Wednesday, May 30, 2007

Shop for Your Mortgage Loan

Would you pay $30,000 for a car if you could buy it for $20,000? Of course not. But it turns out that many people have done the equivalent with their mortgage loans. On May 30, 2007, reported that many subprime borrowers could have gotten a prime mortgage. See That means a lot of people got stuck with a more expensive mortgage than necessary.

Subprime mortgages can have an interest rate 3% higher than a prime mortgage. As the CNNMoney article points out, that difference can increase the monthly payments on a $200,000 mortgage by $300, or $3,600 a year. Can you afford to throw away $3,600 a year? That would be almost all the money you’re entitled to contribute annually to an IRA.

Why does this happen? Because mortgage brokers are rewarded to sell subprime loans. They are paid by commission, and a subprime mortgage’s commission can be as much as 5 times greater than the commission for a prime mortgage. So, like the car salesperson who wants you to buy a model with all the options, a mortgage broker has the incentive to sell you a subprime mortgage, whether or not you need one.

Who do you think covers the cost of the high subprime mortgage commissions? You, the borrower, do, if you take out a subprime mortgage.

What can you do? If you’re already in a subprime mortgage and think you're prime quality, try to refinance into a less expensive mortgage. If you're just looking for a mortgage loan, comparison shop. Shop for a mortgage just like you would shop for a car. People routinely contact several car dealers when looking for the best deal on a car. (See our recent blog on how to get a good deal on a new car: Contact several lenders—try the bank where you have an account, or a credit union if you can join one. Then try the next few banks and credit unions down the street. Do this without going through a mortgage broker, and see what quotes you get.

If you want to use a mortgage broker, look for one who will work for a fixed fee that is set in advance, without any commissions or compensation from anyone but you. A fixed fee will reduce the incentive for the broker to put you into a high-interest rate mortgage you don’t need. An organization called Upfront Mortgage Brokers Association ( may be able to help you find a broker willing to work for a fixed fee.

Interview a mortgage broker before hiring him or her. Ask about all of his or her sources of compensation and whether the broker will be paid more if you are sold a mortgage with features that may be costly to you (like higher or increasing interest rates or a prepayment penalty). Also ask the broker how many lenders he or she deals with regularly. You want to find out if the broker will work aggressively to get you the best deal, or will simply place you with a lender with whom he or she has had a long-standing relationship. Not all mortgage brokers are crooks, but it pays to be careful.

Keep your mortgage loan simple: look for a 30-year or 15-year fixed rate mortgage. These loans are pretty straightforward, which makes comparison shopping easier. Also, your risks are lower because by definition the interest rate won’t go up. See our earlier blog about why the right mortgage loan helps you build wealth

Crime News: You’ve heard of cat burglars stealing jewelry. This one must have been a tiger burglar.

Tuesday, May 29, 2007

Hiring a Financial Planner

You don’t need a financial planner. Financial planning is a relatively recent profession. Many, and perhaps, most of the people who are wealthy today did not have financial planners. Building wealth comes primarily from making a habit of saving and investing. Having that habit, and no plan, has often made people wealthy. Having a plan, but not the habit, will do little good.

Still, the financial world has become more complex in the last few decades, and many people want to hire a financial planner. Here are some things to think about:

1. Find out what you can about the planner’s background. Financial planning is more of an art than a science. Your individual goals are not the same as the next person’s. Look for someone who’s been in the real world for a while. A planner who left her career as a pilot because of an airline’s bankruptcy may have hard-earned knowledge of how to survive a life crisis. This experience may be more valuable than any set of formal credentials.

2. Honesty is extremely important. If you are inexperienced in financial matters, you will be at an informational disadvantage and therefore be vulnerable to a crooked planner. Get references and check them out. Call the Better Business Bureau. If the planner claims to be licensed, call the licensing authority (probably a state government agency or department) and find out whether or not the person is licensed, and whether or not the person has been disciplined.

3. Find out how the planner will be compensated. A planner who receives commissions or other compensation from companies whose products he or she sells has a potential conflict of interest with you. If there's a sales commission in the picture, the planner may have a motive to sell you something that might not serve your needs. If a planner is a “registered investment adviser,” he or she will have a fiduciary duty to you (which is a legal duty to act in your best interests). But having a legal duty and complying with it are two different things. It’s best for you, especially if you are starting out, to have a planner who takes money only from you, and who charges you a flat fee or an hourly rate. Get an estimate, and a description of the services the planner will provide.

4. Try to learn as much as you can about financial matters before you meet with the planner. The more you know, the better you’ll be able to evaluate the quality of the advice you are getting. (Think of it this way: when you go into a car dealership, you don’t accept the salesperson’s claims at face value; you compare them against what you already know about cars.)

If you’re in your 20’s or 30’s and haven’t saved at least $100,000 of financial assets (i.e., assets not including physical assets like real estate, cars, furniture, etc.), you may have trouble finding a financial planner who’s interested in serving your needs. That’s because you don’t have enough money. If that happens, keep saving. The first stages of the wealth building process tend to be relatively simple anyway because the way to start building wealth is to put away as much of your earnings as possible. This doesn’t require any sophisticated knowledge. It simply requires commitment. At this stage, you shouldn’t invest in anything elaborate—fancy investments are for people who can afford to lose the money they invest.

UFO News: If you're a UFO enthusiast, don't miss the conference in Charleston, W. Va.

Monday, May 28, 2007

How to Spot a Crook

When someone approaches you about making an investment, you have to consider whether you're dealing with a dishonest person. You know the stereotype of a crook: shifty eyes, nervous snicker, sweaty hands, weak handshake, won’t look you in the eye. You’ve seen it in cartoons and movies. You’ve even met some people like this. But were they truly dishonest? Or were they just insecure?

Was every charming, engaging, and witty person you ever met truthful? Let’s disregard the jerks that didn’t call you the next morning. How about the person who promised you a job or promotion that you didn’t get?

You can’t tell by appearances if a person is honest. The annals of law enforcement agencies and financial regulators are filled with the names of charming, engaging people who turned out to be thoroughly crooked. Indeed, many of the most outrageous fraudsters are exactly the sort of person you’d like to have a drink with. The fact that they were so engaging and likeable is precisely why they were such successful con artists.

That’s why you have to be very careful about whom you entrust with your money. All investing involves giving your money to someone else. You can’t earn interest, dividends or capital gains if you stuff cash into a mattress. The money has to be given to someone else who uses or invests it, and pays you from the earnings they make.

Deal with people and institutions that are familiar. People who are known in the community and need to stay in good standing with their neighbors are more likely to be scrupulous. Look for organizations—whether national or local—that have good reputations. While there’s no guarantee that a person or organization known to you won’t be crooked, you’re taking a bigger risk when dealing with unknowns.

Never give personal information to anyone who calls you out of the blue or sends you an unsolicited e-mail. Be wary of anyone who contacts you, claims to be from the government or from your bank, and asks you to confirm personal information, either by e-mail or on the phone. Legitimate inquiries from the government or your bank won’t come in this manner. If someone contacts you and says you’ve won a prize, don’t pay money to collect the prize. Legitimate prizes won’t require you to pay money.

Invest in an asset, not a person (even if you like the person). Don’t invest in something just because a friend, neighbor, or acquaintance recommends it. Ask yourself whether the asset makes sense for your financial goals. You’ll get a lot of information about why the investment is a good idea. Research it yourself, and make sure you understand how things can go wrong. When you understand the risks as well as the rewards, you’ll be able to make a sound decision.

Celebrity News: If you’ve read enough already about Lindsay Lohan, don’t click on this link.

Buy a New Car Without Haggling and Save

There’s a way to buy a new car without negotiating and get a price that might be better than what you could get from hours of old-fashioned haggling. Try purchasing your new car through the dealership’s Internet department.

Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.

If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.

Then, research prices. Go to sites like (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)

Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.

Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)

Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.

The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.

Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)

Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.

Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.

It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.

Crime News: A caper with toilet paper.

For more shopping ideas, visit the blog carnival of shopping:

Friday, May 25, 2007

Investing for the Short Term

Almost all financial planning and advice focus on investing for the long term. The principal investment goals most people have are building wealth for retirement, and saving for the kids' college expenses. Long term investing often involves some degree of risk, primarily from investing in stocks. Taking moderate long term risks makes sense because it allows you to profit from the larger gains that stocks often provide, compared to bonds and bank accounts.

However, people also have important short term financial goals. Investing for the short term is very different from long term investing. Short term goals may include things like building an emergency cash fund (of three to six months living expenses), saving up a downpayment for a house, accumulating funds to cover medical expenses of an elderly parent who has declined and needs a lot of care (remember, Medicare and Medicaid don't cover everything), and building up your stash of cash so that you can pay for a new roof. Another scenario that is fairly common is that your child is 14 and you've just started to save for his or her college expenses.

With all these types of expenses, a common element is you can't afford to lose the money. The emergency cash fund is your insurance policy against every risk in your life that isn't insured by a traditional insurance policy. Lose the downpayment and you'll have to keep renting. Living with a leaky roof isn't fun. And when Mom or Dad needs medical care, they need medical care. So how do you invest the money?

Money market funds, especially those that invest only in U.S. Treasury securities, are generally safe and will pay competitive interest rates. Online banks often pay competitive interest rates and are federally insured up to $100,000. Regular bricks and mortar banks and credit unions also offer federally insured accounts (up to $100,000), although their interest rates are usually lower than money market funds or online banks. U.S. Treasury bills and short term notes, and short term bond funds, are likely to be reasonable investments for short term money. But they involve a little more trouble and perhaps investment savvy, than many people would want to be bothered with.

Perhaps this is obvious to many. However, with the Dow Jones Industrial Average having set a remarkable number of new highs in recent months, there are probably some who are investing short term money in stocks. It isn't fun to watch the market move up like this if you have, say, $20,000 sitting in a money market account earning 4.9% a year. But those who forget that the market can go down (and is more likely to go down after a major upwards spike) are doomed to get their butts bit when it happens (and it will). Some people who invested their downpayments in the hot stock market of 1999 lost the opportunity to buy a home when the market fell away in 2000.

When you can't afford to lose the money, don't put it into volatile investments like stocks. Do what is simple and safe.

Automotive News: If you own a Nissan Altima or G35, keep the electronic keys away from your cell phone or be prepared to use the keys the old-fashioned way.

Wednesday, May 23, 2007

Get Some Fast Money: The Employer Match

There is a way you can get fast money, for real and you won't have to do any extra work. It's the employer match in a 401(k) account. Employer sponsored retirement savings plans, like 401(k)s and their equivalents (such as the federal government's Thrift Savings Plan) often have a feature where your employer matches your contributions up to a certain percentage. For example, an employer might match up to 3% of your salary or wages that you contribute to the plan. The match is equivalent to an immediate 100% return on your investment. There's nothing in the financial markets that an ordinary investor can get which would be better.

With some 401(k) plans, the employer match may not "vest" (meaning, truly belong to you) unless you stay with the company for a minimum period of time, such as 3 years. Even so, the employer match is a great deal and you should get it.

What if you have high interest rate credit card debt and would like to pay it off? Should you do that before investing in 401(k) to get the employer match? No. The return on the employer match is better. Cut back on your spending in order to pay off the credit card debt.

What if you want to save up money outside a 401(k) in order to accumulate a downpayment for a house? It's good if you're trying to put a downpayment together, because these days, with the messy state of the mortgage market, people who have a downpayment are more likely to be approved for a mortgage. But the employer match pays a better return than buying a home. So get the employer match; and try to save a downpayment some other way.

What if school loans are like thunderclouds hanging over your head and you want to get rid of them as soon as possible? You'd get more value from obtaining the employer match than from paying down school loans a little faster. If the school loans are driving you crazy, ease up on unnecessary spending. But don't cut back on the best retirement financing deal most people will ever get.

The employer match is about as close as most of us will ever get to free money. Don't pass it up. If you have access to a retirement account with one, contribute at least enough to get the match; and more if you can, since retirement isn't getting cheaper.

Strange News: Drilling for natural gas begins at Dallas-Fort Worth International Airport-- But will they share the wealth with the passengers? How 'bout some free peanuts, at least?

Tuesday, May 22, 2007

The True Price of Affordable Loans

We all know it's a bad idea to let an eight-year old loose in a candy store. Temptation and self-restraint will be mismatched, and cavities, hyperactivity and weight gain will follow. Today's credit market is about the same.

The U.S. economy is awash in credit. Vast quantities of the stuff roam around in every direction, like the enormous herds of bison that swept across the prairies 150 years ago. The abundance of credit puffed up the real estate markets until they bubbled and popped. In the financial markets, the ready availability of credit has enabled hedge funds to accumulate vast investment portfolios funded by borrowed money, and more recently has financed a flurry of "private equity" deals, in which private investors and corporate managements buy up major public companies using credit that banks line up to provide. All this activity has pushed blue chip stocks to record levels. But are these prices sustainable? Only time will tell.

For consumers, there's no shortage of credit, either. Credit card offers in our daily mail kill entire forests. If you have any unused equity in your home, banks rush to offer home equity lines of credit to burn up that equity and convert it into debt payments for you. Car loans now have longer and longer terms in order to make them "affordable" (meaning small enough for you to pay each month). All of this comes at a price, and it isn't cheap.

Car loans illustrate the point. Back in the bad old days when grown men wore leisure suits, cars were usually sold with three-year loans. If you assume an interest rate of 6%, a three-year loan increases the dollar cost of the car by about 10%. For example, a $25,000 car ends up costing about $27,500.

Today, many car loans have terms of five to six years. A six year loan at 6.5% (rates on longer term loans are higher than rates on shorter term loans) will increase the total dollar cost of the car by about 20%. The same $25,000 car ends up costing in the range of $30,000. Of course, the monthly payment on the 6-year loan is much lower--maybe 40% lower (about $425 a month for the 6-year loan, versus approximately $750 a month for the 3-year loan). That's why people take out the longer loans. But they end up paying more for the same car.

A related problem comes up with real estate mortgages. Some mortgage lenders are now offering 40-year fixed rate mortgages as a way to qualify people to buy homes. Arithmetically speaking, a 40-year mortgage costs many more dollars than a 30-year mortgage (around 30% more; so if you're talking about a $200,000 mortgage, that's an extra $60,000 for the same house).

You don't plan to stay in the house for 40 years, so you ask why does it matter? Because the rate at which you build equity in the house is slower with a 40-year mortgage than with a shorter mortgage. The early payments in any mortgage are mostly used to pay interest charges. Only a small portion goes to reducing the principal balance of the loan. As you make more mortgage payments, the amount that goes to reducing the principal gradually increases and you begin to build equity in the house (equity being the value that is yours). A 40-year mortgage with an interest rate of 6% increases your equity in the house by about 8% of the amount of the mortgage loan after the first ten years (about $16,000 for a $200,000 mortgage). A 30-year mortgage with the same interest rate will increase your equity in the house by about 16% of the mortgage loan in the same time period (about $32,000 for a $200,000 mortgage). Given that housing prices are now flat or dropping in most areas, paying down the principal of the mortgage is pretty much your only way to build equity. The monthly payments on a 40-year mortgage might be about 8% or 9% lower than the monthly payments on the 30-year mortgage. But you pay a large price in terms of slower equity growth to get that reduction.

For more information about the risks of financing your home purchase with "affordable" mortgages, please read our May 10, 2007 blog, "How the Right Mortgage Loan Helps You Build Wealth" (

Remember that you will get a finite amount of money in your lifetime--basically, what you earn, what you gain from investments, anything you inherit, and your lottery winnings (haha, just a joke for 99.9999% of us). The more of your finite lifetime income you spend on interest payments, the less you will have for steaks and champagne. This is a zero-sum game: either the banks get your money, or you get it.

The reason why banks crowd around throwing credit at you is because they stand to make big money lending to you. From your standpoint, the problem with that is the big money comes out of your pocket. Borrow if you must, and borrow for a good reason. Getting an education is a good reason. Buying a house is a good reason. Buying a car is a good reason. But not every loan is a good loan. Buy less house or less car if necessary to keep your borrowing under control. You can't borrow your way to a comfortable retirement. You can save your way to a comfortable retirement.

Celebrity News: Paula Abdul and the risks of owning a Chihuahua--

Monday, May 21, 2007

Scam Alert

It's past midnight and you've been in the bar for a while. Maybe you've had two or three drinks, or maybe a bit more. You're still alone and some of the people around you are starting to look better than they did a half an hour ago. One of them walks up and says, "I just won the lottery. Would you like to see the $20,000 shower curtain in my apartment?" Are you going to fall for this?

You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?

Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.

Here are some common scams that you may encounter.

1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.

2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.

3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.

4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.

5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.

The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to

The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.

Crime News: Is this your parakeet? If so, the police may have your camera.

Sunday, May 20, 2007

Why the Tortoise Ends Up Wealthier Than the Hare

Remember how the slow, steady, plodding tortoise of legend beat the swift but all too confident hare? When it comes to investment savings, the tortoise is also the winner. Here's why.

Research has shown that investors tend to chase returns. (See When a market is hot and prices are skyrocketing, people tend to jump in. Often, they enter the market as prices are peaking, and then begin to take losses when the market falters. This happened to many investors in the late 1990's with high tech stocks, and more recently to many buyers in the real estate markets (many of whom exacerbated their problems with high risk loans).

Then, the same investors that plunged into the market when it was rising tended to sell when it declined. They were therefore not invested when the market began to recover, and missed out on the gains that the recovery offered.

The end result is that many investors buy high and sell low. This isn't a way to make money.

What leads people to chase returns like this? From a psychological standpoint, it's unclear. But the financial phenomenon that triggers buying high and selling low is market volatility. That is to say, the tendency of a market or investment to rise or fall rapidly. The faster the market or investment rises, the more it lures people in. The harder it falls, the more likely they will flee. But they aren't making a lot of money this way.

How does an ordinary investor combat the tendency to chase returns? By seeking out more stable investments. The less your investments create false hopes or major gastronomic distress, the more likely you are to stay with them and capture long term gains. You shouldn't embrace risk--too much of it is likely to lead y0u to buy high and sell low. Instead, you should take conservative, calculated risks--enough to have the potential for long term gains from stocks, but with some stable assets like bonds, bank or credit union certificates of deposit, or money market funds to keep you from abruptly exiting the financial markets and putting the money in a mattress.

One of the easiest ways to get a good mix of stability and the potential for long term gains is to invest in lifecycle or target date funds. We discussed them recently in our blog, "Investing Made Simple" (

Perhaps it's counterintuitive to invest in a way that limits your potential for big investment gains. But recognize that we're all human, invest in a way that saves us from ourselves, and you may end up winning the tortoise's victory over the hare.

Retirement News: If you thought you could fund your retirement with lottery tickets, think again. See

Thursday, May 17, 2007

Unclaimed Money

(As Updated Jan. 26, 2013)

There are billions of dollars worth of unclaimed assets in America. It's important to marshal your assets, particularly as you approach retirement. If you've been careful about your finances, chances are that you have everything that you're entitled to. But there are places you can check to make sure you haven't left any money on the table. Remember that you may have money coming to you directly, or perhaps from a deceased family member through inheritance. That means you should check under your name and the deceased person's name. And if your spouse is busy unloading the dishwasher, you may want to check for him or her as well.

Old bank accounts, shares of stock, insurance policy assets and payments, annuities, uncashed checks, unredeemed money orders or gift certificates, security deposits, contents of safe deposit boxes, customer overpayments, and other financial assets must be turned over to the state of the customer's last known address, if the customer has not made any contact or engaged in any activity for a period of time (such as a year or more). You can search at Also, you can go to to get more search options (this site can link you to each state's treasurer, which allows you to search individual states). If you search individual states, make sure to check all states where you, your spouse, your kids, your late parent, or your deceased wealthy uncle, aunt, grandparent, cousin, sugar daddy, sugar mommy or other potential benefactor lived, as far back as you have information.

Remember that there is a chicken and egg problem with unclaimed property. You may have forgotten to cash a check. Maybe a small bank account slipped your mind when you moved some years ago. You may not know that you're a beneficiary of a will or insurance policy. Or you may not realize that your late parent, in the forgetfulness of old age, lost a number of checks without depositing them. You can't get what you've forgotten or never knew about in the first place. States, facing severe budgetary pressure, have become aggressive about getting these assets from insurance companies, corporations, banks, and so on. While the states are looking out for themselves, the consolidation of all this unclaimed property into the hands of state treasurers gives unknowing beneficiaries and claimants centralized places to look for assets to which they may be entitled. So don't be shy about poking around. You have nothing to lose.

You can check for an unclaimed federal income tax refund at Use the "Where's My Refund" feature on the front page. State tax agencies usually provide a way to check online for the status of a refund.

If you think you may have a claim to a matured U.S. Savings Bond, check at  You might locate bonds you bought yourself but forgot, and bonds that your parents, relatives or others bought for you.

If you worked 10 years or more for an employer with a pension plan, you may have earned the right to a pension, even if you no longer work there. You can check with the employer. If it has gone out of business, its pension may have been taken over by the Pension Benefit Guaranty Corp. This is a federal agency that guarantees pension benefits up to a limit (around $49,500 for pensions with a single beneficiary). You can check at to see if you might have a pension claim. Even if your name doesn't appear in this search, you may want to find out if the pension plan is now being administered by the Pension Benefit Guaranty Corp. Search at There's always a chance your name is spelled differently in the government's records, so you should find out who's taken over the plan and then figure out how to establish any claim you may have. Another resource for finding or dealing with a pension plan would be a regional pension counseling project. These projects are listed by the Pension Rights Center, a nonprofit organization, at You can also try the federal Employee Benefits Security Administration at 1-866-444-3272 or You can get the address and phone number of a local EBSA office where you could seek assistance. If you need help figuring out whether the amount of pension benefits your employer promises is correct, you can get four hours of free assistance from the American Academy of Actuaries. See

What if an old employer had a 401(k) plan, and you want to check to see if you have an account? Contact your old employer. If your old employer has gone out of business, you can search a Department of Labor website for information:

Of course, keep track of your Social Security benefits. The Social Security Administration, in a deplorable display of exceptional penny-wise pound-foolishness, announced in early 2011 that it would no longer send out annual benefit statements. You also can no longer request a copy at The Social Security Administration has said that it would allow citizens Internet access to electronic statements of their accounts, although that system isn't ready yet and may not be ready until the end of 2011 or early 2012. Until then, all you can do is wait and hope they get your record right. Whenever it is that you can again check on your benefits, remember that not only do you get benefits, but your spouse and perhaps even your dependent children may get benefits. This is something we discussed earlier at Make sure everyone in your household gets the benefits to which they're entitled.

Veterans of limited financial means may be eligible for an income supplement called the Veterans Pension. This pension supplements other income you have to bring your total income up to levels prescribed by Congress. For those who served during the Vietnam War or earlier, benefits may be available if you had at least 90 days of active service, with at least 1 day during wartime. Veterans whose active duty service began on or after Sept. 7, 1980 need at least 24 months of active service (or the full time period for which they were called up for active duty). For more information, go to the Veterans Administration website at It's very important to note that veterans eligible for a basic veterans pension, who have serious health problems and need assistance from others for personal living tasks, or who have one or more disabilities, may also be eligible for Aid and Attendance or Housebound benefits, which are paid in addition to the basic veterans pension. For a vet facing nursing home expenses, or the costs of home health care, Aid and Attendance or Housebound benefits can make a difference.

For more information about Social Security, read our May 1, 2007 blog, and May 2, 2007 blog,

To avoid having your money or property go unclaimed, see

Animal News: if you're stressed out by work and want an escape, here's a soothing animal story.

Wednesday, May 16, 2007

Investing Made Simple

There's a simple way to invest that gives you the diversified portfolio designed for long term growth that financial experts recommend. And the best part of it is that you don't have to a lot of research into stocks, mutual funds or other investments. We're talking about lifecycle funds, which are also called target date funds.

Lifecycle and target date funds solve two basic problems investors face. First, you should diversify your investments, so that you don't have all your eggs in one basket. Typically, a variety of stocks and bonds is recommended.

Second, you should change the focus of your diversification as you grow older. In your 20's and 30's, your portfolio should be heavily weighted toward stocks, since they have greater potential for long term growth. Of course, stocks can nosedive in value if the market stumbles--and you can be sure it will stumble every now and then. But when you're young, you still have plenty of time to ride through market turbulence and profit from the next upswing. As you grow older, you have less time to recover from investment losses. Therefore, you should shift more of your portfolio into bonds and even money market funds in order to lock in the gains you've achieved and stabilize your financial foundation.

Given the vast array of investments available, how could an ordinary investor figure out how to diversify, and then how to change the diversification appropriately over time? If you have time every week to devote to investment research and strategizing, you could probably do reasonably well. But what if you have a job to keep, kids to raise, housekeeping to do, and fun to have?

The solution is to invest in lifecycle and target date funds. These mutual funds provide a diversified portfolio for you. All you do is pay in your money and they automatically invest it in a diversified way. They have "target dates," which are years (usually in increments of 5, like 2010, 2015, 2020, 2025, 2030, etc.). You pick a year that's close to the time when you plan to retire. For example, if you were born in 1975 and expect to retire around age 65, you'd invest in a fund with a target date of 2040. Right now, this fund would probably be mostly invested in stocks (probably somewhere around 80% in stocks, with the remaining 20% in bonds). As you grow older, the management firm operating the lifecycle or target date fund will gradually reduce the stock portion of the fund's assets and increase the bond portion. By the time you reach 65, the fund might have something like 30% to 40% of its assets in stocks, and the rest in bonds and money market funds. This conservative allocation is meant to lock in much of your investment gains so that you'll have some certainty for your retirement finances.

As with any mutual fund, you should look closely at the fees and expenses of lifecycle and target date funds. Some are noticeably more expensive than others, and in the long run, high fees and expenses can be costly. Vanguard and Fidelity offer lifecycle or target date funds that have pretty low costs. Other mutual fund management companies may also offer low cost funds.

If you are a bit of a stock market buff, you may want to think about the diversification philosophies of the lifecycle or target date funds you consider. They tend to have slightly different approaches--some are more heavily weighted toward stocks, while others have a greater preference for bonds. Make sure you are comfortable with the fund's diversification philosophy.

With a lifecycle or target date fund, all the investment strategizing and diversification happens automatically. You just pay in your money and the fund's managers do the rest of the work.

More and more 401(k) plans are offering lifecycle or target date funds as an investment option. If your employer doesn't offer them, lobby for them. They'll make the process of retirement saving much simpler for you. You can invest in these funds through an IRA--just open the IRA with the mutual fund management company offering the funds in which you are interested. If you've maxed out your retirement accounts and want to save more, you can always open a taxable account with a mutual fund management company and invest in a lifecycle or target date fund that way.

Doing things the simple and easy way means you're more likely to do them. We all recognize the importance of saving for retirement. Keep lifecycle and target date funds in mind as one of the easiest ways to build wealth.

Entertainment News: Celebrity phobias. You've heard of some of this stuff--claustrophobia, fear of flying, fear of heights, and fear of snakes. But pigs? Eggs? Ferns? Gerbils? Houseplants? Antiques? Silver cutlery? Bright colors? And chewing gum? We're not making this up. See

How to Retire Without Saving

Many people can't save. Sometimes it's for good reasons--illness, an aged parent who needs support, a child with special needs, or too low an income. Other times, the reasons are not so good--serial spending, reckless investing or indifference to the future. Whatever the reasons, good or bad, these people need to retire, too. How can they do it? Here are some ideas.

1. Get a job with a pension. Government jobs, military service, law enforcement and educational jobs usually offer pensions. Some of these employers also offer retirement savings accounts similar to the 401(k) plan--the federal government's Thrift Savings Plan is an example. These jobs aren't for everyone. Governments are often bureaucratic, and action-oriented people may have a hard time fitting in. Teachers sometimes find that their jobs involve as much babysitting as teaching. Military and law enforcement personnel perform yeoman's duty for everyone else, but they have to be disciplined, motivated and able to deal with a highly structured and high-pressured environment. It often takes 20 or more years to qualify for a pension, so this isn't a cakewalk. But if you think you're cut out for one of these jobs, and your retirement savings hover around zero on a good day, give it a try.

Corporate pensions continue to exist, especially at the larger, old line companies. But most corporations are fleeing the traditional defined benefit pension (the good kind) faster than rich folks left New Orleans before Katrina. New hires often are unable to participate in the older pension plans. If you have the opportunity to participate in a corporate pension plan, consider yourself lucky. But don't rely entirely on the company pension. You may be disappointed.

2. Buy a house and pay off the mortgage and all home equity debt. Many people who can't put $20 into a savings account always manage to pay the mortgage one way or another. The house can be used as a vehicle for forced savings. Just don't mess things up by taking out a home equity loan or home equity line of credit. You'll get only a finite amount of home equity in your life. If you take out home equity debt, you use up some of your finite lifetime home equity. Yes, you can repay the home equity loan, but you have to use cash that could otherwise have been devoted to retirement savings. If you enter retirement with a home that's free and clear of all liens, you'll have a valuable asset that could add much to your golden years.

3. Work longer. The longer you work, the more your Social Security payments will be. We explained how this works in our earlier blog, Mysteries of Social Security Retirement Benefits, Part 1 ( An added benefit of working longer is that it gives you more time to save, and, if you are lucky enough to have a pension, it may help you earn a larger pension. While working longer isn't the fastest way to the cabana on the beach, you may end up with a nicer cabana.

4. Stay together. This is something we discussed in our blog "Love in a Time of Financial Planning--Part Deux" ( Two people together can often do better than if they were alone. Consider the following example. Each member of a couple gets $15,000 in Social Security benefits, and has $250,000 in savings, enough to allow withdrawal of $10,000 a year in retirement beginning at age 65. Individually, they'd each have $25,000 a year, enough to be okay, but not more than that. Together, they'd have $50,000 a year, enough to be solidly middle class. The idea of staying together for financial reasons conjures up images of bedraggled housewives stuck in loveless marriages with unshaven, potbellied louts who drink too much and smoke cheap cigars. That's not what we mean. Sometimes, no relationship is better than a bad one. But you have many reasons to make your relationship work and your financial well-being may be one of them.

None of these strategies will get you luxuries. You need savings for that. But if you feel like you're financially lost, don't give up. There's still hope for you.

Strange News: Trying to make fast food

Monday, May 14, 2007

The Downsides of Saving for College Expenses

Just as a parent will wake up at 3:00 am to feed a hungry new born, a parent will save for the child's college expenses. Many commentators recommend that you first fund your retirement, and use any remaining money for college savings. The idea is that you don't want to be a burden on your kid(s) when you're old. Given the amount of money it takes to retire comfortably, most people would have little left for college expenses if they actually took care of retirement first. But the parental instinct to provide for the child--be it with food or with an education--extends beyond financial rationality. People will save for the educational expenses of their children, even at the cost of adequately funding their own retirements.

That being the case, they should be aware of some of the pitfalls and downsides of saving for college expenses. The 529 Plan and the Coverdell account are heavily promoted today, especially the 529 Plan. Both a 529 account and a Coverdell account offer tax advantages--the money you put into them isn't tax deductible, but the earnings are not taxed if they are used to pay college expenses. Coverdell accounts can also be used to pay primary school expenses. Some states offer deductions from state income taxes to their residents who open an account in a 529 Plan offered by that state.

However, there are the downsides, which you not hear much about. Each 529 Plan has only a limited number of investment options. The plan itself, and the investment options, may impose high costs and fees on your account (as much as 3% per year in some cases). That's a hefty burden. Even with the tax shelter offered by the 529 Plan, fees at that level seriously reduce your long term returns. If you compare an expensive 529 Plan against an inexpensive taxable account (one where you pay taxes on realized investment gains each year), the inexpensive taxable account can produce greater wealth.

Another problem with 529 Plans is that if the money in your 529 account isn't used for college expenses, you can retrieve it only after paying state and federal income taxes, and a 10% penalty on the earnings. So you have an exit strategy problem if Junior doesn't go to college; or does go, but doesn't graduate. Something like 1/3 to 1/2 of all college freshman do not graduate. If you save for college expenses in an inexpensive taxable account, you have no exit strategy problem and may even come out ahead.

A 529 Plan is a good idea if you can find one with low costs. You can search for low cost 529 Plans at Among the plans that appear to have low costs are the Utah Educational Savings Plan Trust, the Virginia Education Savings Trust, the South Carolina Future Scholar 529 College Savings Plan (Direct-sold), and the New York 529 College Savings Program--Direct Plan. Note that you don't need to be a resident of a state to participate in its 529 plans. Also, you have to contact each of these states directly to open an account--these plans are not sold by brokers (which probably accounts for much of their low costs, since no one gets a commission for selling you one).

Finding Coverdell accounts with low costs tends to be easier than it is for 529 Plans, since you can open a Coverdell with a wide array of financial institutions. One downside of the Coverdell account is that you can only contribute $2,000 a year (the 529 Plan's limit is $12,000--or $24,000 for a married couple--a year). Also, the Coverdell can only be used by people subject to certain income limits. The Coverdell has a severe exit strategy problem: if the account assets aren't used for educational purposes by the time the child who is the beneficiary of the account is 30, the child gets the remaining assets (subject to payment of state and federal income taxes and a 10% penalty on the earnings). You don't get any of the money back for your retirement or any other purpose.

Persons having incomes below $78,100 if they're single, or $124,700 if they're married filing jointly, may be able to avoid paying some or all of the taxes due on the interest income of U.S. Savings Bonds that is used for college expenses. So U.S. Savings Bonds actually provide a tax shelter for college savings for persons meeting the income requirements. Since Savings Bonds can also be used to fund your retirement, they don't have an exit strategy problem. They're also simpler than 529 Plans and Coverdell accounts.

The tax sheltered plans--529 and Coverdell--also require extra work at tax time, especially when your taking money out to pay for educational expenses. If you're concerned about the downsides of 529 Plans and Coverdells, just save for college expenses in low cost taxable investments like well-diversified mutual funds or U.S. Savings Bonds.

Seafood Lovers: Fishy things are happening at restaurants. Order the cheapest fish on the menu, because that's what you might be getting anyway. Here's why:

Sunday, May 13, 2007

How to Maximize Your Investment Gains

Profiting from investment consists of two things: (a) making money; and (b) keeping it. There is risk in almost every investment--even federally insured bank deposits are subject to loss of value from inflation--and risks can cause losses.

Risk and reward walk hand-in-hand down Wall Street. The higher the potential rewards of an investment, the greater the risks it involves. If you invest in something that offers large potential gains, understand that it's likely to have high risks of loss as well.

From time to time, you may hear of investments that are sure bets. When someone offers you a chance at one of these sure bets, put your hand on your wallet and go for a walk around the block from which you don't return. There are no sure bets in the financial markets.

Maximizing your investment gains involves a balancing of risks and rewards. Look for investments with reasonable returns and moderate risks, and you have a good chance of making money and keeping it in the long run.

So, if you are an ordinary investor, what are good investments? We mean the ones where you have a reasonable chance of receiving gains and then keeping them. Here are some ideas:

1. Stocks and stock mutual funds: stocks give you ownership of a small piece of a company. Stock mutual funds own a large number of different stocks, and give you a tiny bit of ownership in all the stocks that the mutual fund owns. Stocks are generally a good long term investment. Of course, we all know that the stock market fluctuates. But if you ride through the ups and downs, you'll likely do well over the years. Stock mutual funds smooth out some of the ups and downs by giving you a diversified pool of investments. As a mutual fund investor, you put your eggs in many different baskets, and therefore have a smaller chance of taking major losses from any particular stock.

2. Bonds and bond mutual funds: bonds are an investment where you invest an amount of money (the "principal") in the bond. The company or government that issued the bond pays you interest from time to time, and eventually repays the principal. In this sense, bonds are like bank certificates of deposit (except they aren't federally insured, although U.S. Treasury bills, notes and bonds are safe). A bond doesn't offer great potential for gains. However, it tends to have low risks, especially U.S. government bills, notes and bonds. A bond mutual fund holds a number of different bonds and helps to diversify your bond investments. You would invest in bonds and bond mutual funds to provide stability to the value of your financial portfolio. Every portfolio should have some stable assets, especially as you get older.

3. Lifecycle or target date mutual funds: these mutual funds hold both stocks and bonds. They are a blended mix of financial assets and are designed to give you the potential of stocks for good long term growth while somewhat stabilizing the value of your portfolio by investing some assets in bonds. The company managing these funds does the investment selections for you, so all you have to do is pay in your money and let them do the rest of the work.

4. Real estate: we now understand that real estate is not a wonder asset that will make everyone rich through no effort whatsoever on their part. Real estate historically has increased in value more slowly than stocks (about 1% after inflation versus approximately 3% after inflation for stocks). Nevertheless, everyone needs a roof over their heads and buying real estate is a good way to pay for that roof while adding to your investment portfolio. Owning a home provides some diversification away from the financial markets, and the home could serve as an asset of last resort in retirement, especially if you own it free and clear of debts.

5. Education: last, but certainly not least, is education. The gap in earnings between those who have a four-year college degree and those who don't has been growing over the years. The U.S. economy has shifted away from traditional manufacturing to knowledge and informational based activities, and it rewards those who know how to utilize knowledge and information. A college education doesn't provide everything you need for a job or a career. But it teaches you how to learn. You have to absorb information faster and on a more sophisticated level in college, and therefore you learn how to learn. That skill is highly rewarded in an economy based on knowledge and information. Education is one of the best investments you can make. Don't worry a great deal about which college you attend. Statistically speaking, there is little evidence that going to an expensive Ivy League school will make you significantly wealthier than attending a good state university. Just make sure you graduate.

Strange News: Apes with expensive tastes--

Thursday, May 10, 2007

How the Right Mortgage Loan Helps You Build Wealth

One of the basic principles of personal finance is to keep things simple and understandable. Simplicity allows you to understand where your risks are, and to figure out how to deal with them effectively. Complicating your personal finances forces you to drive on foggy roads, and you may not see every obstacle in time to avoid it.

The most recent illustration of this point is in the real estate markets. Many homeowners are struggling to meet payments on interest only mortgages, adjustable rate mortgages and option ARMs. Foreclosure rates are increasing. And, with real estate values sluggish or dropping in many major markets, your ability to refinance out of a bad loan is limited or nonexistent.

Interest only mortgages and option ARMs seem like great loans at first. You need to make only modest monthly payments, and it's easy to qualify for a nicer house than you thought you could buy. However, it's important to understand that these loans allow you to delay repayment--but not indefinitely. An interest only loan lets you pay only the interest on the loan for a short time, such as a year or two or three. Then you will have to start paying the principal of the loan. Your monthly payment will jump, and by quite a bit.

The option ARM allows you not only to delay repaying the principal of the loan at first, but also to delay payment of some of the interest. But the unpaid interest is added to the principal of the loan, effectively increasing the amount of the debt. The monthly payments in options ARMs tend to increase sooner rather than later (sometimes within months). With the addition of unpaid interest to the principal, the increase in monthly payments could be seriously painful.

Adjustable rate loans begin with an interest rate that will be effective for a year, or a few years. Then the loan rate will change as interest rates in the financial markets change. But the change is likely only to go upwards. Adjustable rate loans tend not to decrease the rate (you usually have to refinance to get a lower rate). You could see a big jump in payments if interest rates rise significantly.

The common thread among all these loans is that they are complicated and often unpredictable. You can't effectively budget or plan for your long term financial well-being if you don't know what your mortgage payment will be in a year or two. Things only get worse if you can't afford the increased payment. You may be unable to buy the new car you need, and will have to hope the brakes and tires on your old car last a while longer. Money you wanted to save for your golden years or your child's college expenses may be devoted to the greater profitability of your mortgage lender.

So, what to do? Use a traditional fixed rate mortgage. This loan locks in your housing costs. You know how much you'll have to pay each month of the loan. There will be no surprises. Once the loan payment is fixed, you can budget around it and allocate money for savings. Look back at the World War II generation. Before the war, mortgages tended to be for a short duration (like 5 years) and require substantial downpayments (like 50%). When the GIs returned from the war, the 30-year fixed rate mortgage came into common usage. The housing market boomed and home ownership rates rose. With fixed housing costs, the members of this generation could and did build wealth perhaps like no generation before them. They were often able to fully pay for their homes and save money beyond that.

Yes, initially the cost of a fixed rate mortgage is higher, with a larger monthly payment. But no one can predict the direction of interest rates. A loan with an adjustable rate, or which you have to refinance in a few years because you can't afford the payment increases, may cost you more over the long term than a fixed rate mortgage. Further, incomes tend to rise over time, so your income will probably increase while a fixed rate mortgage's monthly payment does not. The extra money can enhance your lifestyle and increase your retirement portfolio. People earning $5,000 a year in 1955 might have had a mortgage payment of about $150 a month (seriously, many mortgage payments were this low). By 1975, they might have been earning $15,000 or $20,000 a year; but their mortgage payment was still $150 a month. That's a good situation to be in.

Fixed rate mortgages may not initially be as easy to get or pay as other, more complex loans. But most things in life worth doing or having don't come easily. The fixed rate loan ultimately makes your life simpler and easier. That will be conducive to your financial well-being. Even if you have to buy less house, you'll have more peace of mind.

Personal Grooming News: Men wearing makeup--

Wednesday, May 9, 2007

How to Teach a Child to Manage Money and Save

The easiest way to build wealth is to start early and save often. A child who learns basic money management skills will spend sensibly and save as soon as he or she enters the adult work force. A person in his or her 20's that has the habit of saving and investing will benefit from a lifetime of good money habits. How do you teach a child to manage money?

1. Give the child an allowance and a piggy bank. After the child has learned to count (at least up to 100), and is familiar with cash (coins and bills), give the child two things simultaneously.

First is an allowance appropriate to the child's age. At age 7, 8 or thereabouts, something like $2 a week might be a good place to start. That's enough to buy a few little things, but not enough for the little one to get into trouble. This allows the child to become familiar with money.

Second is a piggy bank. It is important for the child to understand from the outset that money can be saved for future use and that saving some or all of the allowance will build up money for more expensive things. The child will learn very quickly to think about money as a resource that can be conserved and made to grow over time.

It's important to give the child the allowance and the piggy bank at the same time. Receiving money and saving it should be associated in his or her mind from an early age.

2. Hold the Line on the Allowance. If the child spends all of his or her allowance and then wants a supplement before next week's allowance, don't give in. The child should learn that money is a limited resource and must be spent wisely. Increasing the allowance as the child grows older makes sense. But whatever the amount, don't supplement it. It's important for the young one to learn how to control the impulse to spend.

3. Encourage Math Skills. All aspects of handling money--spending, saving and investing--require an understanding of math. Basic elementary school arithmetic--addition, subtraction, multiplication and division--is sufficient to handle most daily money problems. A middle school level understanding of decimals, exponents and how to read charts and graphs is helpful to understanding investments. Financial markets enthusiasts and Wall Street professionals often use more advanced math, such as statistics and differential equations. The more easily a child grasps mathematical concepts, the better prepared he or she will be to deal with money and investments. It helps if the child can do simple arithmetic in his or her head, without the need for a calculator. Make a game or contest of memorizing multiplication tables; your child will reap a lifetime of rewards from this bit of knowledge.

4. Have the Child Open a Savings Account During High School. Many parents give their kids credit cards (usually with a very small limit) at some point during high school. This isn't a bad idea, since it helps the child to learn about the modern financial system. But don't just give the young one the means to spend. Teach the child how to use the financial system to save and build wealth. Many banks offer special interest bearing accounts for children that allow very small balances without any fees or charges. These accounts can sometimes be opened for as little as $25 or $50. Make sure your child has one, preferably during high school. Watching the balance grow and accrue interest will teach your child about the process of building wealth. This is something a young person should understand before going off into adulthood.

5. Set a Good Example. Kids take after their parents. We all know that. Set a good example for your kids and be sensible about money. You'll not only be rewarded with financially skillful children, but may boost your own retirement portfolio in the process.

For more ideas about kids and money, check out Kids & Money at

For more ideas about money and personal development, check out the Personal Development Carnival:

More on Kids: Children conceived in the summer tend to do less well on a standardized test. See Hmmmmm. Well, summer's not a bad time to take cold showers anyway. But health care workers beware. There could be seasonal layoffs in the maternity wards from March through May.

Strange News: For all you fashion plates, read the latest about antibacterial ties: Is someone getting a little too obsessive?

Tuesday, May 8, 2007

How to Become a Millionaire

So you want to become a millionaire? Here are a few ways, none of which involve calling an 800 number advertised on late night TV.

1. Save $15,000 a year in a 401(k) account (or an equivalent account, like the federal government's Thrift Savings Plan) for 26 years, and you will probably get there. We assume that your investments earn 7% a year. Since you're using a retirement account, your investment earnings will automatically compound. You should invest the account assets in a diversified mix of mostly stocks and some bonds (roughly 60% stocks and 40% bonds). Investing in a lifecycle or target date mutual fund would be a convenient way to get a diversified mix of assets. We also assume that you don't make any withdrawals or take any loans from the 401(k) account. (That way, your investment earnings will compound without interruption.)

If you want the inflation adjusted equivalent of $1 million, increase the amount you save each year by the rate of inflation. You'll probably be able to do this since incomes for most people tend to keep approximate pace with inflation over the long run. Even if your income doesn't always increase as much as the inflation rate, make sure your savings keep pace. Maybe you'll lose a little lifestyle, but you'll get better quality of sleep.

2. Save $10,000 a year in a 401(k) or equivalent account for 31 years. This is based on the same assumptions. Increase your savings annually by the inflation rate to maintain your buying power.

3. Save $7,500 a year in a 401(k) or equivalent account for 35 years. This is based on the same assumptions. Increase your savings annually by the inflation rate to maintain your buying power.

4. Save $5,000 a year in a 401(k) or equivalent account for 40 years. This is based on the same assumptions. Increase your savings annually by the inflation rate to maintain your buying power.

None of these methods will make you a millionaire quickly. But they don't require any special skills, an advanced degree, a bundle of stock options, or a winning lottery ticket. Anyone who is patient and saves steadily can get there. Most people who are well off accumulated their wealth bit by bit. It doesn't matter if you don't make a huge income. The tortoise wins this race, not the hare.

Tacky tacky: See the latest in legal advertising: Is this a new low?

Monday, May 7, 2007

A Financial Checklist for Job Loss

Losing a job is one of the stressful things that can happen. You know you are in financial peril, but may find it hard to think straight and remember things that might be helpful. Here's our list of suggestions for softening the blow.

(a) negotiate for as many weeks or months of termination pay as you can get;

(b) ask for payment of any bonuses, awards or commissions you’ve earned or accrued, or which you can reasonably expect based on your job performance to date (if the award was in non-monetary form, like a trip to Hawaii, ask for the monetary value of the trip);

(c) request payment for accrued vacation and sick days, and any other time off you've earned or been awarded;

(d) ask for continuation of health insurance benefits (remember that you have COBRA rights to retain your employer’s health insurance for 18 months even if your employer doesn’t offer anything else; even though you’d have to pay the entire cost of COBRA coverage yourself, it's still worthwhile);

(e) ask for continuation of other insurance benefits, such as dental coverage or life insurance;

(f) obtain a written statement of the balance in your 401(k) account and any other retirement accounts you might have with the employer, such as an employee stock option plan--the assets in these accounts are yours (except possibly for matching funds from your employer if you haven’t had the job all that long) and you don’t have to negotiate for them; but you should make sure you know how much is there;

(g) claim any stock options, restricted stock and similar incentive compensation benefits that you have earned or are entitled to;

(h) ask about retaining any employer provided equipment, such as a laptop computer or a car, if this equipment is important to you;

(i) ask for the employer’s agreement not to contest your claim for unemployment compensation (if it looks like you’d qualify for unemployment comp);

(j) ask for your employer’s agreement to give you a good reference (or at least a neutral reference such as only a confirmation of dates of employment and positions held); and

(k) ask your employer for assistance from an outplacement or headhunter firm (that the employer pays for).

Your ability to obtain these benefits will depend on the circumstances of the situation, but they are something for you to think about. Certainly, if you don't ask for them, you probably won't get them. If you are represented by a union, consult with a union representative about your rights and options.

Some people try to negotiate for a temporary continuation of employment while they search for a new job, on the theory that it’s easier to find work if you are employed. Others may aim for the use of an office and telephone line at the old employer’s office while they search for a job, to maintain the appearance of being employed. You may want to consider these possibilities. But don’t lie to a prospective employer about your actual employment situation.

Carefully read anything your employer asks you to sign in connection with your termination. Almost always, an employer offering termination benefits will ask you to waive your rights to sue for discrimination, wrongful discharge and other potential legal claims or rights. If you’re seriously considering a lawsuit, don’t sign anything even if that means losing some of the termination benefits. You should be able to use COBRA rights to maintain your health insurance (unless you’ve engaged in “gross misconduct”). If you sign a document that waives your COBRA rights, you can still revoke that waiver for a limited period of time (which should be at least 60 days after your regular employer sponsored health insurance plan’s coverage ends). The assets in your 401(k) or other retirement accounts are yours in any event, so you don’t have to waive any rights to get them.

You may be able to get unemployment compensation. Do so if possible because unemployment comp will help to extend your financial resources.

Of course, start looking for another job as soon as you can. You can't build wealth for retirement unless you keep working. Losing a job can be one of the most emotionally difficult events of your life. But remember that it happens to large numbers of people every year; you are hardly alone. Don't lose faith in yourself. You'll have sunny days as well as cloudy ones. Hang in there and wait for the clouds to blow away.

Strange News: A Brazilian court has ordered a brewery to pay one of its beer tasters compensation for facilitating his alcoholism. See Hmmmmm. They paid him to drink so now they have to pay him for drinking. What's his incentive to stop drinking?

Sunday, May 6, 2007

In Your 20's: Money Matters When Time is Your Friend

When you’ve finished your education and are starting out in the work force, you have perhaps the best opportunity of your life to put your finances on a solid footing. Time is very much on your side. If you control your spending and start a savings program when you’re young enough to benefit from 40 years of compounding investment earnings, you’ll find retirement a lot easier to finance. If you’re like many people, you may not think much about next year, let alone your 60’s. Remember, however, that you’ll probably reach your 60’s (and the alternative is worse if you don’t). You’ll be happier then if you do some advance planning now. Take a few basic steps and you’ll be off to a good start.

1. Live within your means. Don’t try to emulate friends who can lease BMWs because they’ve moved back in with their parents after college. It’s easy to maintain a fancy lifestyle if someone is subsidizing you. But if you’re on your own, live carefully. You’ll become self-reliant, and in the end that will be worth much more than parental subsidies.

2. Build up an emergency cash fund of 6 to 12 months expenses. The emergency cash fund serves as a personal insurance policy against all the bad things that might happen to you which aren’t otherwise insured. For example, if you have a serious car accident, or a rock climbing accident, and can’t work for three months, where will you get money to live on? If you have health insurance (and you should get it, even if you have to pay for it personally), your medical costs will be covered. But you’ll still need money for deductibles and co-pays, food, rent, utilities, car payments, etc. An emergency cash fund may be $20,000, $30,000 or more. That looks like an awful lot of money to have sitting around. But all insurance looks like a waste until you need it. Then, you’ll be very glad you have it. Put the emergency cash fund in an account that is separate from your regular checking account, so that it’s not easy to spend. Good places include a bank or credit union money market account (preferably one that pays a decent interest rate) or a money market fund. Money market funds are actually pretty safe, especially ones that invest exclusively in U.S. Treasury securities, and tend to pay better interest rates than most bank accounts. Some online banks pay relatively high interest rates.

3. Start saving in a retirement account. Open a 401(k) account or other retirement account if your employer offers one. Otherwise, open an IRA. A Roth IRA is probably best if you’re young. These accounts are the best legal tax shelters available to most Americans, so be sure to have one.

4. Don’t run up your credit card debt and pay off any balance you’ve been carrying over from month to month. Credit card debt is expensive because the interest rates are high. Try to stick with just one or two credit cards. Bouncing from one card to another to another isn’t good for your credit rating. Keeping one or two cards for a longer period of time is better. If you consolidate your debt, use the cash flow you free up to pay down debt. Don’t use it for more lifestyle enhancement. The problem with debt is that it is supposed to be repaid, and the interest charges will eventually crimp your lifestyle. Why enrich banks? Pay off your debts and enrich yourself.

Strange News: Apparently the reason why Paris Hilton is going to jail is because she took legal advice from her publicist: Okay. Maybe in La La Land this makes sense. Have you ever heard the joke about asking two publicists the same question and getting three answers . . .

More money hints for those under 30 can be found at this blog carnival:

Thursday, May 3, 2007

Mysteries of Social Security Retirement Benefits: Part Trois--Who

In our two preceding blogs, we discussed how the Social Security Administration determines your retirement benefits, and the advantages and disadvantages of starting to collect benefits at various ages. Today, we discuss who receives benefits. This is where Social Security may be a bit more generous than you might have thought.

You, naturally, receive benefits based on your employment history. Your spouse can also receive benefits based on your employment history, up to as much as half of your benefits. Like you, however, your spouse is receives reduced benefits if he or she starts collecting them before his or her full Social Security retirement age. (We discussed full retirement age in yesterday's blog.) Conversely, you might be able to receive Social Security based on your spouse's employment history.

If you have an employment history that entitles you to benefits and are married, you will receive the benefits you have earned from your own employment history. In addition, if your spousal benefit would be larger than your personal benefit, you would receive an amount equal to the difference between your spousal benefit and your personal benefit. In other words, the amount you get is the greater of your personal benefit or your spousal benefit.

Divorced persons may be able to collect Social Security retirement benefits based on the employment history of their former spouses under some circumstances. They must have: (a) been married for at least 10 years; (b) reached the age of at least 62; (c) be currently unmarried; and (d) not be entitled to a larger benefit based on their own employment history. So not all is lost from the relationship. You can receive up to half of the amount of your ex's full retirement benefits if you wait until your full retirement age. Your spousal benefits will be reduced if you start earlier.

One little known fact about Social Security is that if you are entitled to retirement benefits and have dependent children or grandchildren, the kids under the age of 18 or who are disabled can start collecting benefits when you do. So late in life parents, and grandparents who are raising their grandkids, can get some help. This benefit is subject to limitations on much your family can collect in total (about 150% to 180% of the benefits you receive). If you are eligible for Social Security retirement benefits and are in need of cash to raise the young ones, here's some relief. If you don't need the money, save it up and use it as a college fund for the kids.

Social Security also provides life insurance of a sort, in the form of survivors benefits. Survivors can receive benefits, depending on the deceased person's employment history. A widow or widower can receive benefits as early as age 60, although they will be sharply reduced from what the widow or widower would receive at his or her full retirement age. A divorced survivor who was married to the deceased for at least 10 years and remains unmarried may also be entitled to survivors benefits starting as early as 60. A widow or widower (or divorced survivor) of any age who is supporting dependent children under the age of 16 or disabled children (who themselves are entitled to a child's benefit) may also be able to get survivors benefits. Unmarried children under the age of 18 can receive benefits (and can get them up to age 19 if they are still attending primary school or high school). Even your dependent parents, if you are providing at least half their support, can collect benefits if they are at least 62. Survivors benefits are complex, and we have only touched the surface. For more detail about survivors benefits, go to

There's lots more to Social Security. People receiving pensions from governments or nonprofit institutions may be subject to nasty reductions and offsets if they didn't pay Social Security taxes in those government or nonprofit jobs, even if they otherwise qualify for Social Security benefits from other jobs. Your painkiller budget will skyrocket if you ever have to deal with Social Security disability questions. But it's important to be familiar with Social Security. Close to 50 million Americans receive benefits of one type or another. Almost 34 million receive retirement benefits. About 6.5 million receive survivors benefits. And about 8.6 million receive disability benefits. That means 1 out of every 6 Americans receives something from Social Security. It's by far the most important social welfare program in the country, and one that will benefit almost everyone eventually.

Strange News: Okay, enough already about Social Security. Talk about an incredible headache. How about eco-friendly beer (as if you needed another excuse to drink the stuff)? Read this:

Wednesday, May 2, 2007

Mysteries of Social Security Retirement Benefits: Part Deux--When

In our preceding blog, we gave you a thumbnail sketch of how Social Security determines your retirement benefits. Now, we discuss when you might want to start collecting benefits.

The earliest you can start collecting retirement benefits is age 62. The amount will be less than what you'd get if you waited until your "full" Social Security retirement age. Your "full" Social Security retirement age depends on when you were born. If you were born any time from 1943 to 1954, your full retirement age is 66 (it's lower if you were born before 1943, but in that case you're probably already collecting benefits or about to start collecting them). If you were born in: (a) 1955, full retirement age is 66 and 2 months; (b) 1956, full retirement age is 66 and 4 months; (c) 1957, full retirement age is 66 and 6 months; (d) 1958, full retirement age is 66 and 8 months; (e) 1959, full retirement age is 66 and 10 months; and (f) 1960 or later, full retirement age is 67.

The next question is how much less do you get if you start collecting benefits before your full retirement age. While the Social Security website ( isn't precise, it does give a couple of examples. If your full retirement age is 66, the reduction in benefits: (a) at age 62 is about 25%; (b) at age 63 is about 20%; (c) at age 64 is about 13.3%; and (d) at age 65 is about 6.7%.

If your full retirement age is 67, the reduction in benefits: (a) at age 62 is about 30%; (b) at age 63 is about 25%; (c) at age 64 is about 20%; (d) at age 65 is about 13.3%; and (e) at age 66 is about 6.7%. If your full retirement age is between 66 and 67, the reductions apparently are somewhere between the amounts for ages 66 and 67.

It's important to understand that these reductions are permanent. If you start collecting benefits at age 62, they will always be about 25-30% less than the benefits you would have gotten if you had waited until your full retirement age. The fact that you are getting benefits sooner, and may be able to stop working at an earlier age, may make it worth your while to forego the higher benefits available at a later age. Just be sure you understand the cost.

If you delay taking benefits after your full retirement age, your benefits will increase even more. That's especially true if you continue to work. The amount of the increase will depend on whether or not you work, how long you work and how much you earn. For people born in 1943 or later, a boost of 8% per year is provided for each year of delay (and your benefits may be further increased if you keep working). So you might be able to leverage your benefits upwards as much as 24% or more over your full retirement age benefits if you wait until age 70. But start collecting them when you hit the big 7-0, because they don't increase with further delay.

So, when should you start collecting retirement benefits? That depends on your personal situation. If your health is good and you think you have a long life expectancy, delay benefits as much as possible. That way, you'll have better protection for the last years of your life, when your savings may run low. The benefits you get by waiting until 70 can be 50% or more than the amount you'd get starting at age 62, so we're talking about some serious pocket change. As we discuss in Uncle Leo's Den, boosting your Social Security benefits is a valuable way to pump up your retirement resources.

But be careful if you've stopped working. Without a job, how would you live for the years before you started to take Social Security? If you have a pension, you may be able to get by with that. But if you'd have to burn off a lot of your savings in order to delay benefits, you may be better off starting benefits earlier and conserving your savings. Retired people can't replace spent savings, so if your savings are modest, keep them warm and dry for big expenses like medical care.

On the other hand, if your health is poor, consider taking benefits at age 62, especially if you are unable to work. That way, you'd get something back for all the Social Security taxes you paid.

The answer becomes more complicated if you are married. Your spouse is entitled to Social Security benefits based on your record, and can collect up to half the amount of your benefits (but only when you start to collect). If the two of you are short of cash, and the total amount of your combined benefits would provide badly needed cash flow, it could make sense to start collecting earlier. However, be cautious about jumping the gun. The spousal benefit shrinks if your spouse begins collecting it before his or her full retirement age, similar to the shrinkage in your benefits if you begin collecting them before your full retirement age. Make sure the sacrifice is worthwhile.

While there may be many nuances to the question of when you begin collecting Social Security retirement benefits, our discussion should give you a general idea of what it's all about. Granted, thinking about this stuff can become mind-numbing after a while. But you could receive hundreds of thousands of dollars from Social Security during your retirement, and that's worth a few headaches.

Our next blog will continue to explore the mysteries of Social Security retirement benefits.

Interesting News: If you're still concerned about your SAT or ACT scores not quite landing you in the 99th percentile, stop worrying. Intelligence isn't closely related to how much wealth people accumulate. See

Tuesday, May 1, 2007

Mysteries of Social Security Retirement Benefits: Part 1--How

(As Updated May 8, 2011)

Have you ever wondered how the Social Security Administration determines your retirement benefits? If your answer is no, you pass the sanity test, because no sane person would try figure it out. But if you want to give it a whirl, here's their website: Good luck.

On the other hand, it's worth having a basic understanding of how Social Security works so that you'll know how to maximize your benefits. Our thumb nail sketch is below.

First, to become entitled to any retirement benefits at all, you have to earn 40 Social Security credits. You get a credit by having a minimum amount of earned income (or, net earned income if you're self-employed) per year. In 2007, the amount needed for one credit is $1,000. This amount will be adjusted upward in future years in line with general increases in wages. You can earn up to 4 credits per year. So, if you have at least $4,000 in earned income (or net earned income for the self-employed) in 2007, you'll get the maximum 4 credits you can earn in a year. Accumulate 40 credits (which would take at least 10 years of working in jobs subject to Social Security taxes) and you'll cross the threshold for retirement benefits.

After you have 40 credits, more credits won't affect your retirement benefits. Social Security next looks to the 35 years of your life with the highest earnings. The amount of your benefits will be based on your earnings in those years. You can get an idea of how much your benefits will be from the annual statement you get from Social Security. (In early 2011, the Social Security Administration unwisely announced it would stop sending annual statements, and that by the end of 2011 or early 2012 it would unveil a system for citizens to get Internet access to their account information; we'll see.) Or you can use the benefits calculators at Social Security's website (

Why does this matter? For people who have full careers of 30 or more years, it probably doesn't matter much. But understanding Social Security retirement benefits may be important for people who work substantially less than 30 years. Let's say you started working full-time in your 20's but then took a number of years off to raise children. If you have 32 credits, you're not entitled to any benefits. Understanding that you need to earn a modest amount of earnings for a couple of years to reach the threshold for benefits is now an important piece of information. With 40 credits, you could collect a few thousand dollars a year in benefits, even you've worked only ten or twelve years. That may not sound like much, but it could total many tens of thousands of dollars (or perhaps more than $100,000) over the course of your retirement years. Not bad, considering the alternative.

Bearing in mind that Social Security calculates the amount of retirement benefits based on the 35 years of your working life with the highest income, you can boost your benefits by resuming work eventually. If you've worked a lifetime total of 10 years and have your required 40 credits, you also have 25 years of zero earnings that go into the calculation of your retirement benefits. Every year you work reduces the number of zero years. Work 10 more years, and you'll have only 15 zero years and 10 more years of positive earnings to increase your benefits. The amount of the increase will depend on how much you earn, but something is better than nothing.

We'll continue with more on the mysteries of Social Security in our next blog.

Employment benefits hint: Next time you're working with back pain, remember the accommodation that Ellen DeGeneres got. See