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April 24, 2006

Save on Gas Costs

With the cost of gas now in the $3 per gallon range and in some areas even approaching $4, now would be a good time to start searching for ways to reduce your costs at the pump.

Let's be real though, you are not likely to stop driving anytime soon, start riding a bicycle, or run out and buy a new energy efficient hybrid. So what's left? If you have a good credit rating, our favorite is the Gas Reward Credit Card. There are numerous cards available from different issuers, each with their own particular strength and weakness. Some cards are only good for a particular brand of gas while others give benefits on any gas purchase. Most cards will give a rebate in the 2% to 5% range on a gas purchase with rebates also available on non-gas purchases. Savings are savings and 2-5% rebates can add up quickly. If you spend an average of $30 per week at the pump, at 2% that is $6 per week in savings. Multiply that by 52 weeks and you reduced your gas costs by $312 for the year. Stay away from cards with any annual fees and pay your balance off each month.

April 17, 2006

Why Is Asset Allocation Important?

The theory behind asset allocation is to spread your investments across different asset classes to help protect your portfolio from downturns in any one asset. Since different investments are affected differently by economic events and market factors, owning different types of investments helps reduce the chances that your portfolio will be adversely affected by a particular risk type. Does asset allocation really accomplish this goal?

To see how asset allocation can help reduce your portfolio’s volatility, consider this example. During the period from 1976 to 2005 (30 years), the Standard & Poor’s 500 (S&P 500) had an average annual return of 12.7%, while intermediate-term government bonds had an average return of 8.3%. The largest loss sustained in any given year for the S&P 500 was 22.1% in 2002 and 5.1% for intermediate-term bonds in 1994 (Source: Stocks, Bonds, Bills, and Inflation 2006 Yearbook, Ibbotson Associates).* The S&P 500 is used as a measure of common stock returns, since it is an unmanaged index generally considered representative of the U.S. stock market. Keep in mind that stocks and government bonds have different investment characteristics. Stocks can have fluctuating principal and returns based on changing market conditions, while government bonds have fixed principal value and yield if held to maturity and are guaranteed as to the timely payment of principal and interest.

To obtain the highest average return, you must invest totally in the highest performing asset, but that asset also has the potential for the greatest loss. However, don’t simply look at the least risky combination, since you are also giving up return for that reduction in risk. While a percentage or two may not seem like much, it can have a significant impact on your portfolio’s value over a long time period.

While each person’s asset allocation strategy will be unique, consider these points:

Invest in both stocks and bonds. Stocks tend to have a low positive correlation with corporate and government bonds, meaning on average, movements in stock prices will only moderately impact movements in bond prices. Thus, owning both, as the example above shows, reduces your portfolio’s volatility.

Consider increasing your stock allocation for long time horizons. By staying in the market through different market cycles, you reduce the risk that market volatility will adversely affect your portfolio’s performance.

Diversify within, as well as among, investment classes. For instance, in the stock category, consider value and growth stocks as well as small- and large-capitalization stocks.

Rebalance your portfolio at least annually. Since your strategy is designed to provide a stable risk exposure, it must be periodically rebalanced so the allocation does not get out of line.

Keep sufficient cash on hand for short-term needs. That way, you won’t have to sell investments during market downturns.

Evaluate new investments carefully, ensuring they add diversification benefits to your portfolio. Don’t keep adding similar investments, such as several stocks in the same industry. Not only does this not add much in the way of diversification, but it also makes your portfolio more difficult to monitor.

* Past performance is not a guarantee of future results. Returns are presented for illustrative purposes only and are not intended to project the performance of a specific investment vehicle.

Quicken & UnitedHealth to Develop Health Care Software

Intuit, the maker of the popular Quicken Personal Finance Software and UnitedHealth Group announced last week their intent to develop a series of Quicken-branded software products to help consumers more effectively manage their health care use. Although not scheduled for release until 2007, Intuit and UnitedHealth are already encouraging other health firms to join the initiative. The software is to be designed to allow consumers to view and organize payments and medical records from both their doctors and hospital. ManagingMoney.com thinks this idea is way overdue and wish it was available yesterday as opposed to 2007. We will keep you informed as to the actual product launch.

April 15, 2006

Keep an Eye on Inflation

Inflation has been tame for so long that it’s easy to ignore it when planning for retirement. However, even inflation of 2% or 3% a year, over a period of many years, can seriously erode the purchasing power of your funds. At 2.5% inflation, $1 today will be worth 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. To combat the effects of inflation on your retirement income, consider these tips:

Consider investment alternatives likely to stay ahead of inflation. Thus, a significant portion of your portfolio will probably be invested in stocks, which have typically earned returns in excess of inflation.

Invest in tax-advantaged retirement vehicles. Look into 401(k) plans, Individual Retirement Accounts (IRAs), and other retirement vehicles. While each has different rules for taxing contributions and earnings, all provide some tax-free or tax-deferred benefits. Since you aren’t paying income taxes on earnings throughout the years, that typically means you’ll have a larger balance at retirement. Thus, you’ll start out with a larger retirement base to help combat inflation.

Keep fixed expenses as low as possible. If you aren’t using a significant portion of your income to pay a mortgage, car payment, or credit card debt, you’ll have more flexibility to deal with higher prices.

Make sure you have plans to deal with health-care costs. While Medicare will help once you turn age 65, it still does not cover many health-care costs. Look into Medigap policies and prescription coverage to help with those non-covered expenditures.

Minimize withdrawals from your retirement assets. To counter inflation, you need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don’t run out of funds late in life, keep withdrawals during the early years to a minimum.

April 14, 2006

How Do We Measure Inflation?

The most commonly cited measure of inflation is the Consumer Price Index (CPI). However, the government releases not one, but three, versions of the CPI: CPI-U, CPI-W, and C-CPI-U.

CPI-U is the CPI for all urban consumers and the most commonly cited of the three indexes. It is based on expenditures of almost all residents of urban or metropolitan areas, including urban wage earners and clerical workers, professionals, the self-employed, the poor, the unemployed, and retired individuals. It represents about 87% of the U.S. population and does not include individuals in rural nonmetropolitan areas, farm families, persons in the Armed Forces, and those in institutions such as prisons and mental hospitals (Source: Bureau of Labor Statistics, 2005).

CPI-W is the CPI for urban wage earners and clerical workers. It is based only on expenditures of wage earners and clerical workers in urban or metropolitan areas, representing approximately 32% of the U.S. population (Source: Bureau of Labor Statistics, 2005). This index is typically used to make cost-of-living adjustments for labor contracts and Social Security benefits.

C-CPI-U is the chained CPI for all urban consumers, released in July 2002. It covers the same expenditures as the CPI-U, but is calculated in a different manner. Started during the 1990s, the CPI-U and CPI-W allow for modest consumer substitution of items within the same categories to compensate for price changes. The C-CPI-U, on the other hand, also allows for consumer substitution between categories. These calculation differences typically mean that the C-CPI-U will show a lower inflation rate than the CPI-U.

All three CPIs measure the average change in prices paid by consumers for over 200 categories of goods and services in eight major categories — food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. The CPIs are weighted averages, reflecting the importance of each category in the average consumer’s overall expenditures. For the CPI-U and CPI-W, the weightings are based on consumer expenditure surveys and stay fixed for a two-year period. The C-CPI-U index, on the other hand, uses contemporaneous monthly expenditure estimates. The CPI-U and CPI-W are calculated for the entire nation, for broad geographic regions, and for large metropolitan areas, while only a national C-CPI-U is calculated.

In addition to these three indexes, references are often made to core inflation, typically when monetary policy decisions are discussed. Core inflation typically means the CPI-U index excluding food and energy prices, which represents approximately 23% of consumer spending in the CPI. Food and energy prices are excluded because their prices tend to be more volatile and often change significantly over short time periods due to outside factors.

April 13, 2006

Investing vs. Paying Off Debt

It can be difficult to decide where to allocate your funds when you want to both increase your investment portfolio and reduce your outstanding debt. The decision typically depends on the potential return of the investment compared to the interest rate paid on the debt.

For instance, if you are considering purchasing a bond with a 5% interest rate, paying off a mortgage with a 6% interest rate, or reducing credit card debt with a 12% interest rate, you should probably pay off your credit card debt. When analyzing the situation, look at after-tax, not pre-tax, rates. In this example, interest income from the corporate bond is subject to federal income taxes, the mortgage interest is tax deductible, and there is no tax deduction for the credit card interest. If you’re in the 25% tax bracket, the 5% rate on the corporate bond will net 3.75% after taxes, the 6% mortgage costs 4.5% after taxes, and the 12% credit card debt costs 12% without an income tax deduction.

There are some situations, however, where you should consider other factors, including:

When your employer matches your 401(k) contributions — Many employers match contributions to 401(k) plans, which is money you lose if you don’t contribute. Those matching contributions can make a big difference when deciding whether to invest or pay off debt. For example, assume your employer matches 50% of contributions up to 6% of your salary. If you’re earning $50,000, a 6% contribution equals $3,000, with a $1,500 matching contribution from your employer. Thus, you should typically take advantage of all matching contributions before using money to pay down debt.

When you are paying down your mortgage rather than other debts — Often, there is psychological satisfaction in paying down your mortgage to build equity in your home. However, mortgage debt is usually the last debt that should be paid off, since interest rates are typically lower than other forms of debt and the interest payments are tax deductible. If you want to pay down debt, make a list of all your debts, the interest rates, and whether the interest is tax deductible. Start paying off the debt with the highest nondeductible interest rate. Once that debt is paid in full, move to the next highest interest rate.

When you’re using money from your retirement savings to pay off debt — Many 401(k) plans allow loans at relatively low interest rates. Thus, you may be tempted to take out a loan and use the proceeds to pay off your high interest rate credit card debt and auto loans. One of the dangers of this strategy is you’ll start to regard your retirement savings as a piggy bank that can be dipped into whenever you need money. It’s typically better to leave retirement savings alone so the money can compound for your retirement. Also, you don’t want to take out a loan, pay off your credit cards, and then start running up balances on those cards again.

April 12, 2006

Have You Assessed Your Risk Tolerance?

While investors want the highest returns possible, returns compensate you for the risks you take — higher risks are generally rewarded with higher returns. Thus, you need to assess how much risk you are willing to take to obtain potentially higher returns. However, this can be a difficult task. It is one thing to theoretically answer questions about how you would react in different circumstances and quite another to actually watch your investments decrease significantly in value. What you are trying to assess is your emotional tolerance for risk, or how much price volatility you are comfortable with. Some questions that can help you gauge that risk tolerance include:

What long-term annual rate of return do you expect to earn on your investments? Your answer will help determine the types of investments you need to choose to meet that target. Review historical rates of return, as well as variations in those returns, over a long time period to see if your estimates are reasonable. Expecting a high rate of return may mean you’ll have to invest in asset classes you aren’t comfortable with or that you may be tempted to sell frequently. A better alternative may be to lower your expectations and invest in assets you are comfortable owning.

What length of time are you investing for? Some investments, such as stocks, should only be purchased for long time horizons. Using them for short-term purposes may increase the risk in your portfolio, since you may be forced to sell during a market downturn.

How long are you willing to sustain a loss before selling? The market volatility of the past few years will give you some indication of how comfortable you are holding investments with losses.

What types of investments do you own now and how comfortable are you with those investments? Make sure you understand the basics of any investments you own, including the historical rate of return, the largest one-year loss, and the risks the investment is subject to. If you don’t understand an investment or are not comfortable owning it, you may be tempted to sell at an inopportune time. Over time, your comfort level with risk should increase as your understanding of how risk impacts different investments increases.

Have you reassessed your financial goals recently? Due to the significant market volatility of the past few years, your financial plan may need to be revamped. Otherwise, you may find you won’t have sufficient resources in the future to meet your goals. Based on your current investment values, determine what needs to be done to meet your financial goals. You may need to save more, change or eliminate some goals, or delay your retirement date.

Do you understand ways to reduce the risk in your portfolio? While all investments are subject to risk, there are some risk reduction strategies you should consider for your portfolio. These strategies include diversifying your portfolio and staying in the market through different market cycles.

April 4, 2006

EverBank FreeNet Checking Goes to 5.51% APY

One of the best "teaser rates" we are seeing in the Internet Banking space is the EverBank FreeNet Checking Account.They are currently offering 5.51% APY for the first three months for new customers. The account also comes with free online banking, free check writing, and a free Visa® CheckCard. At the end of the three month period EverBank guarantees you'll continue to earn a yield that ranks in the top 5% of competitive accounts as tracked in the Bank Rate Monitor National Index™ of leading banks and thrifts. With a minimum of only $1,500 to open an account, FDIC insurance, no monthly fees , and a 100% satisfaction guarantee, this is probably worth a look.


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