

If you have a checking account, ask your bank for overdraft protection (or cash reserve) privileges. With this feature added to your account, you can create credit by writing a check for an amount greater than the balance in your account (but not greater than the limit of your cash reserve line!). Alternatively, ask the bank for a small personal loan. As you repay these debts, you establish a credit history. Make sure the bank reports that history to the credit bureaus.

Secured credit cards are also a good way to get started. Your credit line is secured by your deposit in the bank, minimizing the creditor's risk. For example, if you deposit $500 in the bank, you get a credit card with a maximum limit of $500. As you use the card and make payments, you establish a credit history. These cards have high interest rates, but your goal is only to charge what you can afford to repay. As you repay the debt, you establish a repayment pattern seen by other creditors.

You may qualify for a department store charge card or gas card. Because these cards have lower credit limits and may be used only with the companies that issue them, the lending guidelines may be more liberal than those for major credit cards.

If you still have difficulty obtaining credit in your own name, consider a collateralized or cosigned loan. With a collateralized loan, the item you pledge as collateral (such as a car) minimizes the risk to the credit grantor. With a cosigned loan, your cosigner is equally liable for the balance. Spreading the responsibility for repayment in this fashion minimizes the lender's risk. Successful repayment of these types of loans can then be used to establish your own credit history.



Should I buy a home or continue renting?

Question:

Should I buy a home or continue renting?

Answer:

Most people face this question at some time in their lives. Buying a home is part of the American dream. It's also one of the biggest financial investments you'll ever make.

One of the main advantages of buying a home is that you build equity in your property. For example, if you paid rent at $1,000 per month for 10 years, you would have spent $120,000 on rent and have nothing to show for it. However, if you had purchased your home and made $1,000-per-month mortgage payments for 10 years, you would have paid off a sizable portion of your mortgage. And if you decided to sell your home, you might make a profit.

Before buying a house, remember that your lending institution will want proof that you have money saved for the down payment and closing costs. If your savings won't cover these costs, you should probably continue to rent for the short term while establishing an ambitious savings plan.

Even though buying allows you to accumulate a valuable asset, renting also has advantages. You may spend less time doing maintenance than if you owned the home, and you could relocate to another home more easily. In addition, you would probably pay less per month for rent than you would for a typical mortgage payment. This would leave you with more money to spend on whatever you choose.

Remember, it's not easy to buy and own a home. Many people continue to rent throughout their lives. But if you decide to buy a home, start saving now so that someday you will own the home of your dreams.



Should I buy or lease a car?

Question:

Should I buy or lease a car?

Answer:

There is no definitive answer--you must determine which option works best for you. Use these simple guidelines to help you decide. How long will you keep the car? Leases typically run two to four years. If you like the idea of driving a new car every few years, consider leasing. If you prefer to keep a car until you drive it into the ground, or like the idea of ownership because it gives you equity in the car, consider buying. How large of a monthly payment can you afford? When you buy a car, your payments are based on the total purchase price of that car. Compare this with leasing, where your payments are based on the car's expected decrease in value over the term of the lease (its depreciation). The lease payments may be low enough to put you behind the wheel of your dream car, without the need to worry about a down payment. Usually, you will only need to come up with your first payment and a security deposit to secure a lease.How will you treat the car? Analyze your driving habits. A typical lease will include 12,000 to 15,000 miles per year. If you exceed this amount, you may have to pay extra (e.g., $0.15 per mile) at the end of your lease. Therefore, if you travel great distances for work or intend to take any cross-country trips, buying may be the better option. Also, consider your surroundings. Most lease agreements allow only normal wear and tear. If you know you are tough on your car, or if you live in a neighborhood with only on-street parking, a lease may not be right for you. Remember, if you lease a car, you must pay for any nonwarranty repairs (e.g., a dent in the door), but those repairs benefit the leasing agency, not you. When you buy a car, it's yours to do with as you please--you decide if the dent in the door gets fixed.



I get a lot of credit card offers. How can I tell which one is best?

Answer:

Start by carefully reading the advertisement or application you've seen or received. It may seem like a lot of jargon, but that fine print contains important information about terms and costs. Here are three points to consider when comparing credit card offers:

Annual percentage rate (APR): What interest rate will apply to outstanding balances? If you plan to carry a balance, it's especially important to choose a card that has a low APR. But don't be fooled by a low introductory rate. It may apply for only a few months, and only to balance transfers, not new purchases. It's essential to understand what rate will apply once the introductory period is over.

Find out, too, if the APR will change over time. If the rate is variable, you can expect it to go up or down periodically because it's tied to an index (often the prime rate) that changes. If the rate is fixed, it won't fluctuate, but that doesn't mean it will stay the same forever. A credit card issuer can change your rate at any time, as long as you're given written notice 45 days in advance of the rate change. And find out what will happen to your APR if you make a late payment. Some card issuers send your rate skyrocketing if you pay your bill late just one or two times. (Note: After February, 2010, a creditor generally may only raise the rate on an existing balance if the account is 60 days past due.)

Grace period: How long will you have to pay your balance in full before interest starts accruing? If you plan to pay off your balance every month, you'll want to look for a card that offers a relatively long grace period (e.g., 25 to 30 days).

Fees: What fees will apply? If you plan to pay off your balance every month, avoid signing up for a card that has an annual fee. If you plan to carry a balance, it may be worth paying a fee if the interest rate is low enough. And watch out for hidden transaction costs. Compare the fees you'll be charged for transferring your balance, using your card to get a cash advance, exceeding your credit limit, or paying your bill late.

Finally, even if you've carefully read through the offer, you may still have questions. If so, call the credit card issuer before signing an application.



Are my student loan payments tax deductible?

Answer:

The interest portion might be, thanks to the student loan interest deduction. The maximum deduction is $2,500 in 2010. You don't need to itemize to claim this deduction.

To qualify, you must meet two requirements:

First, the student loan on which you're paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students.

Second, you must meet income limits. In 2010, to take the full student loan interest deduction, single filers must have a modified adjusted gross income (MAGI) below $60,000 (below $120,000 for married filing jointly). A partial deduction is available for single filers with an MAGI between $60,000 and $75,000 (between $120,000 and $150,000 for married filing jointly). These income limits are adjusted annually for inflation.

If you paid over $600 of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E from your lender, showing the total amount of interest you paid for the year. If not, contact your lender to request this information.



How will I ever pay off my student loans?

Question:

How will I ever pay off my student loans?

Answer:

As the cost of post-secondary education continues to increase and you take on further student loan indebtedness to pay for it, you may feel as if you are leaving the ivory tower with a mortgage on your back. You may be surprised to discover that some or all of your indebtedness can be forgiven if you are employed in certain public-service sectors, teach in teacher-shortage areas, or go into the Peace Corps.

If these choices aren't available to you, you must find a way to budget for your student loan payments. Review your household income and expenses. Can you reduce your spending on entertainment, luxuries, and discretionary items? If so, you can divert these saved funds toward monthly principal prepayment of your student loans, thus shortening the overall repayment term and saving on interest charges. You are always permitted to prepay the principal of student loans, partially or in full, without penalty.

Would consolidating your loans or refinancing your loans make the payment schedule easier? Check with your current lender to see what options you might have.

Are you in a position to take on a second, part-time job? The income from this job could be used to reduce your student loan indebtedness. Can you devote a tax refund, gift money, or inheritance to principal prepayment? Even infrequent payments of this sort will ultimately reduce your loan balance and save you both time (repaying the debt) and money (the interest on the debt).



Can I refinance my student loan?

Question:

Can I refinance my student loan?

Answer:

Generally, the standard repayment option for student loans involves a fixed monthly payment for a 5- to 10-year term. With increasing tuition costs, however, it's possible you may graduate with student loan payments that are simply unaffordable. Moreover, if you have multiple student loans, you may be required to make several different monthly payments to different loan servicers. Consolidation of your loans may thus make your debt more manageable.

You can consolidate your federally subsidized student loans through a variety of programs. The process pays off your existing loans with a single new loan. Most consolidation programs offer a variety of repayment options. You can choose an extended payment option, a graduated payment option, or (in some cases) an income-sensitive repayment option.

An extended payment option allows the term for repayment to be as long as 30 years. Although this can dramatically lower your monthly payment, it can also dramatically increase the total cost of the loan. The interest rate may be higher, and interest charged on any unpaid principal will continue to accrue for a longer period of time. However, as with all consolidation programs, you can make prepayments against principal at any time without penalty.

A graduated payment option starts off with lower monthly payments that increase over the term of the loan. Theoretically, as your income increases, you are better able to afford the higher payments.

An income-sensitive repayment option ties your monthly payments to your income level. The higher your income, the higher the required payment. Conversely, if your income drops, the required monthly payments may be reduced. This option requires you to allow the lender access to your federal tax return information.

Of course, you are always free to explore other refinancing options, such as an equity loan or a loan against a retirement plan. However, you should explore carefully the advantages and disadvantages of these options before pursuing any one of them.



My friend and I share an apartment. Will her renters policy cover my possessions?

Question:

My friend and I share an apartment. Will her renters policy cover my possessions?

Answer:

Unfortunately, renters insurance and other homeowners insurance policies are designed for single people and traditional families. So when unrelated people share a residence (in this case, you and your friend), insurance coverage can become complicated.

Insurance laws on this topic vary from state to state, and policies vary from one company to the next. However, most insurance companies recommend that each tenant maintain a separate renters insurance policy to cover his or her personal property.

Some insurance companies do allow multiple roommates to be listed on a single renters insurance policy. If your insurance company structures policies in this way, you and your roommate can purchase one renters insurance policy to cover all of your collective possessions.



How much health insurance coverage do I need?

Question:

How much health insurance coverage do I need?

Answer:

Unless you're one of the lucky few who can afford to pay all of their medical expenses out of pocket, you need enough health insurance to cover your medical expenses, both anticipated and unanticipated. In addition to routine exams, prescription coverage, and minor illnesses, you need to consider the expense of emergency-room visits and the possibility of surgery.

Health insurance is usually sold in take-it-or-leave-it packages. Within each package, little or no flexibility exists in terms of coverage, dollar limits, deductibles, or co-payments. The only choice you may have is which package to buy, and that depends on how much you can afford or want to pay.

Employers often offer health insurance as part of their employee benefits package and pay a portion of the premiums. If possible, you'll want to buy coverage through your employer, since it's less expensive than if you purchased an individual policy on your own. As for the type of coverage you can purchase, you really don't have that much choice. Most employers offer only one or two options (e.g., HMO, PPO, or traditional indemnity plan).

If your employer doesn't offer health insurance, contact your state insurance department for information on possible individual health insurance programs for which you may qualify. If you are self-employed, check to see if you can join business or industry associations that offer group health insurance. Naturally, you'll want to purchase the best package you can afford. If you're retired and relying on Medicare, look into buying a Medigap policy that covers medical expenses that Medicare doesn't, such as the inpatient deductible.



Do I need disability insurance?

Question:

Do I need disability insurance?

Answer:

Everyone who works and earns a living probably needs disability insurance. If you suddenly became disabled and were unable to work, could you still meet your financial obligations? Could you get by without having to use savings or borrow from relatives? If not, you'll want to make sure that you have adequate disability insurance coverage that is designed to pay your expenses while you are disabled and cannot work.

Because you have to meet a strict definition of disability to qualify for benefits from government programs (e.g., Social Security), you shouldn't rely on them as your only sources of income if you became disabled. Instead, find out if you have group disability insurance through your employer. It may be paid for by the company, or you may pay part of the premium. If disability coverage is not available at work or if you are self-employed, you should consider purchasing an individual policy from a private insurer. Most policies pay between 50 and 70 percent of your gross income and can last anywhere from a couple of months to age 65.



How can I reduce my auto insurance bill?

Question:

How can I reduce my auto insurance bill?

Answer:

Insurers usually base their auto insurance rates on criteria such as your age, driving record, and the type of car you drive. Rates vary from company to company, however, so a good way to save money is to shop around--you may find that another insurer offers the same coverage at a lower rate.

Some of your coverages may be subject to deductibles (money you must pay before your insurance kicks in). Raising your deductibles can also help you save money. For the most part, the higher your deductibles, the lower your premiums. Before you raise a deductible, though, you'll want to be sure you can cover the out-of-pocket expense should an accident occur. Are you more concerned with lower premiums or full insurance coverage?

Many insurance companies offer credits or discounts. For example, an insurer might provide discounts to those who have safe driving records or to those who insure more than one car with them. Check to see what types of credits and discounts your insurer offers.

To save money, you may also want to rethink your optional coverages. For example, if you have an older car in poor condition, it may make sense to drop your collision and comprehensive coverage if possible. A claim paid by your insurance company on such a car may be minimal and might not even exceed what you'd pay in premiums and deductibles.



What's the difference between an HMO and a PPO?

Question:

What's the difference between an HMO and a PPO?

Answer:

A health maintenance organization (HMO) and a preferred provider organization (PPO) are both managed care plans. A managed care plan is a method of paying for and providing health care for a set fee using a network of hospitals, doctors, and other health-care professionals. The managed care plan monitors (and sometimes limits) the care that its doctors provide to members. Its goal is to ensure that unnecessary and expensive services to its members are minimized.

HMOs are the most popular form of managed care. Here, all health services and financing go through one organization. Services include inpatient and outpatient care and prescription drug benefits. The HMO offers a network of hospitals and health-care professionals that its members must use. These health-care professionals are either employed by or under contract to the HMO. Members pay a monthly fee that does not change (unless, for example, the entire fee structure changes annually) regardless of the care they may need.

PPOs are far less restrictive than HMOs. A PPO consists of a group of hospitals and health-care professionals who agree to provide care to members at a reduced cost. A PPO is designed to provide affordable health care while maintaining flexibility for its members, who do not have to use the services within the network but are encouraged to do so. Staying within the network means that their costs are lower. If members go outside the network, they are still covered but must pay a higher deductible and contribute a higher co-payment.



Do I need to get auto insurance before I buy a new car?

Question:

Do I need to get auto insurance before I buy a new car?

Answer:

You don't need automobile insurance before you buy a new car, but you will need it before you can drive the car home from the dealer's lot.

If you know ahead of time the exact car you're going to buy, you can call your insurance agent with the information. After asking you several questions and getting all the necessary information, the agent will add the new car to your existing insurance policy.

If you're at the automobile dealership and want to buy a car and immediately drive it home, call your agent from the dealership. Give the agent all the necessary information over the telephone, and the agent will issue an insurance binder that is effective immediately. This binder will serve as your insurance policy for the new car until your agent can add the new car to your existing policy.

If you do not have an insurance agent, the car dealer may be able to refer you to one. Chances are, though, that the agent will not insure you over the telephone. Most agents require that you visit them in person to fill out an application and put down a deposit. The best thing to do is to establish a relationship with an insurance agent before you buy a car. This is to your advantage, as the agent will have time to research the best markets for you.

Never drive a car without insurance. If you were in an accident and had no insurance, you could quickly be in severe financial and legal trouble. If you cannot get your new car insured right away, leave the car at the dealership. Get the insurance as soon as you can and then go pick up your car.



I'm considered a "risky driver." How can I get insurance?

Question:

I'm considered a "risky driver." How can I get insurance?

Answer:

First, check with your insurance agent to be sure you really are considered a risky driver. Of course, you'll want to avoid the classification if possible, and such definitions vary by company and by state. The classification of risky driver includes the number and type of accidents that you're involved in, whether you are at fault in the accidents, and the type of automobile you drive. The last three to six years of your driving history will determine the classification.

Some private insurance companies specialize in providing automobile insurance for risky drivers and those who drive racing or sports cars. This insurance is very expensive, however. If you can't buy insurance from a private company, you may be able to buy it through your state program, but again, it will be expensive. The available coverages and amounts of insurance will probably be far more limited than those in the regular or preferred market. Check with your state's insurance department.

There are ways you can avoid the label of risky driver. The most important is to become a safe driver. You can also change the car you drive--premiums for sports cars are much more expensive than for regular sedans. You don't have to sell your favorite sports car, but you can save money by limiting the miles you put on it annually.

Your insurance agent will know the best markets for risky drivers and can guide you.



How aggressive should I be when I invest for retirement?

Question:

How aggressive should I be when I invest for retirement?

Answer:

It depends. The right answer in your case will depend on a number of key factors. These include, among others, your income and assets, your attitude toward risk, whether you have access to an employer-sponsored plan at work, the age at which you plan to retire, and your projected expenses during retirement. But it's possible to lay down some guidelines that may be of help to you.

The conventional wisdom used to be that you should invest aggressively when you're young and then move gradually toward a more conservative approach. By the time you retired, you would probably end up with a portfolio made up mostly of high-grade bonds and other low-risk investments. This model may have worked at one time, but the retirement landscape has changed dramatically in the past 20 years or so. As a result, many of our basic assumptions about retirement planning have been overturned.

The dwindling number of traditional pension plans and concerns about Social Security have led people to take greater responsibility for their own retirement. Investing more aggressively over the long term has become common as people realize that, without anyone else to take care of them, they need to build the largest retirement nest egg they possibly can. In fact, many people these days primarily use growth vehicles (e.g., certain stocks and mutual funds) for their investment portfolios and tax-deferred retirement plans (e.g., 401(k)s and IRAs).

Other factors have changed the way we think about and invest for retirement as well. People tend to retire younger, live longer, and do more during retirement than they used to. With the likelihood that you will have well over 20 years of activity to fund, it's probably a good idea to invest more aggressively for retirement than previous generations did. And there's no reason to switch over to fixed-income securities upon reaching retirement. Many financial planners suggest that you keep a suitably balanced portfolio, including some of your assets in growth-oriented investments, even after you retire.



I think it's time to start planning for retirement. Where do I begin?

Question:

I think it's time to start planning for retirement. Where do I begin?

Answer:

Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. With thousands of investment possibilities, complex rules governing retirement plans, and so on, most people don't even know where to begin. Here are some suggestions to help you get started.

First, set lifestyle goals for your retirement. At what age do you see yourself retiring, and what would you like to do during retirement? If you hope to retire at age 50 and travel extensively, you'll require more planning than other people. You'll also need to account for basic living expenses, from food to utilities to transportation. Most of these expenses don't disappear when you retire. And don't forget that you may still be paying off your mortgage or funding a child's education well into retirement. Finally, be realistic about how many years of retirement you'll have to fund. With people living longer, your retirement could span 30 years or more. The longer your retirement, the more money you'll need.

Next, project your annual retirement income and see if that income will be enough to meet your expenses. Identify the sources of income you'll have during retirement, and the yearly amount you can expect to receive from each source. Common sources of retirement income include Social Security benefits, pension payments, distributions from retirement plans (e.g., IRAs and 401(k)s), and dividends and interest from investments. If you find that your retirement income will probably meet or exceed your retirement expenses, you're in good shape. If not, you need to take steps to bridge the gap. Consider delaying retirement, saving more money, or taking more investment risk.

This is just a starting point. The further you are from retirement, the harder it is to project your future income and expenses. If you're ready for more detailed planning, consult a financial professional.



How can I protect myself against identity theft?

Answer:

The chance that someone will assume your identity to open fraudulent bank or credit accounts is increasing as thieves become more sophisticated. The best way to protect yourself is to try to prevent this from happening in the first place. Here are some ideas:

• Make a list of all of your credit cards, even those you don't carry in your wallet. Include account numbers and the names and emergency phone numbers of each issuer. Store this in a secure place that's quickly accessible to you. Don't keep it in your wallet!

• If possible, don't let your credit card out of your sight when you use it to pay for a store or restaurant purchase.

• Don't carry your birth certificate or Social Security card in your wallet.

• Install a locked mailbox to prevent mail theft. Call your credit card company or bank immediately if your statement doesn't show up on time.

• When dining out, keep your purse or wallet secure. Leaving it on the table when you go to the salad bar is a no-no.

• Use drive-through ATMs if possible. If you can't, use ATMs inside stores or in well-lit, well-trafficked areas. Never let anyone see you type in your personal identification number, and don't write it on your ATM card.

• Shred preapproved credit card or loan applications, and those checks your credit card company mails you, before you throw them in the trash.

• Check your bank statements as soon as you receive them, and order a copy of your credit report at least once a year. Check it over for signs of fraudulent activity.

• If you live in a state that uses Social Security numbers on your driver's license, ask for a randomly assigned number.

• Don't give out your Social Security, credit card, or bank account number to anyone who calls you. Give them out only when you have initiated the call.

• If you are concerned about a potential scam, call the local police.

If your wallet or personal identification is stolen, don't wait. Minimize potential damage by calling the police and other parties such as your credit card companies, your bank, and the three major credit bureaus (Experian (888) 397-3742, Equifax (800) 685-1111, and Trans Union (800) 680-7289). Ask each credit bureau to place a fraud alert on your credit report to alert creditors that your financial information is or may be compromised.



How do I stop those annoying telemarketing calls?

Question:

How do I stop those annoying telemarketing calls?

Answer:

How many times have you just sat down to dinner with your family when the phone rings? You think the call could be important, so you pick up the phone. But on the other end is Susie from the Abracadabra Corporation. She's calling to let you know that she has a great offer for you this evening. If you're like most people, you either hang up on Susie in the middle of her sales pitch or wait until she's finished to say, "I'm not interested."

But if you want telemarketers to stop calling you, you need to say that when they call. Once you tell a telemarketing firm to put you on its "do not call" list, it is required by law to do so. If a telemarketing company continues to call, you may be able to take that firm to court. If you find yourself in this situation, be sure to document the calls (e.g., dates, times, company name, the caller's name) and consult an attorney for more information.

Unfortunately, the effectiveness of this technique is limited. You may put an end to Susie's calls, but Betty, Joe, Lou, and Ben are standing by, waiting to call you. A better way to end telemarketing calls is to sign up for the National Do Not Call Registry. This free federal service, managed by the Federal Trade Commission (FTC), makes it illegal for telemarketers to call you once your number is included on the registry. To sign up, visit www.donotcall.gov or call (888) 382-1222.

Many states that maintain "do not call" registries automatically transfer names from their lists to the national registry, so once you've signed up for your state's registry, you may not need to re-register for the national list. You won't receive any confirmation once your number has been added to the national registry, but you can verify your status by contacting the FTC through the website or phone number listed above.

Although you should receive far fewer dinnertime calls once you've signed up for the national registry, don't expect telemarketing calls to end completely. Because certain calls don't fall under federal rules, you may continue to receive calls from companies with which you have an established business relationship, from charities or political organizations soliciting donations, or from companies doing phone surveys. To end these calls, you'll have to ask these callers, one by one, to put you on their organization's "do not call" list.



Should my partner and I buy a house together even though we're not married?

Question:

Should my partner and I buy a house together even though we're not married?

Answer:

If you want to buy a home with your partner, go ahead. Together, you may be able to qualify for a larger mortgage than if one partner alone applied for the loan.

However, be aware that unmarried partners have some unique considerations that married couples don't have. The laws dealing with the distribution of property when a couple splits up or a partner dies are few and vague when the couple is not married. So it's crucial for unmarried partners to have a detailed written agreement regarding their respective ownership interests in the property and their intentions for distribution of the property if either partner should die or if the relationship ends. Both partners should also keep thorough and accurate records of their respective contributions.

You and your partner can own the property in one of many ways, including:

• Joint tenants with rights of survivorship

• Tenants in common

• Individually in one of your names

• In trust

Joint tenancy with rights of survivorship means that when one partner dies, the surviving partner automatically owns the entire property, bypassing the probate process. This way of owning property may make it more difficult to sell your share of the property without your partner's consent. However, it may also offer creditor protection because neither partner owns a separate share; instead, both own equal rights in the entire property.

As tenants in common, you and your partner each can leave your portion of the property to whomever you choose in your wills. Creditors of tenants in common may have an easier time attaching the property than if it were owned jointly with rights of survivorship.

You and your partner may decide that only one of you will own the property. However, if you choose individual ownership, beware. The person named on the deed will be able to sell the property without the consent or even the knowledge of the other partner.

You can also choose to own the property in trust, with the trust agreement spelling out the rights and obligations of each partner.

You'll want to get advice from an experienced attorney on all of the ownership options available to you and your partner.



My radio broke two months after I bought it. What can I do to get my money back?

Question:

My radio broke two months after I bought it. I tried to return it to the store, but it won't give me a refund. What can I do to get my money back?

Answer:

When your radio breaks and the store won't accept a return, you have several options. If you purchased the radio with a credit card, you can contact the card issuer. If you have already made an unsuccessful effort to resolve the dispute with the store or the manufacturer, the card issuer may credit your account for the entire purchase and handle the dispute directly with the store or manufacturer. Whether you can get a replacement radio or a refund will usually depend on several factors:

• The radio must be for personal use

• It must cost more than $50

• The purchase must have occurred within your state or within 100 miles of your billing address

If you paid cash for the radio, however, your dispute is with the store or the manufacturer. If you cannot settle the matter on your own and a significant amount of money is concerned, you may want to consult an attorney. You may also contact either the attorney general of the state where you made the purchase or the state agency responsible for consumer protection and fair business practices. Check the government listings in your local phone book.

It is always important to be familiar with the store's return policy. The store must have clearly and conspicuously disclosed its return policy in such a way that you saw and understood it before you made the purchase. In addition, the store must always take back defective goods, regardless of its return policy.



What is my tax bracket?

Answer:

Generally, a tax bracket is the income tax rate at which you are taxed for a certain range of income. The income ranges vary, depending on your filing status: single, married filing jointly (or qualifying widow(er)), married filing separately, or head of household. Brackets are expressed by their marginal tax rate, which refers to the rate at which your next dollar of income will be taxed. There are six marginal tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Year 2010 federal income tax rates for single taxpayers are as follows:

If Taxable Income Is: Your Tax Is:

Not over $8,375 10% of taxable income

Over $8,375, but not over $34,000 $837.50+ 15% of excess over $8,375

Over $34,000, but not over $82,400 $4,681.25 + 25% of excess over $34,000



Over $373,650 $108,421.25 + 35% of excess over $373,650



Am I having enough tax withheld from my paycheck?

Question:

Am I having enough tax withheld from my paycheck?

Answer:

It is important that you properly estimate your tax withholding. If an insufficient amount of taxes is withheld, you may end up owing a substantial sum, including penalties and interest, when you file your tax return. Choosing the correct withholding amount for your salary or wages is a matter of completing Form W-4 worksheets, providing an updated Form W-4 when your circumstances change, and perhaps becoming familiar with IRS Publication 919, which deals with withholding.

Two factors determine the amount of income tax your employer withholds from your regular pay: the amount you earn, and the information regarding filing status and withholding allowances that you provide your employer on Form W-4. If you accurately complete all Form W-4 worksheets and you do not have significant nonwage income (e.g., interest and dividends), it is likely that your employer will withhold an amount close to the tax you owe on your return. In the following cases, however, accurate completion of the Form W-4 worksheets alone will not guarantee that you will have the correct amount of tax withheld:

• When you are married and both spouses work

• When you are working more than one job

• When you have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income

• When you will owe other taxes on your return, such as self-employment tax or household employment tax

• When your withholding is based on obsolete W-4 information for a substantial part of the year (e.g., you've gotten married, gotten divorced, gained a dependent, experienced income fluctuations)

To ensure that you have the correct amount of tax withheld, obtain a copy of IRS Publication 919. It should help you compare the total tax to be withheld for the year to the tax you anticipate owing on your return. It can also help you determine any additional amount you may need to withhold from each paycheck to avoid owing taxes when you file your return. Alternatively, it may help you identify if you are having too much tax withheld.



What penalties and interest will I be charged for paying and filing my federal income taxes late?

Question:

What penalties and interest will I be charged for paying and filing my federal income taxes late?

Answer:

If you fail to file your federal income tax return and pay your tax by the due date, you may have to pay one or more penalties, plus interest. Although you are allowed an automatic extension for filing your return if you mail in the appropriate form, you are not allowed an extension for paying your taxes. Interest is charged on any unpaid tax from the due date of your tax return until the date of payment. The interest rate is determined every three months.

• Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is based on the tax not paid by the due date (without regard to extensions). The penalty is usually 5 percent of the tax due for each month or part of a month that a return is late, but not more than 25 percent. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100 percent of the unpaid tax. (Exceptions: You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect. Also, you will not be subject to a late filing penalty if you do not owe any tax.)

• Paying tax late: You may have to pay a failure-to-pay penalty of one-half of 1 percent of your unpaid taxes for each month (or part of a month) the tax remains unpaid. The penalty can increase to 1 percent if you've been sent several notices to pay the overdue tax and still have not paid. In general, this penalty cannot be more than 25 percent of your unpaid tax. You may not have to pay the penalty if you can show that your failure to pay was due to reasonable cause and not due to willful neglect. This failure-to-pay penalty is added to interest charges on late payments.

• Combined penalties: If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is typically reduced by the .5 percent failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100 percent of the unpaid tax. You may not reduce the failure-to-file penalty by the failure-to-pay penalty.



Is student loan interest deductible?

Answer:

You may be able to deduct all or part of the student loan interest you've paid during the year, assuming you meet the requirements. You may be able to deduct up to $2,500 each year from your gross income if you've paid interest on a qualified education loan for qualified higher education expenses during the year.

To be eligible for the deduction, your modified adjusted gross income (MAGI) must fall below a threshold figure. The deduction begins to phase out as your MAGI exceeds $60,000 if you're single or $120,000 if you're married and file jointly. It phases out completely when your MAGI exceeds $75,000 ($150,000 for married persons filing jointly). These amounts are indexed for inflation. No deduction is allowed if your filing status is married filing separately.

Generally, a qualified education loan is a debt you incur to pay qualified higher education (undergraduate and graduate) expenses for yourself, your spouse, or a dependent at an eligible educational institution in a program that leads to a degree. The IRS provides specific requirements regarding the definitions of both an eligible educational institution and qualified higher education expenses. To qualify for the deduction, you must have been enrolled in the institution at least half-time at the time of the loan.

If you are claimed as a dependent, you may not take the deduction. If you are a dependent and your parent borrows money to pay for your college tuition, he or she may claim the student loan interest deduction.

For additional details, see IRS Publication 970 and/or consult a tax professional.



Do I have to file a federal income tax return?

Question:

Do I have to file a federal income tax return?

Answer:

In general, you must file a federal income tax return if you are a U.S. citizen or resident alien and your gross income equals or exceeds a specified figure. The applicable gross income figure depends on several factors, including your filing status and age. There are also special filing requirements for dependents.

For tax years 2008 and 2009, you probably need to file a federal income tax return if your gross income equals or exceeds the following figures:

2009 2008

Single $9,550 $8,950

--age 65 or over $10,750 $10,300

Married filing jointly $18,700 $17,900

--one spouse 65 or over $19,800 $18,950

--both 65 or over $20,900 $20,000

Married filing separately $3,650 $3,500

Head of household $12,000 $11,500

--age 65 or over $13,400 $12,850

Different rules apply if someone else can claim you as a dependent. Generally speaking, a dependent must file a tax return if his or her unearned income exceeds $950 ($900 in 2008).

Even if your gross income does not exceed the levels specified, you may still be required to file an income tax return in certain cases. For example, you are required to file a return if your net self-employment earnings are equal to or greater than $400, if you are subject to the alternative minimum tax, or if you are a nonresident alien with a tax liability not covered by withholding. Additional rules may apply. For further information, consult a tax professional.



Do I need to provide credit information on my auto insurance application?

Question:

Do I need to provide credit information on my auto insurance application?

Answer:

When you apply for an auto insurance policy, don't be surprised to find questions about your credit on the insurance company's application. In addition to the other information you provide, the company may use your credit information as part of its applicant-screening process. But are insurance companies being too nosy and intrusive when they request your credit information? Perhaps. Many lawmakers, consumer rights groups, and others certainly think so. However, many companies claim that they really need this information to properly evaluate your insurance application.

Believe it or not, there may actually be some truth to that. Statistics do show a link between a person's credit history and driving record. In other words, drivers with poor credit generally file more auto insurance claims than drivers with sound credit. How do you explain this connection? According to insurers, careless or irresponsible individuals tend to be that way in all areas of their lives, including both driving and finances. Based on this trend, an insurer may actually charge you a higher premium (or even deny you coverage) if you have shaky credit. Your credit information can also give an insurer a good idea of how likely you are to pay your premiums on time.

Insurers generally must follow specific guidelines when considering an applicant's credit history. Contact your state's insurance department if you have questions about the regulation of credit-based insurance scoring in your state.



How long am I covered under my parents' health insurance policies?

Question:

How long am I covered under my parents' health insurance policies?

Answer:

Whether you live at home or are away at college, chances are you're covered under your parents' health plan until you're about 20 to 24 years old as long as you're a full-time student. Ask your parents to check the policy for the details. Many students take advantage of health insurance plans offered by their colleges because such plans are relatively inexpensive and the services are close at hand. Whether you're covered by your parents or your school, you're likely to be on your own after you graduate. If you're working, check any health insurance options your employer offers. If you're not working or your employer offers no health benefits, consider purchasing short-term health insurance (if available) or catastrophic coverage, or look into your options under COBRA if you recently left a job.



Do I need to insure a car that's worth only a few hundred dollars?

Question:

Do I need to insure a car that's worth only a few hundred dollars?

Answer:

A standard auto insurance policy protects you from liability, property damage, and medical payment claims. Most states require car owners to purchase some level of liability and medical payments coverage (e.g., personal injury protection), while collision and other-than-collision (also known as comprehensive) coverage, which provide protection for damage to your car, remain optional.

If you still owe money on your car, the financing company may require you to keep this optional coverage. But if you own your car, you may want to consider skipping the optional coverage altogether, since the deductible and premiums you'll pay may amount to more than what your car is actually worth.



Help! I forgot to pay my auto insurance last month. Will my insurance company cancel my policy?

Question:

Help! I forgot to pay my auto insurance premium last month. Will my insurance company cancel my policy?

Answer:

Maybe, maybe not. Instead of immediately canceling your policy, your company might just send you an overdue notice and charge you a late fee. The company might inform you that your coverage will remain in force as long as your insurance agent receives payment before a certain cancellation date. Even if you miss that date, you may still be able to reinstate your coverage if you pay the past due amount (again, plus any extra charges that might apply).

Other insurance companies may not be so lenient with overdue premiums. In fact, some companies might simply cancel your coverage--even if you're only a day late with your premium! If you subsequently pay the overdue amount and all charges, your company may still refuse to reinstate your coverage. If that happens, don't assume it will be easy to buy a policy from a different company. After your company cancels your policy, you may have a hard time finding similar coverage elsewhere. Even if you can, it may be at a higher price than you were paying before.

Your state has laws that spell out when an insurance company can and can't cancel someone's coverage. However, most states allow insurance companies to cancel coverage when premiums aren't paid on time. Typically, to exercise this right, all your insurance company has to do is give you 10 days' notice and inform you exactly when your coverage will be terminated. You should also read over Part F of your personal auto policy to see if there are any restrictions on your insurer's ability to cancel the policy. If you're unsure about anything, give your insurance agent a call. He or she can explain your rights (and your insurer's rights) under the policy as well as state law.



Which is better, an HMO or a PPO?

Question:

Which is better, an HMO or a PPO?

Answer:

The question really is, which type is better for you? If you're able to choose between a health maintenance organization (HMO) and a preferred provider organization (PPO), you'll need to evaluate the coverage that each offers and determine which one best suits your needs. Although both HMOs and PPOs are types of managed care systems, each manages health care differently.

HMO members have to pick a primary care physician (PCP), who provides general medical care and referrals to specialists. Both the PCP and any specialists you see must belong to the HMO network. The PCP must approve your request to see a specialist. PPO members aren't required to choose a PCP and can see a specialist without a referral.

Out-of-network care (except for emergency care in some situations) is generally not covered by an HMO. A PPO won't require you to receive care within the network, but you'll save money if you do. For instance, the PPO may reimburse 90 percent of your health-care bill if you saw a doctor within the network, but only 70 percent of your bill if you saw a doctor outside the network.

HMO members usually pay a small co-payment for care (e.g., $10), but aren't required to meet an annual deductible. If you belong to a PPO, you may have to meet a deductible (especially for hospitalization) and pay a larger co-payment (e.g., $20) than an HMO member when you receive care.

So what it boils down to is flexibility versus cost. If you routinely need to see specialists, travel a lot, or are willing to pay more to see whatever health-care provider you choose, then a PPO might be the right choice. But if saving money on health care is your main concern and you're not worried about access to specialists of your choice, consider joining an HMO.



I'm going on a cruise. Do I need trip interruption insurance?

Question:

I'm going on a cruise. Do I need trip interruption insurance?

Answer:

Trip interruption insurance reimburses you for losses associated with your trip being cut short (e.g., emergency flight home, unused prepaid expenses). Whether you should purchase trip interruption insurance depends primarily on whether you can afford to absorb those losses yourself. Other factors may come into play, though, such as your health status, the location of your trip, and how comfortable you are with risk.

Trip interruption insurance coverage varies, depending on the type of policy you buy. However, most policies provide coverage if you get sick (although policies often exclude pre-existing conditions) or have some kind of emergency (e.g., death in the family). Some even provide coverage if your trip is interrupted by bad weather (e.g., hurricane). However, most cruise contracts give the cruise company the right to change the ship's itinerary if there's severe weather. So don't expect reimbursement from your trip interruption insurance for missing a scheduled port of call. Be sure to read your trip insurance policy carefully to understand exactly what is and isn't covered. To get a premium quote, call your property/casualty insurance agent or your travel agent.



Is it true that some sport utility vehicles cost more to insure than others?

Question:

Is it true that some sport utility vehicles cost more to insure than others?

Answer:

What you pay for auto insurance depends on quite a few variables, including your:

• Sex

• Age

• Residence

• Driving record

• Level and type of coverage

As a result, a driver in his or her 20s who lives in the city will generally pay more than a middle-aged, suburban soccer mom for the same coverage on the same make of car. But that doesn't explain why one sport utility vehicle (SUV) could cost either one of these individuals more to insure than another, similar SUV.

In addition to the factors listed above, insurance companies consider statistical data available to them. By doing so, they can estimate how likely it is that a particular type of vehicle will be involved in an accident, vandalized, or stolen. They can also analyze their own and industrywide data concerning the average amounts of claims paid for different types of vehicles. To minimize their risk, insurance companies adjust their rates accordingly. So, the SUV on every thief's wish list is likely to cost you more to insure than the one even known felons will pass by. Similarly, the SUV known to cost the most to repair when it's involved in a fender bender will increase the premium you'll have to pay to insure against that potential loss.

The experiences that affect insurance rates can sometimes vary from company to company. If one company has paid more claims on a particular type of SUV than another company has, the first company's rates to insure that type of SUV might be higher than the second company's rates. As always, in your efforts to get the best deal you can, shop around and get quotes from several insurers.

Note: In some states it is the state, not the insurer, that decides how each vehicle is rated.



Can I buy health insurance for my dog?

Question:

Can I buy health insurance for my dog?

Answer:

If you think you can buy insurance for just about anything nowadays, you're probably right. Not only can you buy health insurance for your pet, it's actually a pretty good idea, given the high cost of veterinary bills.

Pet health insurance policies usually cover routine examinations, vaccinations, and medical treatment for illnesses and injuries. You pay an annual premium, and (as with your own health insurance) you should expect deductibles, co-payments, and pre-existing condition limitations.

To locate an insurance company that offers pet health insurance, you might want to start with your veterinarian--ask him or her for a recommendation. It will probably pay to shop around, though, and the Internet can help you find several different companies. You'll want a licensed product from a trusted company. The extent of coverage, the type of policy, and the exclusions or limitations may vary from company to company.

What about the cost of the policy? That will depend on several factors, such as the type of pet you own, its age, and your location. If you insure more than one pet with a particular company, you might even get a discount. Paying for veterinary care on your own can be pretty expensive, especially when surgery is involved, so it may be more cost effective to buy pet health insurance.



I don't own a car, but occasionally I borrow my friend's. Do I need my own auto insurance policy?

Question:

I don't own a car, but occasionally I borrow my friend's car. Do I need my own auto insurance policy?

Answer:

Your friend's auto insurance policy should cover you if you get into an accident. But if you want additional liability protection, you have the option of buying a nonowners policy that covers liability, medical payments, and uninsured/underinsured motorist coverage. This would give you added protection in case you cause an accident.

You should discuss this insurance question with your friend and find out how much coverage he or she carries. Is the coverage just the required minimums, or has he or she purchased higher amounts of coverage?



I'm buying my first car. What should I look for in an insurance company?

Question:

I'm buying my first car. What should I look for in an insurance company?

Answer:

You should look for a company that has been selling auto insurance for a number of years and has a strong reputation in the industry. You can learn a lot about different companies simply by talking to people you know and trust. How satisfied have your friends, family members, and coworkers been with their insurance companies' level of customer service and handling of claims? A company's reputation for paying claims in a timely manner will be very important when you have an accident, theft, or other loss. Word-of-mouth references will help you narrow down the field to the most service-oriented companies.

There are several other issues to consider when shopping for an insurance company. For example, is the insurer financially stable? This is important because you want to be certain that the company you choose will be around for a long time and have no trouble paying its claims. A number of independent firms rate insurance companies based on their financial strength and other factors. Of course, you also want to make sure that a company can provide the auto insurance coverage you need at a good price. Premiums for the same coverage often vary widely among companies, so it pays to shop around. You should also find out what discounts and optional coverages are available from each insurer.

In most cases, your best bet is to work with a good insurance agent or broker. One of these professionals will help you find a reputable company that can meet your coverage needs without straining your budget. However, be aware that you may be able to save money by buying auto insurance from a company that sells policies directly to consumers. If you choose this path, a variety of on-line and print resources are available that you can use to research companies and coverages. You can also contact your state insurance department for information on different companies.



Is there a minimum number of quotes I should get when shopping for an auto insurance policy?

Question:

Is there a minimum number of quotes I should get when shopping for an auto insurance policy?

Answer:

Like anything else, the cost of your auto insurance can vary depending on where you purchase your policy and what state you live in. As a result, you'll want to get quotes from more than one insurance company. How many do you need? That's in part up to you and your own comfort level, but three or four should be enough for comparison purposes.

When you get your quotes, you'll want to know you're comparing prices for like products. Before you start asking for numbers from the insurance companies, decide on a few numbers of your own. Determine what deductible you want, and remember that you can reduce your premium if you're willing to choose a higher deductible. Find out if your state requires any minimum amounts of liability and other types of coverage. Then decide if you need to carry more extensive coverage than your state requires. Whatever you decide, make sure the quotes you get are all for the same coverage amounts so you can compare apples to apples.

Ask each company if you qualify for any discounts. You might be eligible for a reduction in your premium if you insure several cars under one policy or if you carry all your insurance (e.g., life insurance, homeowners insurance) with one company. If you've taken a driver's education class within the last five years, you may qualify for a lower rate. Low annual mileage, an antitheft device, or air bags may also entitle you to a break on the price. These are just a few examples of discounts that many insurers offer.

When you're ready to get the quotes, you might do this through an independent insurance agent or broker. In addition to reviewing your needs and offering advice, the agent will get quotes from several companies for policies tailored to your situation. If you want to do more of the work yourself, you can contact insurance companies by telephone or on the Internet. You can also use an on-line quote service to help with your shopping.



Does my auto insurance policy cover me on car trips outside the United States?

Question:

Does my auto insurance policy cover me on car trips outside the United States?

Answer:

That depends on where you go. If you visit Canada, your stateside auto insurance will offer you the same protection there that it does here. But if you decide to take a trip South of the Border, that's a different story.

In Mexico, your automobile liability insurance--and generally your collision and other-than-collision (also known as comprehensive) coverage--is not valid. If you're in an accident, you may wind up in jail until you can prove that you can pay for any damages. So you'll probably want to purchase a Mexican auto insurance policy that will provide liability coverage and, if necessary, collision and other-than-collision coverages. If you're traveling to Mexico, ask your insurance company or travel club for information on these policies.



How do I determine how much renters insurance I need?

Question:

How do I determine how much renters insurance I need?

Answer:

Renters insurance typically provides coverage for losses to your personal property, along with some level of liability protection. Most insurance companies have minimum policy amounts for personal property (e.g., $15,000, $30,000), so if you have relatively few possessions or if you don't own many expensive items, that may just be enough coverage for you. To be sure, though, you should take an inventory of your personal property--things can really add up. Estimate how much it would cost if you had to replace everything you owned in your apartment all at once.

As for liability protection, the standard coverage amount is usually around $100,000. The amount of liability coverage you should have depends on the assets you would like to protect (e.g., car, investments). Call your insurance agent for a quote--you'll be surprised at how inexpensive renters insurance can be.



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