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June 28, 2006

I’ve Been Sued by a Creditor!

No matter how many times it happens, it always causes a cold lump to form in the pit of your stomach: you just opened your mail to discover that a complaint that has been filed against you in court by one of your creditors. The situation seems hopeless: if you didn’t have enough money to pay the creditor in the first place, where on earth will you find the money to hire a lawyer to fight the lawsuit? Your first instinct is to throw the complaint away and pretend it never happened. After all, you think, I don’t have the money to pay, so how can a legal judgment hurt me?

Many people faced with substantial debt feel this way, but disregarding a complaint is the worst thing you can do. First, let’s consider the consequences: if you do not respond within the time specified by your state, the creditor will receive a default judgment. That means that they win the lawsuit due to your inaction and a public record will be made which states that you owe the amount of money requested by the creditor. If the creditor claimed that you owe more than you really do, or calculated the interest incorrectly, there’s little you can do about it once it has been reduced to a judgment.

Another problem is that once a judgment has been filed, it will be reflected on your credit report and negatively affect your credit rating. If the creditor has already reported your lack of payments, and perhaps also sent the debt to a collection company, the judgment will be the third time that your credit has been negatively impacted for the same debt. Avoiding a judgment will prevent your credit from being lowered further.

Finally, in many states, a judgment will allow your creditor to garnish your wages, your bank accounts, or in some places even prevent the sale of your real estate without first paying the amount due. If you are already having a hard time making ends meet, the last thing you need is to have part of your paycheck taken by the creditor before you even see it, or having what little money is in your bank account taken, causing checks to bounce.

So, what can be done to prevent the creditor from obtaining a judgment against you? Your best bet is to hire an attorney. If you cannot afford to pay an attorney, most places have a legal aid society that will represent you after receiving proof that you don’t have sufficient funds to hire a lawyer. (If that isn’t possible, you can represent yourself if necessary, although this should always be considered a last resort.) With some negotiation and compromise, most creditors will agree to accept a reduced amount in payment or may accept payments over an extended period of time.

If a judgment has already been filed in a lawsuit against you, don’t despair; try to get it paid off as quickly as you can. After it has been paid, make sure that a “Satisfaction of Judgment” is filed in your case. A Satisfaction of Judgment is a document that demonstrates that you have paid off the debt reflected by the judgment. The filing of a Satisfaction of Judgment is important because after a judgment has appeared on your credit report, it will not be removed, but it can be improved through a Satisfaction of Judgment proving that you no longer owe the money. Then, chalk the experience up to an important event in your financial education.

Article Written by Kristen J. Welcome

June 26, 2006

CitiBank e-Savings Account Goes to 5.00% APY

Just when we thought it couldn't get any better Citibank today raised the interest rate on their e-Savings Account to 5.00%. Last week we reported that Emigrant went to 4.80%, but now Citibank has retaken the throne. Regional Bank stocks took a beating last week as many reported a significant outflow of deposits. Since Citibank launched their e-Savings account a couple of months ago they have had a net inflow in excess of $3 billion in deposits. That money had to come from somewhere and we suspect the smaller banks is where it came from. Any investor can now open up numerous online accounts and electronically move their money to those paying the highest rates. Once again the Internet is leveling the playing field to the benefit of the consumer. You can search and sort the rates from the major Online Banks by visiting the ManagingMoney.com Banking Center. Stay tuned as this new banking battle heats up.

June 22, 2006

Emigrant Increases Savings Rate to 4.80% APY

Emigrant Bank, sponsor of the popular EmigrantDirect American Dream Savings Account, increased their interest rate to 4.80% APY this morning. This makes their rate one of the most competitive in the country. Rates have consistently been rising for months now, but even we are a bit surprised by this increase. Emigrant seems to be wanting to replace Ben Bernanke, the new Chairman of the Federal Reserve, by raising rates even before the Feds next meeting. This implies that competition is stiff among the online banks. We still expect the Fed to stop raising rates soon as the fine line between protecting against inflation and shifting the economy into a recession is probably being approached. Investors should take advantage of these high, insured rates while they can.

June 19, 2006

How to Rebuild Your Credit After Filing Bankruptcy

After a great deal of thought, you finally decided that filing a bankruptcy was right for you and your family. You have proceeded through the bankruptcy court system and your debts have been discharged. You have a clean slate—except that your bankruptcy is appearing on your credit report and causing your credit score to nosedive.

Unfortunately, there’s no “quick fix” solution to revive your credit score. The bankruptcy will remain on your credit report for several years before it drops off. In the meantime, however, there are a few steps you can take to minimize the damage.

The first, and most obvious, step is to resolve to avoid the same mistakes that lead to bankruptcy in the first place. Never pay bills late, and never, ever allow a debt to go to collections. If you dispute any amounts owed, try to negotiate an amicable resolution and avoid letting the matter become the subject of litigation from which a judgment could arise. Don’t allow companies such as credit card, cell phone or mortgage companies to pull your credit score unless you have narrowed down your options to just a couple of companies, since excessive credit pulls can damage your credit score. Examine your credit report at least twice a year and write letters to the credit bureaus to correct any inaccurate information that could damage your credit.

That’s all well and good, you say, but what steps can I take to actually improve my credit score?

One way to improve a credit score is to make credit card payments on time. If you have no credit cards and your credit seems insufficient to obtain a new credit card, check with a personal banker at your local bank about low limit credit cards (ranging from $100 to $300). If your bank does not offer this service, many major department stores offer similar cards that are targeted toward the college student market. These low-limit cards often do not require a minimum credit score. After you have obtained such a card, use it only occasionally (and only for essential items that you would need to purchase anyway) and pay it off every month. This will result in a positive report to the credit bureaus and will show on your credit report as “Pays as agreed.”

Another way to make payments resulting in a positive report to the credit bureaus is a small, secured loan from your bank. The personal banker at your bank may be able to help you secure a small loan (such as $1,000) that is secured by a CD or savings account of the same amount. Make payments on this loan every month and a positive report will be sent to the credit bureaus. Please note that this method is only possible if you have extra cash available with which to secure the loan, and you should also bear in mind that you will be required to pay interest on the loan. Only use this method if you are in a financial position to make these payments in order to add a positive report to your credit report.

Finally, know that a bankruptcy does not remain on your credit report forever. Eventually it will be removed. At that point, if you have been careful to protect your credit, your score will improve, gaining you greater financial freedoms.

Article Written by: Kristen J. Welcome

June 12, 2006

Organizing Records for an Emergency

After all the natural disasters of 2005, you should give some thought to what you would do in the event of an emergency. If you had to evacuate your home, could you quickly get your hands on all important financial documents? Consider organizing and keeping those records in one place, preferably a fireproof, lockable box. Items that should be placed in the box include:

Cash — Place enough cash to last at least a few days away from home, in case banks are closed. You may also want to include a charge card with a zero balance that can be used in emergencies.

Legal documents — This would include birth certificates, marriage certificates, passports, Social Security cards, military records, naturalization and adoption papers, deeds to property, titles to vehicles, divorce or separation agreements, diplomas, wills, and powers of attorney. In some cases, you may only want to include copies in this box, retaining the originals in a safe deposit box or other secure location.

Financial records — Keep a list of all account numbers and contact numbers for all your financial accounts, including bank accounts, investment accounts, 401(k) plans, Individual Retirement Accounts (IRAs), credit cards, and outstanding loans and mortgages. You should also prepare a list of attorneys, accountants, investment managers, and financial planners. If you keep most of your financial records on the computer, include a backup of those records in this box.

Insurance policies — Include copies of all insurance policies, including life, homeowners, automobile, medical, and disability. Also keep a record of your insurance agent and his/her contact information.

Household inventory — You should have a complete inventory of the entire contents of your home. You can either write or videotape the inventory. Either method will work, but a videotape typically requires less time. Make sure to include everything in your house, systematically working your way around every room so that nothing is left out. Keep receipts for the larger items with the inventory.

June 8, 2006

Utilizing Losses in Your Portfolio

Capital gains on investments held for one year or less are short-term capital gains taxed at ordinary income tax rates. For investments held over one year, the maximum long-term capital gains tax rate is 15% (5% for taxpayers in the 10% or 15% tax bracket). While this is significantly below the maximum ordinary income tax rate of 35%, it still can take a significant chunk out of your investment portfolio.

To help minimize your capital gains tax bill, you should actively harvest any losses in your portfolio. Some strategies to consider include:

Recognize losses to at least offset $3,000 of ordinary income. Keep in mind the tax rules regarding gains and losses — capital losses offset capital gains, and an excess of $3,000 of capital losses can be offset against ordinary income. If you are holding stocks with losses in your portfolio, you should probably take advantage of this tax rule.

If you still want to own the stock with the loss, you can sell the stock, recognize the tax loss, and then repurchase the stock. You just have to make sure to avoid the wash sale rules. These rules state you must repurchase the shares at least 31 days before or after you sell your original shares to recognize the loss for tax purposes. That timing can be troublesome. If the stock’s price rises substantially before you repurchase it, your tax savings from the loss deduction may not be worth as much as the investment gains during that time period. You can avoid that concern by purchasing the additional shares first and then selling your original shares 31 days later. Another strategy is to purchase a similar stock, perhaps of a competitor, to replace the stock you sold. Since it isn’t the same stock, you don’t have to wait 31 days to purchase it.

Consider recognizing all, or a substantial portion, of any losses in your portfolio. Realize that no one likes to sell investments at a loss. And since you can only offset an excess of $3,000 of capital losses against ordinary income, you might wonder why you should incur excess losses that can’t be used currently, even though you can carry them forward to future years. There are a couple of advantages to this strategy.

First, it gives you an opportunity to totally reevaluate your portfolio. If you are convinced all your investments are good ones, you can sell them, recognize the tax loss, and then repurchase the stocks, being sure to avoid the wash sale rules. But it’s probably more likely that you own some investments you wish you didn’t or you don’t think will recover as quickly as other investments. This is your opportunity to reinvest in stocks you believe have better potential going forward.

Second, it gives you more flexibility when recognizing gains in the future. You may be a little more skittish about letting capital gains ride with the market. Until you use all your capital losses, you can recognize capital gains without worrying about paying taxes. Even if your losses are long term, you can use them to offset short-term capital gains that would be subject to ordinary income tax rates.

Use stock losses to offset other capital gains. You don’t have to match stock losses with stock gains. If you have capital gains from the sale of another type of asset, such as a business or real estate, stock losses can be used to offset those gains.

Don’t gift stocks with losses. If you are planning a large charitable contribution, it makes sense to donate appreciated stock held for over a year. You deduct the fair market value as a charitable contribution, subject to limitations based on a percentage of your adjusted gross income, and avoid paying capital gains taxes on the gain. If the stock has a loss, however, you should first sell it, and then send the cash to the charity. That way, you get the charitable deduction and recognize a tax loss on the sale.

June 7, 2006

Financial Tips for Your Children

As a parent, you often wish you could impart wisdom you have gained over the years so your children don’t have to make the same mistakes you made. What are the most important financial tips you should pass on to your children? Try these:

Graduate from college. Even if your children are interested in pursuing careers that don’t require a college education, encourage them to obtain a college degree first. It is much easier to go to college straight out of high school, before getting married or taking on other responsibilities. And financially, college graduates on average have higher earnings than nongraduates. For instance, the median earnings by level of education for 2003 were $21,600 for someone without a high school degree, $30,300 for someone with a high school degree, $35,700 for someone with some college, $37,600 for someone with an associate degree, $49,900 for someone with a bachelor’s degree, $59,500 for someone with a master’s degree, $79,400 for someone with a doctoral degree, and $95,700 for someone with a professional degree (Source: Trends in Higher Education Series 2005, October 18, 2005).

Develop written financial goals. Developing written financial goals will help your children think about their future and how to achieve their goals. As part of the process, encourage your children to get a money management system in place to track expenditures and organize information about assets and investments. Establishing these good habits at a young age will help ensure your children achieve their financial goals.

Live well within their means. As your children start lives of their own, help them make some fundamental decisions about how to live. Make sure they realize that the only way to save for future goals is not to spend all their current income. So, before your children decide where to live or what kind of car to drive, help them prepare a budget to see how much they can really afford for those items and still have money left over for saving.

Utilize all retirement vehicles available. As soon as your children are eligible, they should start contributing to a 401(k) plan at work. If their employer doesn’t offer a 401(k) plan, teach your children the benefits of Individual Retirement Accounts (IRAs), both traditional deductible and Roth. The importance of saving for retirement at a young age can’t be stressed enough. If you’re having difficulty accumulating funds for retirement, imagine how much more difficult it will be for your children, with the prospect of even longer life expectancies and less help from employers and the government.

Use debt sparingly. If your children get into too much debt early in life, they can spend the rest of their lives struggling to get out of debt. Large payments for principal and interest can seriously reduce the funds available to save for other financial goals. Stress to your children that it is best to only use credit cards if they can pay the balance in full every month. Other debt, like car loans and mortgages, should only be taken on after a careful analysis of whether your children can afford the payments and whether the purchase fits in with their financial goals.

June 5, 2006

Countdown to Retirement

When your retirement date is only a couple of years away, you should start taking steps to ensure a smooth transition from a working life to retirement.

Financial Considerations

• Determine your retirement income and expenses as precisely as possible. You may want to do this before, rather than after, retirement, when your options are more limited. Although you probably won’t be able to significantly impact the amount of your savings in a couple of years, you may decide to postpone retirement or reduce expenses.

• Consider working part-time after retirement. You may want to work to supplement your retirement income or to fill your free time. Review your options before retirement, so you don’t count on an unrealistic amount of income from that job. You may want to check with your current employer for part-time employment opportunities.

• Review your debts and loans, paying off as much as possible.

• Examine your investment portfolio, making necessary adjustments. You may need to reallocate your investments or make arrangements for monthly distributions.

Pension Plan Considerations

• Select your retirement date carefully. Ask your company to calculate benefits based on different retirement dates. You may find that staying for a short period may add substantially to your benefits.

• Review your pension benefit options carefully. Often, your company will offer several distribution options, which may include an annuity and/or a lump-sum distribution. Once made, you usually can’t change your decision.

• Check into health insurance coverage. Determine what health insurance benefits your employer provides, if any, and how much you must pay for those benefits. Even if you qualify for Medicare, you’ll want to investigate Medigap insurance so you’re not unprotected in key areas. Starting January 1, 2006, you can purchase insurance to supplement Medicare subsidized prescription coverage. Review your choices immediately, since you incur a 1% per month permanent increase in premiums for every month you wait past age 65. While you are still employed, you and your spouse should get a complete physical to identify any health problems that may be a concern after retirement.

• If you have pension benefits from previous employers, notify them at least six months before you retire.

Social Security Considerations

• Review your Social Security statement, which is automatically sent approximately three months before your birthday. This statement estimates your retirement benefits at age 62, full retirement age for Social Security purposes, and age 70. Several factors will influence when you start benefits, including your health, work income after retirement, other retirement income sources, and your spouse’s age and health.

• Apply for Social Security benefits at least three months before you retire.

Other Considerations

• Think about how you would like to spend your retirement years. Will you travel, take on new hobbies, start a second career, spend more time on volunteer activities, start a business?

• Decide whether you will continue to live in your current home. You may want to sell your home to help finance your retirement or because you don’t need a home that large.

• If you plan to move to another city, research and visit that city. Make multiple trips for an extended period, preferably during each season, to make sure you really like the new location.

• Evaluate your life insurance. You may want to cash in a policy or convert it to an annuity to supplement your income. Insurance may also be an attractive way to provide for estate taxes.

• Consider long-term-care insurance. As you get older, the cost of this insurance becomes prohibitive, so consider the coverage as soon as possible.

• Now is a good time to review your entire estate plan and make sure your will is updated.

• Analyze your tax situation. Many of the decisions you make for retirement will have an important impact on your tax bill.

June 2, 2006

Back to Basics with Bonds

With the future direction of interest rates uncertain, you may wonder whether now is a good time to invest in bonds. If you are reassessing your bond investments, consider the following:

Decide how much of your portfolio to allocate to bonds. Whether you’re shifting funds between stocks and bonds, rebalancing your portfolio, or setting up an investment strategy, decide how much of your total portfolio to invest in bonds. Your allocation to the bond portion of your portfolio will depend on your personal situation, but over time your percentage of bonds is likely to change. In general, the percentage of bonds you own should increase as you become more averse to putting your capital at risk.

Understand your objectives for your bond investments. Many investors purchase bonds for a dependable income stream and to protect their principal. These investors will typically buy and hold bonds until maturity. They are looking to maximize yield for a given time frame with a comfortable risk level. Other investors prefer to use bonds to reduce risks in a portfolio heavily weighted with stocks or to actively trade bonds for capital gains. These investors will assess the likely future direction of interest rates in conjunction with other factors. Each type of investor will use different strategies for bond investments.

Determine maturity dates you are interested in. Your best approach may be to select a maturity date that coincides with when you need your principal. Otherwise, if you have to sell before maturity, fluctuating interest rates and transaction costs may leave you with less than you expected. Before deciding on a maturity, review the yield curve to see if there are advantages to selecting a slightly longer or shorter maturity. You may find that increasing the maturity date by a couple of years will increase your return or that committing your funds for a long time does not bring much additional return.

Evaluate different types of bonds. Consider your personal situation and risk tolerance. Treasury securities are the safest type of bond, since they are guaranteed by the U.S. government. However, they also typically have the lowest yields. Interest income is usually exempt from state and local income taxes, but is subject to federal income taxes. Government issued inflation-indexed bonds may be of interest to long-term investors who are concerned that inflation will erode their investments’ purchasing power. Investors in higher tax brackets should review municipal bonds, since their interest income is typically exempt from federal income taxes and may be exempt from state and local income taxes. Corporate bonds usually carry more risk, but also typically offer higher returns. Interest income from corporate bonds is subject to federal and state income taxes. Interest rates can vary significantly among different types of bonds and among bonds with different maturities or credit ratings. However, different types of bonds do not always respond to interest rates changes in the same magnitude. Before purchasing a bond, review the historical spread in yields between two different types of bonds. This can reveal whether the bond’s yield is attractive compared to another type of bond.

Diversify your bond portfolio in several ways. You can select different bond types, issuers, maturity dates, coupon yields, or credit ratings. All of these factors add diversification to your bond portfolio.

Consider laddering your bond portfolio. A bond ladder is a portfolio of similar amounts and types of bonds, which mature at several different dates. For instance, a $30,000 portfolio might consist of six issues of $5,000 each, maturing in six consecutive years. Since the bonds mature every year or so, you reinvest the proceeds over a period of time rather than in one lump sum. If rates increase, you have money every year or so to reinvest at the higher rates. With declining rates, you have some funds invested in longer-term bonds.

Review the use of bond swaps, where appropriate. A bond swap is simply the sale of one bond issue and the purchase of another. Swaps take advantage of inefficiencies in the bond markets and between different bonds. One of the more popular bond swaps is the tax swap, which realizes losses on a bond for tax purposes. In essence, you sell a bond with a current market value less than your purchase price to realize the loss and deduct it on your tax return. You then use the proceeds to purchase similar bonds. The end result is you still own a comparable bond, but you also have a tax loss. Review the cost of the swap before executing the transactions to ensure the costs don’t offset most of your expected tax savings. Make sure to comply with the wash sale rules or your loss won’t be tax deductible. A wash sale occurs when an investor sells a maturity and 30 days before or after the sale purchases substantially the same security. Bonds purchased within the 30-day window must differ from the bonds sold in a material way, which includes different issuers, coupon rates, or maturity dates.

Use duration to help manage interest rate risk. Interest rates and bond prices move in opposite directions, which can significantly affect a bond’s market value. However, it is often difficult to determine what impact a given interest rate change will have on a specific bond, since maturity date, credit ratings, coupon rate, and current interest rates all affect the result. Duration can be a helpful tool in estimating the expected impact of interest rate changes on your bond portfolio. Duration calculates how much a bond’s price will move for every 1% change in interest rates. A bond’s duration is typically shorter than its maturity. You can set an overall target duration for your portfolio, so you’ll have a reasonable estimate of how your bond portfolio will fluctuate with interest rate changes.

Remember the basics. In general, rates of return reward you for the risks you assume. If prevailing interest rates are 4%, a bond paying 7% probably carries some additional risk. Make sure you understand that risk before purchasing the bond. Evaluate your entire portfolio periodically to ensure your bonds still meet your investment objectives. Changes in credit ratings or other events can significantly affect your bonds’ value.


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