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January 26, 2009

Escaping the Credit Card Trap: Getting Your First Credit Card

(A continuing series)
If you're new to the working world, or are still in college, you may be wondering why you should get a credit card at all. One the one hand, you see thousands of people struggling with high interest payments for years and years, while on the other access to all that cash is pretty tempting. Unfortunately, the banking system is essentially holding your credit hostage to make sure that you borrow money or at least have an open line of credit. Your credit score is partially determined by the following factors:

• What is the oldest line of credit you still have?
• What is the ratio of available credit to income?
• What is the ratio of money owed to available credit?
• Do you have a history of on time payments?

There are many more, and I've certainly oversimplified even these to make the point. If you have never borrowed money, or opened a credit card account, then you do not have a long credit history, you have no record of making on time payments, you don't have a high ratio of available credit to borrowed money, and in short, your credit rating is probably below average. Of course a very high income and a large savings certainly helps. At some point in your life, you are going to need to borrow money, whether it is for a new car, your first home, or even unexpected medical bills. When you do, the interest rate you pay will depend upon your credit rating.

I would definitely recommend having at least one credit card. If you tend to be impulsive and may spur of the moment purchases, then you should definitely not keep the credit card with you. Put it away in a safe deposit box or in your sock drawer, or anywhere where you can't use it to buy electronic gadgets, clothes, or whatever it is that you can't resist. You do not want to use a credit card to buy luxury items that you could not afford to buy with cash, not ever.

On the other hand, there are cards that offer rewards for using them. These might come in the form of cash back, frequent flyer miles or some other type of bonus that accrues whenever you use the card. Since the credit card companies are using these benefits to try to draw you into debt, use them right back. Set up automatic payments of all your monthly bills through your credit card, make sure they are recorded as purchases and not cash advances though. If you see them recorded as a cash advance, you'll probably be charged an additional fee that outweighs the benefit. Use a separate bank account to pay your credit card each month. Make sure you deposit enough money in that account each month to pay all your bills, and pay off the card in full each month.

This way you are using the card enough to avoid non-use charges that some banks use as another tool to try to get you to go into debt, but you also avoid paying interest on any carried balances. On top of that, you earn regular bonuses for each payment you make with the credit card. In no time at all you may have enough frequent flyer points to take a vacation, paid for by your credit card company. Just watch your incidental spending while you're there. In fact, if you routinely put a little extra into the account you use to pay off the credit card each month, it will build up over time and you might have some spending money to take along with you.

Of course, the rewards are incidental to building your credit history and improving your credit rating. Don't be tempted to buy things just for the rewards, but use the card for things that you need and for which you can afford to pay cash. You can't get caught in the credit card trap if you don't put your foot in it in the first place.

Author: Brad Sylvester

January 20, 2009

Escaping the Credit Card Trap: Choosing Which Cards to Pay First

(A continuing series)
If you are carrying a large credit card debt, chances are you have several cards with outstanding balances. Paying the minimum balances on each card means that it will likely take many, many years before you get them all paid off. You must pay as much extra every month as you can afford in order to get rid of those balances. Just look at the finance charges on your statement. Add them all up and multiply by twelve. That's how much extra cash you'd have in your pocket each year if you got rid of your credit card balances. That's not even counting the principal repayments.

So how do you decide where to send the extra payments? Should you split it up among all the cards or focus on just one? We recommend targeting just one card with the extra payments. There are two ways to decide which one to choose, but first you need to do a little homework to minimize your existing finance charges.

In a previous installment in this series on Escaping the Credit Card Trap, we told you about transferring high interest rate credit card balances to new cards with low promotional rates. What we didn't mention is why you should transfer those balances to a new card instead of an existing card that already has a high interest rate balance, even if they offer a lower rate for a balance transfer. Most credit cards apply your payment to the lowest interest rate balance. That means your payment will go to repaying the promotional interest rate transfer balance until it is all gone before one penny is applied to the rest of the balance which is sitting there gaining interest at a much higher rate. Depending upon the amounts and rates, these kinds of balance transfers can work against you. You want your payments to be attacking higher interest rate balances first.

Once you've gotten your credit balances in the lowest possible interest rate accounts that you can, we suggest either of the two following strategies for deciding which one to pay off first. Mathematically, you should always pay every spare cent to the card with the highest interest rate first. This lowers the amount of interest charges that you incur every month and helps you get out of debt as fast as possible. If you are committed to getting out of debt and disciplined enough to make sure that you send every bit of spare cash as extra payments against this debt, then that's the way to go, hands down.

If, however, you have moments of weakness, and find yourself wavering between sending the cash to the credit card company or going out to a restaurant for dinner, then there's another option that might make it easier to stay committed to your goal of becoming debt free. Attack the credit card with the lowest remaining balance first. Pay it off and get rid of it. There is no greater motivator than success and knocking off credit cards one by one can help you stay focused not only on the longer term goal, but can provide intermediate successes along the way. After all, the only way to get rid of all your credit card balances is to stay focused and stay committed to the goal for the long run. If ignoring the mathematically best option helps you to achieve that commitment, then this might be the best option for you.

Either way, you need to be consistent and immediately stop all credit card spending. As we have already mentioned, though, don't cancel the accounts (unless they carry an annual fee, of course) or you risk damaging your credit rating even further. In a future installment of this series, we will talk about the responsible use of credit cards, but only AFTER you've paid off all your existing balances.

Author: Brad Sylvester

January 17, 2009

What your Body Language Says to a Potential Employer

In a job interview, you may be telling the hiring manager more than you want to with your body language. Most professional interviewers have a good eye for reading the visual cues you are sending. Many companies are even providing training on interpreting body language and projecting the right image to their front-line interviewers and hiring managers.

Body language and facial cues can let the interviewer know whether you are confident, deceiving, afraid, uncertain, trustworthy, aggressive, and even whether you are really listening to what they are saying. Rather than leaving your first impression to chance, practice using your body language as if it were another aspect of your resume. Like your resume, it helps a prospective employer know who you are and what kind of an employee they will get if they hire you.

Professionally trained interviewers will almost always project a confident, attentive, non-threatening persona during the interview, and this is what you should strive for as well. Attentiveness can be shown by sitting forward on your chair, and leaning in toward the conference table just a little bit. Not too much though, if you lean too far toward the interviewer you can seem overbearing or aggressive. Fidgeting or fumbling with a pen or other object gives the appearance of impatience and boredom, as though you can't wait for the other person to stop talking. Your attention should be firmly focused on the interviewer. A slight smile and nodding in agreement when the interviewer makes a point shows that you care about what is being said, without signaling aggression. Nodding as the interviewer finishes a question, can signal that you have thought about this issue and are prepared to answer, implying competence and attention to detail.

Nobody likes to be stared down, but maintaining eye contact is important. Good eye contact will show confidence and honesty, especially when you are talking. If you are constantly averting your eyes or have difficulty looking the interviewer in the eye when answering a question, the interviewer may note this as a sign of deception, dishonesty, or extreme lack of confidence in whatever you are saying. If your eyes are darting down and to the left, this is almost universally recognized as a sign of deception. If you must look away, looking up and to the right signals that you are searching your memory or processing a thought, but is still not as effective as maintaining solid eye contact.

If you fear that you seem too aggressive or overbearing, recent raised eyebrows with eyes wide open is subconsciously interpreted as a submissive gesture and can help put the interviewer back at ease. This works best when reacting to something the interviewer is saying in a sort of "oh, really?" expression. Smiling whenever you can work it in to the conversation naturally is one of the best tools you can bring to the interview. Smiling is a confident gesture, and makes you seem more friendly and approachable. Salesmen smile because it induces trust in clients, and it'll help you close the deal with an interviewer in the same fashion.

It's important to practice these techniques so that they appear natural. Use them in conversations outside the workplace and make sure you are getting the reactions you expect. Obviously artificial gestures or expressions will make you seem shallow or aloof. If you can't pull it off in a natural manner, then don't try it in an important interview. Keep practicing, though, and eventually you'll be able to use body language as a key part of your conversations in any situation.

Finally, the first chance you'll get to use body language to your advantage is also the last impression that you leave with the interviewer- the handshake. No matter whether the interviewer offers you a "break your hand" squeeze or a "wet noodle" handshake, you should meet their gaze with a friendly smile during the handshake. Offer a firm, but not overbearing grip. At the close of the interview, the final handshake is your opportunity to thank the interviewer for their time and ask when you might expect to hear from them for the next step in the process. Your body language will tell a story about you in an interview, if you pay attention to details, that story is much more likely to end happily.

Author: Brad Sylvester

January 16, 2009

For the IRS, a Season of Kindness

The IRS is promising to be kinder in 2009. They say that agents will have more freedom to suspend collections in those cases where people who owe back taxes are unable to pay. That doesn't mean they won't have to pay eventually, just that the IRS won't keep harassing you if you don't have the ability to repay what you owe at the present time. The guidelines issued to agents include cases where the taxpayer is facing serious illness, relies solely on social security or welfare, or have lost their jobs.

The IRS will also let some people who have already entered into payment agreements for past due taxes to continue on in their repayment programs even if they need to send in a reduced payment or skip a payment due to economic hardship. This doesn't mean that everyone in a tax payment program can skip a payment with impunity, however. Agents will want some evidence of your financial distress such as proof that you lost your job. The IRS says if you face difficulty in meeting your obligations, you should contact them before you miss a payment to discuss it with an agent. Missing a payment and then waiting for the IRS to catch up with you is not going to put the agent in a forgiving mood, and since the allowances are at the agent's discretion, you want the agent to see that you are being upfront and forthcoming about the situation.

The third compromise the IRS may be willing to make at this time is loosening the standards for reducing the principle amount owed on back taxes. These arrangements are known as "offers in compromise" and usually require that any equity in your home be considered and used in the repayment. However, since many homes have fallen in value and continue to lose value every month, the IRS may be willing to lighten up on using every bit of available equity to repay your back taxes. Again, this will depend upon your ability to convince the agent that your particular situation merits such an allowance.

The bottom line is that the IRS has instructed its agents to consider the current economic climate and the individual situation of the taxpayer when collecting past due amounts. If you have lost your job or face other severe financial distress that affects your ability to repay your past due taxes, contact the IRS and see if you can rework your current deal. This does not mean that those with current tax liabilities will be allowed to let them become past due without penalty. If you have the wherewithal to do it, the best course of action is to get these debts paid and out of the way so you can move on with your life.

Author: Brad Sylvester

January 15, 2009

Keep Your Estate Plan Flexible

Estate planning has become more difficult in recent years due to changing estate tax laws. Estate tax rates and exemption amounts keep changing, increasing to $3,500,000 this year. Next year, the estate tax will be repealed, but it will be reinstated the following year based on 2001 tax laws. All these changes can make it difficult to determine whether your estate plan should be revised due to new changes. Thus, it is increasingly important to build flexibility into your estate plan. Below are eight key points to consider:

Find ways to incorporate changing exemption amounts in your estate plan. Many estate planning documents indicate that trusts should be funded with assets equal to the estate tax exemption amount or generation-skipping transfer tax exemption amount. Evaluate whether those amounts are still appropriate considering their current high levels. Those amounts may leave more than intended to certain heirs or may place so much in a credit shelter or other trust that your spouse may receive very little of your estate outright. You may want to set a cap on the amounts placed in trust, even if that means you won't fully utilize your exemption amounts.

Make sure you have enough solely owned assets to fund these trusts. Once you have decided how much should be placed in trust, make sure you have sufficient assets titled in your own name. Assets that you own jointly with your spouse or another individual will automatically go to that person, rather than to the trust, after death.

Consider adding a disclaimer provision to your estate planning documents. This provision details what will happen if one of your heirs disclaims his/her inheritance. That way, your heirs can decide after your death how much should be placed in various trusts. For instance, a husband can leave all his assets to his wife with the condition that any disclaimed assets go into a trust paying her income for life, then passing the principal to their children after her death. This gives the wife the opportunity to divide assets based on her needs and wishes at the time of her husband's death.

Review your gifting strategies. You may still want to continue gifting strategies to utilize your annual gift tax exclusion ($13,000 in 2009 or $26,000 if the gift is split with your spouse) and your lifetime gift tax exclusion amount. For those with estates large enough to be subject to estate taxes, these strategies remove assets from your taxable estate without paying any gift taxes. When using your lifetime exemption amount of $1,000,000, look for ways to maximize your tax-free gift. For instance, individuals who transfer noncontrolling interests in businesses, farms, real estate, and other assets during their lifetime may be able to assign a minority interest discount to the gift's value. By gifting assets to certain types of trusts, such as qualified personal residence trusts and grantor retained annuity trusts, you can place an asset in trust now, retain use of the asset for a period of time, and assign a lower value to the gift.

Consider making charitable contributions during your lifetime. While charitable contributions made after death are free of estate taxes, that may not be a consideration due to higher exemption amounts. Charitable contributions made during your lifetime will still lower your taxable estate, and you receive an income tax deduction currently.

Reevaluate your life insurance needs. Since the estate tax will only be repealed for the year 2010, you may still want life insurance to help your heirs pay estate taxes. Even if you die in the year 2010, any inherited assets will not receive a step-up in basis, perhaps leaving your heirs with a large capital gains tax burden.

Review how specific assets are distributed. In 2010, inherited property will have a basis equal to the lesser of the decedent's adjusted basis or the property's fair market value at the decedent's date of death, with three exceptions: 1) $1,300,000 of basis can be added to assets. 2) Unused capital losses, net operating losses, and certain built-in losses can increase this cap. 3) An additional $3,000,000 of basis can be added to assets inherited by a surviving spouse. Due to these exceptions, you may want to specifically allocate assets with low bases to your spouse and assets with a higher bases to other heirs to ensure the step-up in basis is maximized.

Go over your entire estate plan at least every three years. No matter how much flexibility is built into your estate plan, you should still thoroughly review your plan every three years or so. Even if there are no major changes in the estate tax law or your personal situation, such as a marriage, death, divorce, or birth, gradual changes in your situation, such as an increasing net worth or a decline in your investment portfolio, may make changes to your estate plan necessary.

January 13, 2009

Escaping the Credit Card Trap: Dealing with Emergency Expenses

(A continuing series)
Any advice that I can give you about getting rid of your credit card debt is absolutely worthless unless you do one thing first: stop using your credit cards. If you do everything else right, but continue to rack up new charges on your credit card then you can't rid yourself of the seemingly endless cycle of finance charges and credit card payments. For many people, the decision to end the use of credit cards works fine until there is a large unexpected emergency. Whether it's an auto repair bill, a washing machine that stops working, or some other unplanned expense, the credit card often seems like the only option.

To get out of this cycle, you need to have another way to cope with emergency expenses. I won't parrot all the experts who say you need to keep six months' salary in a separate emergency savings account; those so-called "experts" are out of touch with mainstream America in my opinion. You do need to keep some cash reserved for emergencies though. The money should be in a separate account so it doesn't get mixed in with and used up in your regular monthly budget. Many will say it should be in cash in your local bank so you can get it on a moment's notice. I strongly disagree. It should be difficult to get at this money so that it is only used in true emergency situations, and not just when you are a few bucks short for groceries.

Instead keep your emergency fund in a place where it takes a little effort to get your money, but where you can have it within 3-5 days or so if needed. There are, for example, a number of reputable online discount stock brokerages that have very low initial deposits and no ongoing minimum balances. Look for one that allows you to write checks against the balance if needed. That way you can get the funds easily and quickly for true emergencies. However, be aware that depending upon how your funds are invested at the time you need them, taking out the cash means selling any securities or investments even if they are currently worth less than when you acquired them.

Try to use an automatic payment plan to build this account over time. Have $25 a week taken from your checking account if you can afford it, if not then $10 a week, $25 a month, or whatever you can afford a regular basis. The money in this account should be invested VERY conservatively. Interest bearing accounts or stable money market funds are generally good choices. The last thing you want is for this safety fund to lose value in risky investments. Don't buy and sell often, with small dollar amounts, the transaction fees will eat up your money quickly. Put the money aside in this account and leave it alone. Remember, though, this account is taxable and any gains or losses must be declared on your income tax statements.

The goal is not to use this emergency fund except in the direst of emergencies. Let it build up over time with regular deposits, and if it ever reaches a comfortable level of perhaps $5000, then take any excess and the amount you had been depositing and send it in as extra payments on any outstanding credit card balances. Start the fund as soon as possible, even if you only have one or two hundred to get started. With regular deposits, you can build it up over time. Do not ever use your credit card to fund any investment, even an emergency fund. Your goal is to retire your credit card debt once and for all. It takes discipline and perseverance, but you can do it.

Author: Brad Sylvester

January 12, 2009

What Happens if you Become Disabled?

For many people, a long-term disability would be financially devastating. Although no one likes to think about this possibility, you should consider your options now so you can obtain disability income insurance if needed.

Many individuals can find the funds, even though it might be difficult, to get through a short-term disability of six months or less. Find out what benefits you would be entitled to under sick leave policies, short-term disability policies provided by your employer, and workers' compensation. Another source of funds might be your emergency fund of three to six months of living expenses.

When considering a long-term disability, assess your income needs until age 65, when presumably retirement benefits would begin. During this analysis, consider the following items:

Estimate your monthly expenses following a disability. Typically, some of your disability benefits would be free of income taxes (if you paid the premiums), and you won't incur work-related expenses. However, don't underestimate your expenses, since your medical and rehabilitation expenses might be much higher after a disability. Find out if you would continue to be covered under your employer's health insurance plan. If not, you'll need to make provisions for that expense.

Review your annual Social Security Statement for an estimate of disability benefits. However, keep in mind that the eligibility requirements are quite stringent -- you must be totally disabled, have little or no chance of recovery, and wait six months or longer for your first check. Even if you do qualify, benefits tend to be modest.

Decide what personal resources you would want to use. You can access funds from individual retirement accounts, annuities, or 401(k) plans without penalty if you are disabled. But first consider whether you want to risk depleting your retirement fund or children's college fund due to a long-term disability.

Investigate any long-term disability benefits provided by your employer. Long-term group disability plans are less common and typically less common than short-term plans. The policies frequently have strict definitions of disability, pay up to 60% of your base salary (bonuses and commissions generally aren't included), pay two to five years of benefits, and don't provide cost-of-living increases. Also factor in income taxes that must be paid on any benefits your employer paid for. Check to see if your employer-sponsored retirement plan offers an option for early retirement in case of disability.

Consider purchasing disability income insurance to fill any gaps. However, you might not be able to replace more than 60% to 80% of your income through insurance, since insurers want you to have an incentive to return to work. Any benefits from policies you paid the premiums for are received income-tax free. Coordinate your employer-provided insurance and your own policy so that the maximum benefits do not exceed the amount the insurance companies will pay. Otherwise, you may pay for coverage you won't receive.

If you decide to purchase disability income insurance, make sure to consider these main points:

Pay special attention to the definition of disability. There are three basic types of coverage: own occupation, any occupation, and income replacement. Own occupation pays benefits when you can't work at your specific occupation. Many professionals, such as doctors and lawyers, opt for this coverage. However, due to substantial claims, this coverage is now more difficult to obtain. You may be able to find own occupation coverage for a specified period, with the policy then converting to any occupation coverage. Any occupation means you must be unable to work at any occupation that your training and education would be suited for. Income replacement policies pay the difference between what you were earning before the disability and what you are earning now. For most individuals, income replacement policies will provide the best balance between cost and benefits.

Opt for a long waiting period before benefits start. This is a good way to reduce premiums, provided you have other resources to rely on for the short term, such as sick leave, personal savings and investments, and short-term disability coverage. Waiting periods can range from one week to two years, but the most common option is a 90-day delay in benefits.

Consider coverage that pays benefits until age 65. Disability insurance is designed to protect your financial situation from a serious disability, so you should obtain coverage for the long term. Policies for lifetime benefits are rare and expensive. It's probably not needed, however, since you will probably be eligible for Social Security and other retirement benefits once you turn 65.

Look for a policy that provides residual benefits. This allows you to return to work on a part-time basis and still receive partial benefits.

Make sure the policy is either noncancelable or guaranteed renewable. Noncancelable means you can renew the policy every year at the same premium. Guaranteed renewable means you can renew the policy every year, but the premium can increase as long as it is not done so in a discriminatory manner. Either provision will ensure that the policy can't be canceled due to medical problems.

January 11, 2009

Gifting Considerations

Deciding whether you should give a significant asset to an heir during your life or after your death has typically involved weighing potential estate tax costs against capital gains taxes that would be due when the asset is sold.

You can make annual gifts, up to $13,000 in 2009 ($26,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. There is also a lifetime gift tax exemption of $1,000,000 ($2,000,000 if the gift is split with your spouse). The basis of any gifts made during your lifetime equals your basis plus any gift taxes paid on the gift.

The estate tax exclusion is $3,500,000 in 2009, with a 45% estate tax rate. The basis of any assets distributed to heirs after your death is stepped up to fair market value on the date of your death. With such a large exclusion amount, you can transfer assets with fairly significant values to heirs without paying estate taxes, while still stepping up the basis to fair market value. However, keep in mind that the estate tax will be repealed in 2010, with special rules in effect for basis adjustments in that year. In 2011, the estate tax will be reinstated based on 2001 tax laws, with a $1,000,000 estate tax exclusion amount.

Thus, when making gifts, you have historically had to evaluate whether it was better to make the gift after death so your estate will pay estate taxes on the value or during your lifetime so your heirs will pay capital gains taxes when the asset is sold. With much larger exclusion amounts, many individuals do not need to focus on estate taxes. Instead, gifts should be made in a manner that will reduce overall income and capital gains taxes for the family. Some strategies to consider that may help accomplish this objective include:

Transfer low-basis assets after death. When heirs receive an asset that has increased significantly in value after your death, its basis is stepped up to market value. They retain your basis when it is received during your lifetime, so significant capital gains taxes may be due when the asset is sold. However, if you plan to sell the asset in the near future, you should evaluate the tax impact if you own the asset or your heirs own the asset. Especially if you are going to use the proceeds for your heirs' benefit anyway, there may be a lower capital gains tax bill if your heirs sell the asset. Capital gains taxes are currently 15%, but through 2010, taxpayers in the 10% or 15% tax bracket pay no capital gains taxes.

Consider using an estate defective trust (EDT) to transfer significant, low-basis assets. Once the asset is placed in trust, any income from the asset is allocated to the trust or the trust beneficiaries, who will typically be in a lower tax bracket. However, the asset is still considered part of your estate, so beneficiaries will receive a step-up in basis after your death.

Reevaluate buy-sell agreements for businesses. Often, buy-sell agreements are funded with life insurance. If one owner dies, the other owners use the life insurance proceeds to purchase the deceased owner's shares. If the life insurance is owned by the company, the proceeds are paid to the company, and the remaining owners do not receive a step-up in basis. If each owner owns life insurance on the other owners, the proceeds will be paid to each remaining owner. Those owners can then use the proceeds to purchase shares from the company at fair market value, in essence receiving a step-up in basis.

Review discounting techniques carefully. Many estate-planning strategies have involved the use of discounts to reduce the fair market value of the transferred assets. For instance, individuals who transfer noncontrolling interests in businesses, farms, real estate, and other assets may be able to assign a minority interest discount to the gift's value. As long as the gift won't result in the payment of gift or estate taxes, your primary goal will be to increase the basis as much as possible.

January 10, 2009

Investment Portfolio Mistakes

Investing is a gradual process -- purchasing some investments and selling others as the years go by. After a period of years, this can result in a mixture of investments that don't fit your overall investment strategy. Thus, periodically review your portfolio, watching out for these common mistakes:

You don't use an asset allocation strategy. Many investors select individual investments over the years, not considering their portfolio's overall makeup. Add up all your investments and calculate what portion is invested in each investment category. Assess your current allocation and determine whether it fits your personal situation.

You have too many investments that aren't adding diversification to your portfolio. Diversification helps reduce the volatility in your portfolio, since various investments will respond differently to economic events and market factors. Yet it's common for investors to keep adding investments to their portfolio that are similar in nature. This does not add much in the way of diversification, while making the portfolio more difficult to monitor. Keep in mind that diversification does not ensure a profit or protect against loss in a declining market.

Your portfolio's return is lower than benchmark returns. While everyone likes to think their portfolio is beating the market averages, many investors simply aren't sure. Review the return of each component of your portfolio, comparing it to a relevant benchmark. While you may not want to sell an investment that has underperformed for a year or two, at least monitor closely any investments that significantly underperform their benchmarks. Next, calculate your portfolio's overall rate of return and compare it to a relevant benchmark. Also be sure to compare your actual return to the return you targeted when setting up your investment program.

You trade too frequently without adequate research. With so many choices and so much information, it's tempting to trade often based simply on other people's recommendations. Yet, besides the tax and trading costs associated with trades, frequent traders often underperform those who trade less frequently. Instead, purchase investments you are willing to hold for the long term.

You don't consider income taxes when investing. Ordinary income taxes on short-term capital gains and interest can go as high as 35%, while long-term capital gains and dividend income are taxed at rates not exceeding 10% (0% for taxpayers in the 10% or 15% tax bracket). Using strategies that defer income taxes for as long as possible can make a substantial difference in your portfolio's ultimate size. Some strategies to consider include utilizing tax-deferred investment vehicles, minimizing portfolio turnover, selling investments with losses to offset gains, and placing assets generating ordinary income or that you want to trade frequently in your tax-deferred accounts.

January 9, 2009

Lessons About Saving for Retirement

First, the stock market declines in 2000 and during the past year removed substantial gains from individuals' net worths. Now, the decline in housing values has reduced people's net worths even more. For instance, the Center for Economic and Policy Research estimates that the average net worth of individuals between the ages of 45 and 54 is 25% less than it was in 2004, due to declining home prices. For individuals facing retirement in the near future, it has been a double whammy for their retirement savings. What lessons can be learned from these events?

Don't overload on hot investments. By the time the average individual notices that a particular investment has become hot, it's often too late to take advantage of that knowledge. Many individuals invested in technology stocks just as they were peaking. Scared by stocks, many then started investing in homes and real estate. Instead of focusing on one hot area, make sure your investments are diversified among a variety of investments that you are comfortable holding.

Gains do not equal savings. As stock and housing values went up in value, it caused a phenomenon called the "wealth effect." Because the increases in value made people feel wealthier, they felt less need for saving and more comfortable spending. While that fueled the economy for several years, it also meant that many individuals cut back on saving for retirement.

Excessive debt just makes things worse. Whether it's a margin loan used to purchase stocks or a mortgage used to purchase a home, the dangers of too much debt become readily apparent once the value of the assets underlying those loans decreases. For many homeowners, it has become difficult to justify struggling to make a mortgage payment they can barely afford on a home that is decreasing in value.

January 8, 2009

Times are so Hard Companies are Even Cutting Back on Mice

You know things are going from bad to worse when companies are even cutting back on mice, but that's just what's happening. The Swiss based Logitech (NASDAQ: LOGI), maker of computer mice and other peripherals, has announced that it will be reducing its workforce of 9000 employees by about 5% globally. The cuts, they said, would be concentrated in marketing, sales, legal, and information technology and would total about 500 lost jobs. Technically, then, they are not losing any mice makers, but some of the legal staff will be let go.

The cost-cutting measures were made necessary by what has been a dismal holiday selling season, not only for Logitech, but for nearly all manufacturers of retail goods, with luxury and big ticket items being particularly hard hit. Although the products that Logitech makes with the exception of some of their computer speaker systems are generally quite inexpensive, they unfortunately, are usually tied to a computer sale, most often a higher end gaming system. So it is difficult to say whether Logitech's sales troubles indicate retail weakness spreading to lower priced items at this point.

Like many exchange listed firms, Logitech offers stock market analysts guidance or estimates of their future earnings and revenue. With the announcement of the job cuts, however, Logitech also gave notice that their previous guidance should be ignored due to deteriorating business conditions. The company declined to offer revised guidance. That's never a good sign.

CEO Gerald Quinlan told analysts, "We expect the economic environment to worsen in the coming months and we are, therefore, taking significant actions to align our cost structure with what is likely to be an extended downturn." He went on to note that although Logitech sales took a sharp nosedive in the fourth quarter, the company did not lose market share. In other words, expect other makers of computer peripherals to report troubles at least as bad as those affecting Logitech.

While Logitech has a strong financial position heading into this downturn, the company's shares should be viewed with extreme caution until they provide some more specific information about the size of their sales decline and some estimation of forward expectations. Third quarter results are due on January 20th and Logitech has promised that it will give further details of the latest sales figures at that time.

Author: Brad Sylvester

January 7, 2009

Escaping the Credit Card Trap: Take Advantage of the Marketers

(A continuing series)
If you're carrying large balances on your credit cards, you see the finance charges that are added every month on your statements. Add up all these finance charges for one month and then multiply by twelve. Ask yourself if you could find better uses for that money than giving it to the credit card companies. That's your incentive to get those cards paid off and to get your interest rates lowered in the meantime.

Some people will advocate calling the credit card companies and asking them to lower your interest rates. Sometimes this works, sometimes it doesn't. If you follow through on threats to cancel the card if they don't lower your rate you can end up damaging your credit rating. If you tell them you can't afford the higher payments, they may judge you a higher risk and increase your rates. So what to do?

Credit card companies actually love it when people carry big balances, as long as they pay the bill every month. If you haven't defaulted, had repeated late payments, or declared bankruptcy, chances are you are getting offers for new credit cards in the mail every week. Like many, once you dug yourself into a credit card hole, the last thing you want is another credit card so you toss them straight into the shredder (to prevent someone from applying in your name and stealing your identity). However, you need to start opening them and reading them. Look for three things. The lowest promotional introductory rate on balance transfers, the longest term for that promotional rate, and a standard interest rate.

Many offers will give you a zero percent interest rate on balance transfers for 12-18 months. Others offer something like 2.99% on balance transfers for the life of the balance. Taking advantage of one of these promotional offers can help substantially reduce the interest rate you are paying on your current balances. However, applying for too many credit cards within a 6 or even 12 month window can be seen as a sign of financial desperation by lenders and may hurt your credit score. So choose only the best offer.

Take a month and go through all your incoming credit card offers. Pick one with the lowest, longest term introductory rate, but not one with a much higher than usual standard rate, and apply to transfer all your current balances. List the transfers in order from the highest current interest rate to the lowest. So that if the credit line they offer won't cover them all, you can easily determine which one(s) are most important to get transferred. Meanwhile keep paying the old cards! Many people assume that once they've sent in this transfer request, the old cards are taken care of immediately. That's not the case. Keep paying the old cards as if nothing happened until you get a statement from them showing your balance has been paid off.

Once you get the statement with the paid off balance, remove the credit cards from your wallet. Put them away in a safe deposit box or cut up every one of them except the one with the lowest standard interest rate. This is your emergency card, for use ONLY as a last resort for emergencies. Also remember that the new card probably will charge the standard rate on any new purchases. Not only that, but any payments will go toward the low interest rate balance transfers first, leaving the new standard rate balances for last while they accrue interest month after month. Once you make your balance transfers, you must stop using credit cards until you have them completely paid off.

If you don't get promotional credit card offers in the mail, it may be that your credit rating is already very bad, or it could be that you have opted not to receive pre-screened credit offers. In this case, go online and look for major credit card banks. Call them up and ask if they have any balance transfer promotional offers. They'll be happy to send you all the details.

Now you have 12-18 months of time when your credit balances will be racking up little to no interest charges. If you want to dig yourself out of the hole, take advantage of this. Send every spare cent and as much as you can afford in as payment against your balance. You want to have as much as possible paid off when the promotion expires. Don't use payment holidays or send in minimum payments. Always send in extra even if it's only a few dollars. Your number one financial priority has to be to retire those large credit card balances. Once you do, think of all the money that will go stay into your pocket each month.

Author: Brad Sylvester

January 6, 2009

New Cartel Announces the End of Cheap Gas

We are familiar with OPEC and the effects they have had on the price of oil over the years. The OPEC nations meet on a regular basis to decide how much oil they will allow the rest of the world to have from their stores. They set quotas and limits on production in an attempt, they say, to keep the price steady at a level that is good for both consumers and the producers. We've seen how that works. Fortunately, many of the producers balk at reducing output and have a tendency to cheat, producing more than their allocation. Now, we are witnessing the formation of a new cartel, this time of producers of natural gas.

Natural gas is used widely in Europe and Asia for heat, as it is here in the US. Last week, a consortium of natural gas producers met in Moscow. The goal of the meeting was to establish an OPEC-like cartel of gas producers who would control output. Although the meetings participants were quick to say that they do not intend to engage in price fixing, the keynote speaker, none other than Vladimir Putin, said "...despite the current problems in finances the era of cheap energy resources, of cheap gas, is of course coming to an end."

Russia is no stranger to throttling gas supplies in order to negotiate better prices. The Republic of Georgia can bear witness to that fact, having had their entire supply of Russian gas, which is used for heating homes there, cut off in the middle of the freezing winter. Now that winter is here again Russia is turning up the heat on the Ukraine by turning off their heat as well. Coincidentally, prior to Russia cutting off their gas, both Georgia and the Ukraine were actively courting the United States and have begun steps toward joining NATO. This makes the Russian bear and Vladimir Putin, in particular, very upset. The threat to the gas supply in Europe (which passes through the Ukraine via pipeline) has already caused a noticeable spike in oil prices. Keep your eye on the price at the pump and don't be surprised to see it climb a little bit. It shouldn't be anything like the $4/ gallon we saw in 2008, but the downward trend is likely to stop and reverse until the Ukraine gives in to Russian demands and the gas flows unimpeded again.

With a strong Russian leadership in a natural gas cartel, then, would we expect that policies and supplies would be formed without political motivation? Or would we expect, as Russia's recent actions with both Georgia and the Ukraine have shown, that gas supply would become a weapon to be used to help dictate trading and military policy to the European Union and other US allies? I'd bet on the latter.

As for the US, we need only take Putin at his word that gas prices will increase dramatically. Although the US is a major gas producer as well, global prices will dictate US domestic prices to a large extent. If you are considering converting to natural gas heat, think twice. If the new cartel has its way, it may not seem like such a good idea in the not too distant future. On the other hand, renewable energy sources such as wind and solar are much harder to monopolize and as prices for other forms of energy continue to rise, green energy will not only become more competitive, but will help provide stable energy prices that are too a large degree immune from artificial supply constraints devised by foreign cartels to drive up the price.

Author: Brad Sylvester

January 5, 2009

Escaping the Credit Card Trap: Cancelling a Credit Card Can Increase your Interest Rate

(Part one of a continuing series)
For many people, credit cards have become a necessity and that's fine as long as they are used properly. However, many people continue to increase their credit card balances year after year and find themselves paying a significant portion of their income to the credit card companies every month with no end in sight. When a credit card is finally paid off, many of these frustrated consumers cancel the card outright so that they'll never get caught up in the credit card trap again.

Common sense would tell us that if we have fewer outstanding credit cards, we are likely to be in better financial shape. Unfortunately, credit card companies and other lenders don't see it this way. Cancelling a paid off credit card can actually hurt your credit rating. Your credit rating is used by banks and lenders to estimate how likely you are to pay your loans on time for the complete terms of the loan. Based on this estimation, they assign you an interest rate that reflects the level of risk that they feel they are taking on by giving you a loan or a credit line. The worse your credit score, the higher the interest rate. If your credit score is too bad, you may have trouble getting a loan at all.

So how can closing a credit card make you a worse credit risk? One of the measures banks look at to assess your creditworthiness is your ratio of borrowed money to available credit. In other words, if you have three credit cards and each one has a total credit line of $5000, you have a $15,000 line of available credit. If you owe $2000 on one credit card, and $1000 on another, and zero on the third card, then you have an outstanding balance of $3000 against that $15,000 line of credit. That's 20% of your available credit. Now, though, if you cancel the paid off card, your available credit drops to $10,000 and the balance jumps to 30% of your total available credit.

Lenders look at this percentage to see how well you are living within your means. The higher the percentage, they feel, the more likely you are to dig yourself into a financial hole and be unable to repay the debt. So by cancelling a paid off credit card, lenders see you as less able to find money to pay them and will judge you to be a higher risk, consequently charging you a higher rate on any new loans or credit cards. Sometimes, even your existing credit cards will increase your interest rate if your credit rating falls.

The old rule of thumb used to be that you should keep the percentage of money owed to less than 30% of your available credit line. However, with the tight credit markets, many experts are suggesting that 10% or less is needed for a top credit rating. In any case, cancelling your paid off card can hurt your credit rating and make it harder for you to get good terms on a car loan or a mortgage. Cut up the card if necessary in order to stop yourself from overcharging, but don't cancel the account if you expect you'll need to borrow money in the near future. Keeping the best possible credit rating means lower interest rates and its one more step to help escape the credit card trap.

Author: Brad Sylvester

 

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