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August 31, 2006

Teaching Children About Money

Even though it seems like money and financial topics are discussed everywhere, these are not concepts your children will learn automatically. Some of the most valuable lessons you can teach your children involve basic money concepts, such as the value of saving and investing. Some strategies you can use to help teach these concepts include:

Impart money concepts along with the children’s allowance. You must decide whether to tie your children’s allowance to the performance of chores. Some people feel that doing so instills the concept of working for pay, while others feel chores should be performed without pay as part of children’s family responsibilities. When setting the allowance, make sure your children understand what expenses must be paid with it. The allowance should increase as your children grow older and should be large enough so children have money left over to make their own purchasing decisions.

Provide opportunities to earn extra money. Offer to pay your children for additional chores around the house, so they learn the connection between effort and pay. If your children want part-time jobs, first make sure they understand that their primary responsibility is to do well in school. Go over your children’s pay stubs with them, so they understand what taxes are deducted and how much of their pay they represent. Start teaching your children ways to reduce their taxes, such as funding an individual retirement account.

Allow your children to make their own financial decisions. You may not agree with the choices your children make, but it is important for them to learn from their mistakes. That doesn’t mean you can’t discuss options with them, but the financial decisions should be theirs.

Encourage your child to save money. Saving for tomorrow rather than spending today is a difficult concept for both adults and children. Thus, you may need to offer incentives to encourage saving. You may require your children to set aside a certain percentage of their allowance for long-term goals. Or you can match your children’s savings, perhaps contributing 50 cents or a dollar for every dollar your children save.

Explain the basics of investing. At an early age, open a bank account for your children, explaining concepts like saving and compound interest. Around age eight or so, explain how businesses operate and how investors buy and sell stocks. As their interest grows, help them purchase stocks with their savings. Since minors can’t own stocks, you will need to purchase the stock as custodian for your children. Teach your children how to research a stock, follow its price, review its annual report, and decide when to sell it. Exposing your children to these concepts at a young age will hopefully make them comfortable with investing when they become adults.

Encourage your child to take finance courses. Many high schools and colleges offer courses that teach stock basics and personal finance. Encourage your children to take at least one of these courses.

Be conscious of the money messages you send to your children. Your children watch your actions closely, so how you treat money will be a significant influence on their views. If you make large purchases only after careful research and price comparisons, your children will learn to be careful before making a purchase. If you use your credit cards cautiously and explain how to select a card, what items to charge, and how to pay off the balance every month, your children will learn not to abuse credit cards.

August 28, 2006

Fast Facts on Prepaid Credit Cards

Prepaid Credit Cards are becoming more popular as consumers veer away from checks and cash. These cards are ideal for consumers on a limited budget. The prepaid cards allow for the convenience of easy spending, while limiting the possibility of overspending. Not only are they easy to use, but also, they are easy to purchase.
What is it?

A prepaid credit card is one in which the consumer determines the credit limit of the card by putting a certain amount of cash to the purchase of the card. They are used in the exact same way as a regular credit card.

Why get one?

A prepaid credit card is easier to acquire than traditional credit cards for people who have bad credit. Therefore, a consumer who has a bad credit history, but who has been able to begin the small climb back from endless debt, is able to acquire a means of credit.

The amount of spending is limited to a predetermined amount of cash. Therefore, consumers can guarantee that they will not spend more than they can afford, since the card cuts off once the previously placed funds are gone.

Prepaid credit cards provide teenagers with a safe way to handle spending without incurring debt. It is a good initial step to allowing your teenager a bit of financial freedom in which the parent retains control, but expresses their trust in the teenager’s responsibility on an initial level.

Gifts are often troublesome to select. A prepaid credit card is the perfect gift. No fuss and no muss are attached to this simple transaction. Moreover, it is sure to be appreciated since it can be used anywhere that credit cards are accepted.

Advantages

• The application process is simple.
• No interest charges will accrue.
• No credit checks, no income requirements, and no background checks are necessary.
• Prepaid credit cards are available for purchase in numerous locations, anywhere that credit cards are accepted.
• Prepaid credit cards are as widely accepted as traditional credit cards.
• Prepaid credit cards look like typical credit cards, most commonly Visas and MasterCards.

Disadvantages

• A set up fee is usually charged and may be expensive, depending upon the origin of purchase.
• In general, prepaid credit cards cannot be used for automatic monthly billing charges or payments.
• The individual making the purchase of a prepaid credit card will need to have the cash up front.
• Keeping an idea of the balance available on the card may prove to be troublesome in a minor way.

August 26, 2006

ManagingMoney.com Blog Joins Technorati

ManagingMoney.com is pleased to announce that we have added our Blog to the Technorati community of bloggers. Currently tracking over 52 million blogs, Technorati is the recognized authority on what's going on in the world of weblogs. The ManagingMoney.com Blog can be found under tags such as money, investments, economics, and personal finance. Check out our Technorati profile when you have the chance here: Technorati Profile

August 25, 2006

Breast Cancer Survivors are Now Quickly Insurable at Standard Life Insurance Rates

In a recent press release that garnered little mainstream press, one major life insurer has turned what has been a difficult insurability situation for many breast cancer survivors into a non issue going forward. To date, no other life insurance carriers have announced they are following suit.

In the past, if you had been treated for breast cancer, it could be as long as two to five years from the date of surgery, with no recurrence, before you would be eligible to be considered for private life insurance coverage industry wide.

Even if you were post treatment, approved and given an offer of coverage, you could generally expect to pay a higher or rated premium over the policy lifetime.

Your only other option during this already stressful time frame could have been the guaranteed issue group coverage at your employer for minimal amounts of coverage amounting to usually less than $50,000 per person, if it was even available.

The advances in early detection, successful breast cancer treatment protocols, plus the resulting excellent survival rates for many forms of the disease have changed the life insurance availability options for women of all ages with that little distributed press release from one major company.

Now, women will be able to apply for life insurance coverage and receive it at Standard rates with no ratings or premium increases. When can they apply? In as little as two months after surgery depending on the diagnosis and pathology reports, a fraction of the prior waiting period.

The diagnosis of the disease is no longer the instant life insurance disqualifier it was only a few short months ago. Unfortunately, the vast majority of women this will benefit today, probably just like the ones reading this now who don’t know anything about the opportunity before them remain uninformed.

Hartford Life, this leader in supporting breast cancer survivors, has established underwriting guidelines for women over age 40 with T1aNOMO and T1bNOMO breast cancers. If they meet the established criteria, each could be eligible for up to $2.5 million dollars in life insurance coverage at standard rates on permanent products in house. Higher amounts for permanent policies could be forthcoming with the use of re-insurers.

In general, the Hartford indicates for underwriting purposes appropriate treatment for grade 1 breast cancer includes: mastectomy plus axillary node sampling, breast conserving surgery plus axillary node sampling plus breast irradiation and Tamoxifen or Aromatase inhibitors.

Women aged 71-85 could be eligible for up to $1 million in coverage in permanent products before reinsurance would be an option for higher amounts.

For those who prefer term insurance coverage, the eligible ages at this writing are 40-70.

To consider making a coverage offer, the insurer must have pathology reports with the appropriate treatment completed, and the first post treatment follow-up appointment has been completed.

If you are a breast cancer survivor, or you know one who purchased any type of life insurance coverage in the past that had ratings imposed with corresponding higher rated premiums due to the disease with any insurer, you should have a professional comparing what you have in force with the new product pricing at standard rates. You may be pleasantly surprised at the difference in costs. If you need/want more coverage, I would encourage you to apply for coverage without delay before you turn one insurance year older to determine if this change in pricing is a viable option for your needs.

Even if you are a little, or a lot older than when you secured the current in force rated policy, in many cases, even with the increase in your age, you will find substantial premium savings with the removal of ratings. Another bonus is the ability to lock in new long term premium guarantees you may not have in your present policy.

Contact an experienced agent without delay to take advantage of this second victory in your battle over the after affects of the disease, you’ve earned it.

Author: Amy Rose Herrick, a Member of the Paladin Registry

August 22, 2006

Retirement Planning: Are You Scared or Prepared?

If you are planning on winning the lottery, don't bother reading this. For the rest of you, however, it is never too early to begin planning for a comfortable retirement. Given the new economic realities of retirement planning, building up a nest egg is a top priority. No longer can you rely on the government or employer-provided pensions to carry you through your retirement years. The long-term viability of the Social Security system is uncertain, given the crush of aging baby boomers who will begin retiring after 2010.

Generally, the private sector is shifting away from defined benefit plans -- which promise a certain payout for long-time workers after they retire -- to other types of arrangements like 401(k) defined contribution plans, which place greater responsibility for retirement investing on employees. Additionally, Americans are living longer than ever before, so to avoid outliving your savings, you'll need to set aside more now to finance a retirement that could last over twenty years.

Unfortunately, when it comes to retirement planning, many people are more scared than prepared. Three out of four working Americans are worried about not having enough savings for retirement, yet over half have not begun to save for retirement, according to a New York Times/CBS poll. Retirement planning may seem like a struggle, but you can reach your goals if you develop a disciplined savings strategy.

The first step is to set your goals: when would you like to retire and what kind of lifestyle will you maintain during retirement? Next, you may want to contact a financial professional to help you estimate what your expenses in retirement will be, how much you will receive from Social Security and your employer's pension, and how much you'll need to make up any shortfall between retirement expenses and income. Full Social Security benefits now accrue at age 67 for someone born in 1960.

Don't rely too heavily on the rough rule of thumb that you'll need about 70 percent of your pre-retirement income after you stop working -- your expenses for health care and leisure activities, for instance, may increase as you get older.

Whether you have 25 years or five years until retirement, take full advantage of the time you have until you retire. Obviously, the earlier you begin, the more you will end up contributing over time. Additionally, starting early lets you generate a greater payoff down the road due to the process of compounding -- the process by which the investment earnings you accumulate begin to generate earnings of their own. Compounding benefits increase with time.

Avoid the habit of contributing to your retirement fund only if there happens to be any cash left over at month-end. Without fail, set aside a specific amount each month for retirement before paying other bills. Saving even a small amount regularly is much easier than trying to save it all at once.

Another tip: contribute as much as you can to any tax-deferred retirement plan offered by your employer. A 401(k) plan, for instance, lets you contribute pre-tax dollars and exclude any investment earnings from your yearly taxable income until you withdraw your money later at retirement. As an incentive for you to save, some employers match some or all of what you contribute, which can help build up your nest egg even more. Withdrawals prior to age 59 ½ are subject to a 10% penalty and income taxes.

Choosing the right investments isn't easy. Your portfolio will be shaped by several factors, including your age, time horizon, tax bracket, and risk tolerance. All investments are subject to varying degrees of risk, but one type of risk in particular -- inflation -- is often overlooked. Inflation erodes the value of your savings over time and takes its toll on most types of investments, including those, which are considered "safe," such as money-market funds.

Naturally, you want to be cautious with your retirement savings, but investing too conservatively can keep you from reaching your goals. Avoid putting all your eggs in one basket by diversifying or spreading your savings among several types of investments, such as stocks, bonds and money market accounts. Diversification may help moderate the risks inherent in investing, but diversification cannot eliminate the risk of investment losses.

If planning for your retirement seems like a daunting task, contact a qualified financial professional for help. He or she can help you devise a strategy to meet your goals and suggest the most appropriate investments for your retirement portfolio.

Author: Ken Painter, a Member of the Paladin Registry

August 20, 2006

Organizing Your Business as a Limited Liability Company

As a sole proprietor, you've enjoyed watching your business take off. Your customer base is building, orders are steady, and your overhead is under control. But with this growth, you now realize you can't handle everything yourself. You need to attract investors, take on a few associates, and protect your personal assets from your firm's liabilities.

You've reached a turning point: it's time to run your company in a more formal manner. But should you set up the business as a corporation or partnership? The answer may be neither. As an alternative, consider a limited liability company (LLC) -- a form of business organization popular among small business owners that combines some advantages of a corporation and a partnership.

Compare the LLC
Why the need for an LLC? LLCs can offer a competitive advantage over corporations and partnerships in three areas: taxes, liability protection, and flexibility. Although the LLC statutes vary among the states, it's possible to generalize about how LLCs measure up against other business arrangements.

Taxes
If the LLC is structured properly, it will be taxed like a partnership for federal income tax purposes. That means no tax at the company level. Like partnerships, LLCs distribute income and losses directly to owners who then report these items on their personal income tax returns. Being taxed like a partnership also avoids the double taxation problem faced by shareholders in a corporation. Corporate earnings can be taxed twice -- first as income to the corporation, and again as a dividend income to the individual shareholder. This combination of two levels of tax can mean a much higher tax cost than the single tax available through ownership of an LLC.

Liability
In general or limited partnerships, general partners can be held personally liable for the partnership's debts and obligations, as well as other partners' mistakes -- a big deterrent to many would-be entrepreneurs and prospective investors. Additionally, in certain situations, limited partners who become actively involved in running a partnership can be reclassified as general partners and lose their limited liability protection. But LLC owners, like corporate shareholders, are shielded from personal liability beyond the value of their investment. Their personal assets are generally not subject to the claims of business creditors. LLCs avoid the threshold problem in forming a limited partnership -- finding a general partner willing to be exposed to the business's liabilities.

Flexibility
The various state laws authorizing the use of LLCs generally permit their use in almost any type of business. LLC organizers have broad discretion in deciding who will manage the company. Often, LLCs are managed by a small group of the company's owners. And, while LLCs share some subchapter S corporation advantages -- such as limited liability and taxation only on the individual level -- they have far fewer restrictions. For instance, only individuals, estates and certain trusts may be S corporation shareholders, and the maximum number of shareholders is limited to 75. In contrast, LLCs have no such limits.

Forming an LLC
Forming an LLC typically involves filing articles of organization with the state. This document is analogous to a corporation's articles of incorporation and contains basic information about the LLC. The fundamental governing document is the operating agreement which outlines the rules for operating the business and allows the owners to allocate ownership interests in any desired fashion. It is generally a flexible, private agreement that can be customized to meet your business needs.

Disadvantages
If you are already doing business as a C corporation or S corporation, you may face a host of taxes, expenses and complications in converting to an LLC. Merging LLCs with other entities is also fraught with potential complications. Since LLCs are relatively new and untested, many legal issues have yet to be addressed by statute or by the courts. Additionally, failure to carefully follow the LLC guidelines established by the IRS could nullify the tax advantage -- which would subject an LLC to corporate or "double" taxation. And there are no guarantees that the earnings of businesses conducted as LLCs will not be subjected to some form of taxation in the future. A few revenue-hungry states have already expressed such an interest.

Is the LLC the entity of choice for you? That depends on a number of factors. Adopting or changing your form of business requires careful consideration of your business, tax and financial needs and the legal risks. An experienced, professional advisor can assist you in making that decision.

Author: Ken Painter, a Member of the Paladin Registry

August 17, 2006

ManagingMoney.com Adds UK Credit Cards

We are very excited to announce the addition of United Kingdom (UK) Credit Cards to our Credit Card Center. The addition of UK credit cards complements our existing United States and Canadian credit card listings and now brings our total card listings to over 150 credit cards. The addition of this new category is also in line with our corporate strategy to position ManagingMoney.com as a global personal finance portal.

As with the US and Canadian credit cards, we provide Detailed Reviews and a Star Ranking System to help our users find the best card for their particular situation. The UK credit cards include both business and personal cards and include issuers such as American Express UK, British Airways, Marbles, and Nectar.

August 15, 2006

Why Do Bond Prices Fluctuate

If you hold a bond to maturity, you will receive the full principal amount. However, if you want to sell before maturity, your bond will probably sell at a premium or discount to that amount. Why do bond prices fluctuate? There are two primary reasons: credit rating changes, or interest rate changes.

Credit rating changes:

When a bond is issued, rating agencies assign a rating to give investors an indication of the bond’s investment quality and relative risk of default. The first four rating categories are considered investment-grade bonds, while the lower categories are considered speculative. A bond’s rating affects the borrowing cost for the issuer. Typically, higher-rated bonds pay a lower interest rate than lower-rated bonds. After the bond is issued, the rating agencies continue to monitor it, making changes if warranted. A bond’s price will decline when a rating is downgraded and will increase when a rating is upgraded. The price change brings the bond’s yield in line with other bonds with a similar rating. However, these price changes are typically minor if the rating changes by only one notch. Certain downgrades are more significant than others. You should review whether you want to continue to hold the bond if any of the following occur:

• A downgrade moves a bond from an investment-grade to a speculative rating.

• A downgrade of more than one notch occurs.

• A series of downgrades occurs over a short period of time.

Interest rate changes:

Interest rate changes will typically cause a bond’s price to fluctuate more than credit rating changes. When interest rates rise, a bond’s price will decline, while the bond’s price will increase when rates decrease. For instance, assume you own a 10-year bond that pays a 3% coupon, while bonds of the same maturity currently pay 4%. It would be difficult to find someone willing to pay the full principal amount to receive 3% interest, when they could easily purchase another bond with 4% interest. To encourage someone to purchase the bond, you would have to lower the price enough so the bond pays the equivalent of 4%.

To extend the example further, suppose you own two bonds paying 3% — one with a five-year maturity and another with a 10-year maturity. Would you be able to get the same price for both bonds? Since the bond with the 10-year maturity is paying a lower interest rate for a longer period, you would have to discount that bond more. One of the reasons longer-term bonds typically pay higher interest rates is because there is more risk that interest rates will change during the bond’s life.

In summary, before selecting a maturity date for a bond consider when you will need your principal. If you sell before the bond matures, interest rate and credit rating changes will affect the selling price.

August 12, 2006

Apple Selling Refurbished iPods

We normally don't write about consumer electronic deals but this is one we couldn't pass up. Apple is now selling Refurbished iPods. One of our mandates at ManagingMoney.com is to help our users Save Money. With just about everyone in the world either already owning an iPod or planning to buy a new one, we thought you ought to be aware of this offer. It can easily save you up to $100 which is money you can invest elsewhere.

Apple Certified Refurbished iPods are pre-owned iPods that have undergone Apple's stringent refurbishment process. All refurbished iPods are covered by Apple's one-year limited warranty. As an example of some of the savings available, a refurbished white 30GB iPod that normally sells for $299.00 is available for $199.00. As part of the refurbishment process, all units are fully tested, are refurbished with genuine Apple replacement parts for any defective modules identified in testing, are put through a thorough cleaning process, and are repackaged with appropriate documentation and cables. With Christmas just around the corner this deal will keep both the children and your bank account happy.

Gift Giving to Adult Children

With the high divorce rate in this country, you might have concerns about making large gifts to a married child. It’s one thing to worry about your child using the money wisely. It’s an entirely different worry to think your ex-son- or ex-daughter-in-law might leave the marriage with your money. Some ways to ensure the money stays in the family include:

Pay for specific expenses. Rather than making a general cash gift to your son or daughter, offer to directly pay for a specific expense. You might pay for a vacation or private school for your grandchildren. Probably the best option is to directly pay for medical expenses or education costs, since those expenditures won’t count toward your annual tax-free gift limit of $12,000 in 2006 ($24,000 if the gift is split with your spouse).

Keep the money separate. If you make cash gifts to your children, you might stipulate that the money be kept in a separate account solely in your child’s name. Typically, those accounts won’t be included in divorce settlements, so the funds will stay with your child.

Consider trusts. One way to keep control of the gifts is to set up a trust, naming your children as beneficiaries. However, due to the costs involved in setting up trusts, you probably won’t want to use this strategy unless significant sums of money are involved.

Encourage your child to sign a prenuptial agreement. This agreement specifies how assets acquired during the marriage, including gifts and inheritances, will be distributed after death or divorce. While a prospective spouse may not like the idea of signing a prenuptial agreement, it is probably in his/her best interest if it encourages you to gift more generously to your child

Visit ManagingMoney.com's Legal Center to obtain your Legal forms such as Living Trusts, Small Estate Forms, and more.

August 10, 2006

Steps for Global Investing

If you want to invest in international investments, you may want to consider a systematic approach. Some of the steps include: the percentage of your portfolio to allocate to international investments; whether you want to invest based on countries or companies; familiarity with the available investment options; risks involved in international investing; and reviewing and monitoring your investments.

1. Decide what percentage of your portfolio to allocate to international investments. International investments should be one component of your overall asset allocation plan. What percentage you allocate to global investments will depend on several factors, including your risk tolerance, time horizon for investing, and comfort level with foreign investments. Consider allocating at least 10% to global investments, since less than that will typically have little impact on your total return.

2. Determine whether you want to invest based on countries or companies. There are two basic approaches to international investing:

• A top-down approach analyzes various markets to determine which countries or regions of the world are likely to experience above-average investment returns. Based on that analysis, individual investments in those countries are selected.

• A bottom-up approach analyzes specific companies, selecting those that exhibit strong fundamentals. Which country that company is located in is typically not a factor.

3. Get familiar with the available investment options. There are numerous investment vehicles in the international arena. Understand the basic choices so you can make informed decisions about which alternatives are most suitable for you.

4. Understand the risks involved in international investing. In addition to the risks associated with domestic investing, international investments have unique risks:

• Political and economic trends. A wide variety of government decisions can impact a country’s investments, including nationalizing industries, changing investment regulations, or adopting more stringent trade policies. While these risks may not be as significant a concern for major industrialized nations, the risks can be significant for emerging markets.

• Currency fluctuations. A foreign investment’s return is based on two factors: the investment’s actual return, and the impact of currency fluctuations. If the U.S. dollar declines compared to the other country’s currency, your investment will increase in value since more dollars are now needed to purchase the investment. An increase in the U.S. dollar compared to the other currency means your investment will decline in value.

• Market volatility. While market volatility also occurs in U.S. markets, it tends to be more pronounced in foreign markets, especially emerging markets.

• Information. It’s generally more difficult to find information about foreign investments. Also, financial reporting practices in other countries are different than those in the U.S., making comparisons between foreign and U.S. companies difficult. Disclosure requirements are typically not as extensive.

• Transaction concerns. Transaction costs can be significantly higher in foreign countries and delays in settling trades are not uncommon. Many foreign stock markets are thinly traded, making liquidity a concern.

5. Review specific investments. Once you have decided how much to allocate to this area and have become familiar with international markets and the alternatives available, you can start investigating specific investment options.

6. Monitor your investments. You should periodically review your international investments, along with your other investments, to ensure conditions at that company or in that country have not changed dramatically.

August 9, 2006

Considering Your (Stock) Options

To attract and keep top employees, more companies are offering them employee stock options. If you receive employee stock options as part of your compensation package, careful planning can help you make the most of them.

What Is an Employee Stock Option?

Employee stock options give you the right to buy stock in the corporation that employs you at a specified price - the exercise or “strike” price - at a future time. Usually, the strike price is equal to the stock’s market value at the time the option is granted. You benefit if the value of the stock rises and you sell it for more than you paid for it.

Employee stock options usually have an “exercise period” during which you have to buy the stock or lose the options. They also may have a “vesting schedule” that requires you to wait a certain period before you can exercise your option.

Employee stock options come in two basic varieties: nonqualified and incentive.

Nonqualified Options

With a nonqualified stock option, you generally owe no taxes on the option until you exercise it. Then, you must report income equal to the difference between the stock’s market value and your exercise price.

For example, if you exercise an option to buy 100 shares of your employer’s stock for $10 per share when the stock is trading at $25 a share, you are considered to have received $1,500 (100 shares × $15 profit per share) of taxable income that year. You’ll have to pay tax on that income at regular tax rates, which range as high as 35%.

Once you exercise your option, you own the shares of stock. You can sell your shares right away or hold on to them and sell later. Returning to the example, you’ll make $1,500 if you sell the stock for $25 a share. Sell it for $35 and you’ll make another $1,000 (taxable as a capital gain). For most investors, the maximum long-term capital gains tax rate on stock held more than a year is 15% (through 2008).

Incentive Stock Options

With incentive stock options (ISOs), you don’t generally recognize any income for regular tax purposes when the option is granted or exercised. Rather, income is recognized only when you sell the stock and, if you meet two requirements, it’s taxed at the lower capital gains rates. Those requirements: You must wait until you’ve had the stock more than one year before you sell and the date of the sale must be more than two years after the date you were granted the option.

Watch Out for AMT

However, with ISOs, you could find yourself subject to alternative minimum tax (AMT) in the year you exercise the option. AMT is intended to prevent people from reaping more than their fair share of benefits when they use certain deductions, credits, and exclusions to reduce regular income tax. The difference between the price you pay for the stock when you exercise an ISO and the stock’s market value at that time is considered an adjustment for AMT purposes. If you’re subject to AMT, you effectively have to pay tax on this “profit” even though you haven’t yet sold your stock.

A common employee stock option strategy is to hold on to options as long as the stock price continues to rise. And waiting until you have plans for the money - college expenses, a new home, or retirement - can keep you from spending any profits frivolously. Talk with your professional financial advisor. He or she can help you integrate your employee stock options into your overall investment program.

Author: Mark Sherin, a Member of the Paladin Registry

August 8, 2006

Why Consider International Investing

During the 1990s, the U.S. stock market significantly outperformed international stock markets. Never a particularly large percentage of U.S. investment portfolios, international investments drew even less attention during that time. Due to the significant volatility in the U.S. stock market over the past several years, is now the time to take another look at international investments? Before deciding, consider the answers to these questions on the subject:

Do international investments really add diversification benefits to a portfolio? The primary objective of diversification is to reduce the volatility in your portfolio. For instance, when the U.S. stock market is declining, investments in other parts of the world may be increasing. Over the short term, especially during periods of crisis, stock markets throughout the world tend to move in the same general direction. But over the longer term, stock markets tend to be less correlated, with individual markets still responding primarily to their local economy.

One way to determine the diversification benefits of adding an asset class to your portfolio is to review the correlation between the two assets. Correlation is a statistical measure of the extent to which one asset class moves in relation to another asset class, ranging from +1 to -1. A correlation of +1 means the two asset classes are highly correlated and move very closely together in the same direction. Combining assets with a high positive correlation will not provide much risk reduction. A correlation of -1 indicates the assets move in opposite directions, a rare event in the investment world. A correlation close to 0 means no relationship exists in the price movements of the two assets. Combining assets that aren’t highly correlated can help reduce a portfolio’s volatility.

A recent study reviewed the correlation of various asset classes over the period from 1970 to 2004 (Source: Journal of Financial Planning, February 2006).* The study found that correlations have increased in recent years. For the period from 1970 to 1997, the correlation between international investments and the Standard & Poor’s 500 (S&P 500) was 0.48, but increased to 0.83 from 1998 to 2002. The correlation between emerging market investments and the S&P 500 increased from 0.45 during the period from 1988 to 1997 to 0.75 from 1998 to 2002. In the eight down years for the S&P 500 during the period from 1970 to 2004, international investments outperformed the S&P 500 in four years and underperformed in four years. While no one knows whether these correlations will stay high, the increasing globalization of trade makes this a realistic assumption.

Another study found that while correlations have increased in recent years, those correlations tended to stay fairly level over long investment periods (Source: Financial Planning, November 2005).** For instance, one-year correlations between the S&P 500 and the EAFE were 0.74 in 1974, dipping to 0.25 in 1996, but started increasing again in 1998, reaching 0.90 in mid-2005. However, using 10-year rolling periods, the correlation was 0.70 in 1979, decreased some in the mid-1990s, but recently was at 0.70, the same level as 25 years ago. Thus, for investors with long time horizons, international investments still provide diversification benefits.

Do returns in foreign markets offer greater potential than U.S. stock market returns? No one can predict the future performance of any stock market. However, reviewing past performance can help develop realistic expectations. International investments outperformed the U.S. stock market for five-year rolling periods from 1974 to 1982 and from 1985 to 1990. From 1990 to 2003, international markets lagged the U.S. stock market. The year 2004 was the first year since 1990 that international markets outperformed the U.S. stock market (Source: The Case for Global Investing, 2005).

These returns, however, compare overall international returns to U.S. returns. For the 20-year period ended December 31, 2004, 13 different countries had higher average total returns than the S&P 500 (Source: The Case for Global Investing, 2005).

With international investments lagging behind U.S. investments for such a long time, there may be opportunities to find investments in other parts of the world that are more attractively priced than those in the U.S.

Does international investing offer other advantages? The U.S. stock market now represents only 49% of total market capitalization in the world, down from 66% in 1970 (Source: The Case for Global Investing, 2005). Limiting yourself to U.S. investments means eliminating over half of the world’s investments from consideration. In a number of industries, the world’s leading companies are not U.S.-based. Of the top 10 industry leaders in terms of market capitalization, the following were located outside the U.S.: 9 in electronic equipment, 8 in metals and mining, 8 in oil and gas, 8 in wireless telecommunications, 7 in automobiles, 7 in commercial banks, 7 in electric utilities, 6 in beverages, 6 in insurance, and 5 in pharmaceuticals (Source: The Case for Global Investing, 2005). Also, since different countries are at different developmental stages or at different stages in the economic cycle, you may find opportunities to invest in trends in other parts of the world that you missed in the United States.

What percentage of your portfolio should be invested in international investments? It is usually recommended that you allocate at least 10% of your portfolio to international investments, since less than that will typically have little effect on your portfolio’s total return. However, what percentage you allocate will depend on personal factors, such as your risk tolerance, time horizon for investing, and comfort level with foreign investments. International investing may not be suitable for everyone. In addition to the risks associated with domestic investing, foreign investing has unique risks, such as currency fluctuation, political and social changes, and greater share price volatility.

* The study used the returns of the Standard & Poor’s 500 (S&P 500) for U.S. stock returns, the Morgan Stanley Country Index for international returns, and the Morgan Stanley Emerging Markets Index for emerging market returns. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot directly purchase an index. Past performance is not a guarantee of future returns. This information is presented for illustrative purposes only.

** This study used the returns of the S&P 500 for U.S. stock returns and Morgan Stanley’s EAFE (Europe, Australasia, Far East) index for international returns. The EAFE Index is an unmanaged index of foreign stocks generally considered representative of stock markets outside the U.S.

August 6, 2006

Living Wills Don't Work

Time to abandon a failed policy! Living wills don't work -- and can't work -- for their intended purpose of allowing people to plan in advance how they'd want to be treated in end-of-life situations. According to a University of Michigan study, the very documents designed to help people choose the care they want at the end of their life fails to meet five key criteria for success.

The U of M report takes on a document that has become ingrained in American medical culture and is recognized by every state. It is a document that many experts recommend to avoid the kind of problems raised by the Terry Schiavo case in Florida; A case in which a patient's husband and parents have fought a long legal battle over whether she should be kept alive. The U of M team can imagine circumstances where the living wills may be useful for patients who are imminently facing death, who know their medical circumstances and who have strong and specific beliefs about them. The best patients can do, argue the researchers, is to use a "durable power of attorney for health care issues (DPA)" to appoint someone to make decisions for them when they can no longer make their own choices.

A review shows that living wills fail all five tests that would have to be passed for them to work. First, most people don't even have living wills. Second, those who do rarely know what care they would truly want in some hypothetical future. Third, it's surprisingly hard for people to state their wishes accurately and understandably. Fourth, the document is often unavailable when decisions need to be made. Fifth, even when it is available, surrogate decision makers usually cannot reliably apply its instructions to the patient's current health condition.

The living will was designed by bioethicists who wanted to give patients a chance to spell out what treatment they would want and what treatment they would reject if they became unconscious or unable to make their own decisions The idea of the living will is to allow people to maintain control even at the end of their life. Often, the living will starts as a blank form for patients to fill out in writing, stating their individual preferences. The instructions might suggest that patients write down whether they'd want to be kept on life-support machines if they had a catastrophic accident or were terminally ill.

For instance, according to the instructions for the form on the U of M Health System Web site, a patient could write, "Do whatever is necessary for my comfort, but nothing further," or, "I authorize all measures be taken to prolong my life." Patients can also write about their wishes regarding specific medical interventions, such as respirators, cardiopulmonary resuscitation (CPR), surgery and blood transfusions. And they could say how they feel about receiving food and water administered through "feeding tubes." The functional illiteracy of many Americans, and the difficulty even for skilled writers of expressing their wishes well, add to the problem, the articles authors suggest. And, people's preferences often change as their situations or medical technology changes.

For most people, the article’s authors say, a durable power of attorney for health care may be adequate. DPA's allow people to name someone whom they would want to make decisions about their care. That person is usually the patient's spouse or child, but it can be any trusted individual.

DPA's only require a few simple choices, and they don't differ significantly from the existing system of allowing family members to make medical decisions about incompetent patients. They also allow the decision-maker to use the information about the patient's condition that's available at the time a decision is needed, rather than asking the patient to guess about something far in the future. And they're inexpensive. If living wills were free, perhaps their failure wouldn't matter. But living wills cost money. Patients must take time to write them, and doctors and lawyers must be paid for their help in writing them. What is more, the federal Patient Self-Determination Act, which requires hospitals to tell patients about living wills and other "advance directives," cost an estimated $101.5 million to startup nationwide and demands additional untold time and effort from hospital administrators and clinicians each year. In addition, the authors find, here is no convincing evidence that living wills save money by reducing the cost of end-of-life care.

So the bottom line is pretty clear; Talk to your attorney about Durable Powers of Attorney for Health Care Issues"

Author: Craig Carnick, a Member of the Paladin Registry

August 4, 2006

Resolving Financial Issues before Marriage

Personal financial topics are often some of the most difficult topics for people to discuss. But since financial issues often cause significant problems in marriages, you should try to reach agreement on your finances before your wedding. Some items to consider include:

Where do you want to be in five or 10 years? Our dreams for the future often come with price tags. If one spouse wants to continue his/her education or start a business, significant sums may be needed for that goal. If children are part of your future plans, when you have those children, how many you have, and whether both of you continue working will have a significant impact on your finances. Planning now will allow you to set priorities and start saving for those goals.

What assets and liabilities are each of you bringing to the marriage? Preparing a combined net worth statement will give you a starting point for determining how you can help achieve your financial goals. If one or both of you have significant assets, you might want to consider a prenuptial agreement to spell out what happens to your assets in the event of death or divorce.

Do either of you have credit problems? When you apply jointly for credit, both of your credit histories will be evaluated. Thus, if one of you has an outstanding credit history and the other has credit problems, it can affect the approval process and your debt's cost. If one of you has credit problems, work hard during the early years of your marriage to correct those problems.

Should you combine your finances or keep them separate? Some couples prefer pooling all funds, thinking it helps create a feeling of unity. Others, however, have difficulty losing their financial autonomy, especially if they have been on their own for many years. Keep in mind that this is not an either/or decision. You can set up a joint account for shared expenses, with each spouse contributing a predesignated amount to the account. For the remaining funds, separate accounts can be kept for discretionary spending.

How will you handle spending decisions? The process of defining goals and setting a budget can help resolve differing views about money matters, forcing couples to compromise and make joint decisions about how money will be spent. While that might seem like a painful process, addressing these issues now can help prevent future misunderstandings. You may want to set a maximum amount that each of you can spend without consulting the other.

How will you handle insurance? If you both have medical insurance through your employers, it may be cheaper to select one plan for both of you. Combining auto insurance may also reduce premiums. You'll also want to evaluate your life insurance.

Who will handle financial tasks? Decide who will handle financial tasks. One person may be more suited for these tasks due to his/her background or time availability. However, the other spouse should not give up total control. Set up a formal time, perhaps monthly, to go over financial matters. This keeps both spouses informed and provides a designated time to discuss spending or items of concern. You then won't fret about how to bring up financial topics or let finances interfere at other times.

Author: Roger Wohlner, a Member of the Paladin Registry

August 2, 2006

60% of the Population Will Require Long Term Care

The good news is we are living longer than prior generations! If you were born just 100 years ago, your life expectancy was only an average age of 47. Now a child born today has a life expectancy average of 77 years, a 30 year increase.

With the good news, comes the bad news from the Federal Office of Personnel Management that in 2003 concluded a sobering 60% of the population will need some type of long term care. Think about it in real terms. You have ten members in your company management team; six of you will require some type of long term care (LTC) as a part of their future living expense planning during your lifetime. Just four of these educated professionals will not require funding for this expense during their lifetime. You may need to do more financial planning than just to max out your 401(k)!

Reality is that only a fraction of the 60% of the population that is identified as at risk for incurring long term care expenses has taken action to protect hard earned assets from this substantial future liability with insurance.

We are having on average substantially smaller families than 100 years ago, so there are fewer potential care givers adding to the long term care management issues.

Why are so few insured? Perhaps it is perspective that it can’t happen to me combined with the in place status quo by making it mandatory to get insurance to get something else you really want.

Do you have auto insurance? Of course you do! Why? Well, initially in order to secure a loan on the vehicle, the lender required it. Then the state often insists you show proof of coverage before you can legally obtain tags. Only 7% of you on average will have a car accident this year, but 100% of you driving legally are insured. So if only 7% of you will have a loss, why are 100% of you insured? It’s mandatory! How much are you paying in annually in auto premiums?

Do you have homeowners insurance? Most will say yes. Why? Likely a loan is in place with a lender requiring it to protect their interests, its mandatory! Many will keep the coverage in force even when a home had been paid for because there is a fear of losing everything you have to a catastrophe. The reality, only about .5 or one half of one percent of you will have a home fire this year. How much do these premiums cost?

What about life insurance? It has been proven since time began all people die at some point leaving families, jobs, businesses, debts and unfunded dreams behind, often without warning. Yet, with a 100% certainty that death will occur, not everyone secures life insurance because it is voluntary. Your lifetime earning power and physical presence will generally be your biggest asset and sadly most of you reading this will pay less for life insurance and have a lower percentage of coverage on yourself than these other listed possessions.

The key to securing LTC coverage is designing a plan that compliments what other resources you already have in place. This is not a matter of waiting until you are retiring either. Long term illness or accident recovery can affect those still in prime working years too, and does. If you doubt the validity of working adults needing long term care, spend a day sitting outside a local rehabilitation center. Make a note of the different ages that pass through the doors and their wide variety of disabilities requiring therapy. Who is providing the transportation and assistance to make the appointment?

Still scoff? Ask a therapist about their youngest to oldest patients. National market surveys have shown the average cost for a year in an assisted living facility is $34,860. Upgrade to a nursing home environment and the cost soars to an average of $74,095 a year. That figure does not include time off work for your support person, likely a spouse or adult child, transportation or other expenses.

The number one objection for not buying LTC is cost. Adults question the benefit versus the costs. Plus the whole subject terminology can be upsetting or confusing. How much coverage you secure will be the determining factor on pricing. Certainly a lifetime benefit will be more costly than a one, two or three year benefit policy. But, really how much statistically is “enough”?

A comprehensive study by Milliman the leading national long term care insurance actuarial and product development firm concluded that for the vast majority of insured’s, a three year benefit may very well be “enough”. Why? Only 8 in 100 claimants exhausted their three year policy benefits.

The study examined over 1.6 million in-force policies to reach this conclusion. Only 14.4% of closed long term care claims lasted longer than 24 months, while 33.2% of still open claims lasted longer than 24 months.

Only 5.6% of closed claims lasted longer than 36 months. 16.2% of open claims lasted more than 36 months.

There are basically two types of policies.

One type is a traditional reimbursement plan, and pays much like your health insurance. First you incur the expense, submit it to your carrier for verification of what is covered, then payment is made and you remit the remainder not covered by your policy. In these types of situations, someone must devote a lot of time to keeping track of your every medical related expense, and then be diligent in submitting each and every days worth for consideration and reimbursement, then remitting payment as needed. This can be a very time consuming task for someone else because it is unlikely you will be able to do this for yourself. Some exhausted family members equate the managing of the care giving, submission of claims to all the involved insurers and finally management of the payments for all services provided to more than a full time job.

The second newer type is a cash benefit policy. It pays benefits if you cannot perform two adult daily living activities. It is much simpler to administrate in every way. You need not prove what you are spending the money for. The check arrives once a month.

This is an improvement over the older policies because it dramatically lessens the time and book keeping burdens on care givers by eliminating the submission, reimbursement, payment and tracking steps.

Either plan could be a good “fit” depending on what you need in place to compliment what you already have. You may require a modest $50 a day to be “enough”, or about $1,500 a month. Most policies will have a benefit ceiling of about $9,000 a month. This is the limit the insurer is willing to take on any insured.

LTC policies can also be an excellent alternative, or supplement to a traditional disability policy for high earning professionals. In many cases, for a successful attorney or physician, they must secure multiple policies from several different carriers to cover their income levels, so the addition of a LTC policy could enhance their existing program for a fraction of the cost of a similar dollar benefit traditional disability plan.

LTC premiums may also be 100% deductible on your taxes, where private disability coverage is not.

For married couples without coverage, the reality could be that you impoverish one spouse for their remaining lifetime to support the other in LTC for only a few years.

For singles, LTC can be a way to secure a standard of living when you do not have a spouse or children to rely on for financial or assisted care help.

Every LTC situation will be unique. Consult a professional to design a plan for you without delay. Remember the majority consisting of 60% of you reading this will need the coverage. Do you have yours yet?

It has been proven that some LTC asset protection will prove for claimants to be better than none in every situation.

Author: Amy Rose Herrick, a Member of the Paladin Registry

 

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