Found a website that talks about the importance of saving for an emergencies."This is a sound choice. Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially"
They recommend an amount between $500 to $1,000 as a savings goal to start with. The website also offers a program uou can enroll in to help you meet your savings goal. The website also provides information on other savings goals. "Are you ready to take charge of your financial future? America Saves is here to help. Enrolled savers receive the American Saver newsletter which offers information on a wide variety of savings topics and it will introduce you to other Savers who are achieving their financial goals. We’ll also provide email access to free financial planning advice and best of all – America Saves will motivate you to discover for yourself the peace of mind that accompanies having money in the bank. Let us help you build wealth, not debt"
Source
http://americasaves.org/
February 29, 2008
Why An Emergency Fund - Follow Up
Financial Crisis - $600 Billion In Losses
Bloomberg News is reporting that UBS estimates that globally financial firms are expected to lose up to $600 billion due to the collapse in the subprime mortgage market and credit crisis. The article quotes Gerad Charpin, head of European credit strategy for UBS:
"We have to recognize the risk that the economy will suffer more damage than what consensus suggests. All the investment schemes that have been built on the basis of a strong and resilient economic backdrop have to be unwound/scaled down."
"Our global banks team estimates total industry losses in this financial crisis should reach north of $600 billion, of which listed banks and brokers should account for 'only' $350 billion."
Of the $350 billion, attributed to the financial industry, only $160 billion in losses have been announced. Since it has taken 6-9 months for companies to report the $160 billion, one could estimate that it may take another year for all the loses to be announced.
What is interesting is the other $250 billion, or close to 40% of the total losses, may be the responsibility of 'others'. These 'others' may not be as eager to disclose their loses and keep them on their books, causing them to be less willing to put money to a productive use in the future (like bailing out US banks and brokers).
Most of the news about the current financial crisis has been focused on problems with the companies based in the states. The thing to remember is that a lot of the 'innovative' credit products (CDO's & ABSs) were sold to foreign banks, financial companies and governments. Foreign banks, financial companies and governments have been the buyer of last resort (or suckers) for the debit generated by US consumers, companies and our government.
Having loaded up on credit products that are now worth less than what they were purchased for, will make these same entities less like to buy debit in the future. All of which seems to compound the current problem of no one wanting to lend money.
Source:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQFTerb4XMU8&refer=home
http://www.reuters.com/article/bondsNews/idUSL2976281020080229
February 28, 2008
Why An Emergency Fund?
One of the most important steps to maintaining financial security is to establish an emergency fund. Building and emergency fund, along with paying down debt and reducing monthly expenditures, is probably one of the things most recommended by financial experts.
What Is An Emergency Fund?
An emergency fund is money that is set aside for emergency expenditures. The money should be in an accessible location, preferable a bank account and not under your mattress. You want the money available if you need it, not laying around so you can spend it.
A quick definition of what constitutes an emergency expenditure: car repairs, home repairs, medical expenses, expenses if you lose your job, or other large unplanned expense. A trip to NYC for a weekend of shopping is not an emergency. Without an emergency fund you may be forced to charge these emergency expenses to your credit cards and take on additional debt, putting you further behind.
How Much Should Be In Your Emergency Fund?
Most experts agree that anywhere between three to six months worth of living expenses should be in the emergency fund. If you are single with no dependants, you probable could get away with 2-4 months worth of expenses saved away. If you are married with a couple of kids you probably want to have 6-8 months worth of expenses. The more people dependant on you the more you should have in the account.
No one ever talks about if there is an upper limit to the amount you have in an emergency fund, but anything over 8 months is probably too much to put away in just a bank account. If you feel the need to have over 8 months of savings look to put some of the money in a conservative allocation mutual fund or a CD ladder.
As your life changes; marriage, kids, divorce, retirement for example, it would be good to review your expenses and compare that to the amount in your emergency fund. Even if you do not experience a change with your living situation, you should review your budget yearly and adjust your emergency fund accordingly.
Where To Keep Your Emergency Fund
The best place to keep the emergency fund is in an account that is separate from your normal savings or checking accounts. A critical requirement for the emergency fund is that the money is accessible or liquid, so get an account with check writing privileges, an ATM card or web/phone access for fund transfers. If you think you may spend the money too easily, get an account at a local bank with teller access only.
Below is a list of account types for an emergency fund with pros and cons:
Account Type | Pros | Cons |
Checking Account | Very Liquid Unlimited Access FDIC Insured | Low Interest Rate Potential for Monthly Charges |
Savings Account | Very Liquid Unlimited Access FDIC Insured | Low Interest Rate Potential for Monthly Charges |
Money Market Account | Liquid Slightly Better Interest Rates FDIC Insured | Limited Transactions |
Money Market Fund | Liquid Better Interest Rates | Limited Transactions Not FDIC Insured Could Lose Money (Market Risk) |
CD | Better Interest Rates FDIC Insured | Not Liquid |
Conservative Allocation Mutual Fund | Better Returns | Not FDIC Insured Not Liquid Could Lose Money (Market Risk) Management Fees |
No single account is the best for all people all of the time. If you have a small emergency fund, sticking with a bank or savings account probably makes the most sense. As you build your emergency fund look to a money market account or a money market fund.
How To Build An Emergency Fund
As with all things financial there is no quick scheme to build up with an emergency fund. It is best to plan for the entire amount that you need for your emergency fund and develop a plan to save that amount. If you estimate that you need $10,000 to cover 3 months of expenses, calculate what you can save each month to determine how long it will take you to build-up those funds. You will probably find that it may take a couple of years to save the entire amount. Don't worry, the important thing is to start. (A caveat to this, remember to re-evaluate the amount that you need each year. You may find that your expenses increase over time.)
The best way is to have a set amount of money each paycheck go towards your emergency fund. Over the course of a couple of months you can build a fund worth a couple hundred dollars. As you get additional money by working overtime, income from hobbies, birthday/holiday checks or selling things, put all of that money into the emergency fund.
What are you planning on doing with your tax rebate or stimulus package check?
February 27, 2008
Declining Home Prices
The news release quoted Robert J. Shiller, Professor at Yale University, Chief Economist at MacroMarkets LLC and co-creator of the index:
"We reached a somber year-end for the housing market in 2007. Home prices across the nation and in most metro areas are significantly lower than where they were a year ago."
"Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates. Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.”
Miami was the worst market for home values, sinking 17.5% in 2007. Las Vegas and Tampa tied for the second worst with values slipping 15.3%. The next three markets at the bottom were; San Diego (-15.0%), Los Angles (-13.7%) and Detroit (-13.6%).
Source:
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_022603.pdf
http://www.macromarkets.com/csi_housing/sp_caseshiller.asp
February 26, 2008
Inflation Definitions
With all of the talk about recession, inflation, CPI and PPI it might be a good opportunity to define the terms. Beware these are government speak.
Recession, as defined by the National Bureau of Economic Research (NBER), is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
The Consumer Price Indexes (CPI), as defined by the BLS, measures inflation as experienced by consumers in their day-to-day living expenses. (It is sometimes referred to as the retail price index.)
The Producer Price Index (PPI) , as defined by the BLS, are a family of indexes that measure changes in the selling prices received by domestic producers of goods and services.
January PPI jumps 1 percent, core up 0.4 percent
This morning the Labor Department announced that producer prices increased by 1% in Janurary, and is up 7.4% from last Janurary. This YoY increasre is the largest in 26 years. The prices were higher due to energy costs and by the biggest increase in food costs in three years.
That report stirred fears among some economists that the economy could be returning to the stagflation of the late 1970s. Stagflation is shorthand for sluggish growth coinciding with high prices.
The data will provide ammunition to Fed hawks, some of whom have argued recently that the central bank has already cut interest rates enough over the past six months.
Here is a list of price increases:
- Energy prices rebounded 1.5% in January after having fallen 3% in December and having jumped 11.4% in November.
- Gasoline prices rose 2.9% last month, while wholesale prices for home heating oil climbed 8.5%.
- Food prices surged 1.7% in January, marking the fastest pace since October 2004.
- January's prices for car and light truck both rose 0.3%, with wholesale prices for drug preparations having increased 1.5%.
- Book publishing costs rose 1.7% in February, which is the fastest pace since March 2002.
See my earlier post on Stagflation.
Source:
http://news.yahoo.com/s/nm/20080226/bs_nm/usa_economy_prices_dc_1
http://www.marketwatch.com/news/story/us-jan-ppi-jumps-energy/story.aspx
February 25, 2008
Airline Mergers
Several of the major airlines are in discussions with each other to consolidate operations. Currently the match-ups seem to be Northwest merging Delta and United merging Continental. If the union issues can be worked through, these mergers should go through. I don't see the current administration objecting too much since stronger airlines means less government help. After the 2008 election, these mergers might have a harder time getting approved.
After the events in 2001, the government had to step in to offer emergency aid and low rate loans to keep most airlines aloft (sorry for the pun). By September 2005, 4 of the top 7 carriers in the US were flying under bankruptcy protection (US Airways, United, Northwest & Delta). On September 27 2005, America West Holding finalized its merger of US Airways Group starting this round of consolidation.
There will be winners and losers in this round of mergers. Winners will be the major hubs airport of each airline, the vendors at these airports, and flyers out of these hub airports. The losers will be the secondary hub airports, flyers from smaller towns which may have been served by two different airlines and one of the unions from the merged airlines. Many consumer groups are very concerned with the proposed mergers. An article from the Houston Chronicle notes:
(C)onsumer groups say merged airlines would gain the upper hand because they would control more gates at airports, effectively limiting competition in certain markets. Regulators, if they approve any deal, must force merged carriers to relinquish control of some of those gates, they said.
In addition, consumer groups say past airline mergers not only have made customer service worse, they have failed to keep the airline industry from slipping back repeatedly into periods of turmoil.
In the long run merged airlines are probably a good thing for everyone. There will be some pains along the way, but strong competitive industries are great for the end user. Look at the computer industry, we started out with huge machines that could barely add, the Ipod shuffle. Most of this innovation was driven by competition and the desire to make a profit. Based on this I would hope that the government requires the mergered airlines to give up a certain number or percentage of landing slots at airports with consolidated operations to introduce some competition into these markets. Oh and it would be great if they could mandate airlines to provide better customer service.
Here is a cool interactive map showing the main hubs of merged airlines.
Delta & Northwest shares fall amid doubts.
NEW YORK (Reuters) - Delta Air Lines Inc (DAL.N) and Northwest Airlines Corp (NWA.N) shares fell on Monday partly on concerns their merger talks may fail on the inability of pilots to agree on how to combine their ranks.Sources:
http://www.chron.com/disp/story.mpl/front/5548007.html
http://www.ajc.com/business/content/business/delta/stories/2008/01/31/hubs_0131.html
http://www.portfolio.com/interactive-features/2008/02/Airlines
Checklist of Common Tax Return Errors
Below is a checklist of common errors when preparing a tax return listed in Tax Topic 303 from the IRS website
- Did you use the peel–off label and enter any corrections? If you used the label, did you enter your social security number in the space provided?
- If you do not have a label, or there are too many corrections, did you clearly print your name, social security number, and address, including zip code directly on your return?
- Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to http://www.ssa.gov/ or call at 1–800–772–1213.
- Did you check only one filing status?
- Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the Social Security Card, for all of the dependents claimed? Is the total number of exemptions entered?
- Did you enter income, deductions, and credits on the correct lines and are the totals correct?
- If you show a negative amount on your return, did you put brackets around it?
- If you are taking the standard deduction and checked any box indicating either you or your spouse were age 65 or older or blind, did you find the correct standard deduction using the worksheet in the Form 1040 Instructions or the Form 1040A Instructions?
- Did you figure the tax correctly? If you used the tax tables, did you use the correct column for your filing status?
- Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?
- Do you have a Form W-2 from all of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholding from all Form W-2's, on one return.
- Did you attach any Form 1099-R that shows tax withheld?
- Did you attach all other necessary schedules and forms in sequence number order given in the upper right–hand corner?
- If you owe tax, did you enclose a check or money order with the return and write your social security number, tax form, and tax year on the payment? Refer to Topic 158 for more information, and
- If you are due a refund and requested direct deposit did you check the routing and account numbers?
- Did you make a copy of the signed return and all schedules for your records?
A few of the more common errors are:
- Incorrect or missing social security numbers.
- Incorrect tax entered from the tables.
- Errors in figuring the child and dependent care credit or the earned income credit.
- Missing or incorrect identification numbers for child care providers.
- Withholding and estimated tax payments entered on the wrong line
- Math Errors. Both addition and subtraction.
- Not signing and dating your return.
- Forgetting to include interest, dividends and capital gains.
- Not including all of the required forms.
- Using the incorrect forms, especially using the 1040EZ when the longer form might cut your taxes.
- Not filing on time.
- Not requesting an extension, if needed.
A lot of the errors list above could be avoided by using a tax preparation service (H&R Block, Liberty Tax Service, Jackson Hewitt)*, tax software (TurboTax or Tax Cut)* or a free online filing service (TaxAct)*. The best thing about using one of these methods is that they take care of doing all of the math for you.
One of the things I always hated was completing the secondary worksheets or needing to reference another IRS publication to determine what to enter on your tax forms. Using a tax service, tax software or an online filing service does all of this work seamlessly. Most importantly, if you have all of your records together, using any of these methods above will save you time.
For my money the cost of the tax software is well worth the expense. If you watch the ads carefully you can get the tax software on sale and walk out with some free stuff.
If you find that you are receiving a big refund, or have a large tax payment to make, see my post on the W4 Withholding Calculator. This posts talks about how to calculate the amount you should have withheld from each paycheck in order optimize your tax payments.
Useful Links:
Free File Alliance Online Tax Preparation Companies
*This is not an endorsements for any specific tax product or filing method.
February 22, 2008
Mortgage Refinance
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- Value/Equity of Home - if you have at least 20% equity of have experienced a 20% increase in market value of your home you can avoid PMI (private mortgage insurance.)
- Break Even Period - this is driven by the cost to refinance, rates, remaining term on existing loans and how long you plan on staying in the home after the refinance.
- Points/Closing Costs - you may get a great rate and your monthly payments are a lot less than what you pay now. However if you have to pay points up front or have to expensive closing costs you may not end up saving anything after taking these expenses into account.
- Mortgage Rates - obviously you want a rate lower than your current loan rates.
After running the numbers it did not make sense to refinance the loans. I would like to say that I created an Excel spreadsheet that did all of the analysis, but can't. I did find a site (Mortgage Professor's Website) that had a series of calculators one could use to analyze all types of mortgages and financing scenarios. This is the calculator we used.
Besides the calculators there is a lot of information on mortgages, home buying, mortgage brokers, and the loan process. This site is a great place for first time home buyers to become educated about mortgages.
Useful Links:
http://www.mtgprofessor.com/
http://www.bankrate.com/
An Introduction to 529 Plans
What is a 529 plan?
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.
What are the differences between pre-paid tuition plans and college savings plans?
Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.
College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
The following chart outlines some of the major differences between pre-paid tuition plans and college savings plans.1
| Prepaid Tuition Plan | College Savings Plan |
Locks in tuition prices at eligible public and private colleges and universities. | No lock on college costs. |
All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses. | Covers all "qualified higher education expenses," including:
|
Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased. | Many plans have contribution limits in excess of $200,000. |
Many state plans guaranteed or backed by state. | No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value. |
Most plans have age/grade limit for beneficiary. | No age limits. Open to adults and children. |
Most state plans require either owner or beneficiary of plan to be a state resident. | No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers. |
Most plans have limited enrollment period. | Enrollment open all year. |
1 Source: Smart Saving for College, FINRA®
How does investing in a 529 plan affect federal and state income taxes?
Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board.
However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Many states offer state income tax or other benefits, such as matching grants, for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence. Just a few states allow residents to deduct contributions to any 529 plan from state income tax returns.
If you receive state tax benefits for investing in a 529 plan, make sure you review your plan’s offering circular before you complete a transaction, such as rolling money out of your home state’s plan into another state’s plan. Some transactions may have state tax consequences for residents of certain states.
What fees and expenses will I pay if I invest in a 529 plan?
It is important to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of plan. Prepaid tuition plans typically charge enrollment and administrative fees. In addition to “loads” for broker-sold plans, college savings plans may charge enrollment fees, annual maintenance fees, and asset management fees. Some of these fees are collected by the state sponsor of the plan, and some are collected by the financial services firms that the state sponsor typically hires to manage its 529 program. Some college savings plans will waive or reduce some of these fees if you maintain a large account balance or participate in an automatic contribution plan, or if you are a resident of the state sponsoring the 529 plan. Your asset management fees will depend on the investment option you select. Each investment option will typically bear a portfolio-weighted average of the fees and expenses of the mutual funds and other investments in which it invests. You should carefully review the fees of the underlying investments because they are likely to be different for each investment option.
Investors that purchase a college savings plan from a broker are typically subject to additional fees. If you invest in a broker-sold plan, you may pay a “load.” Broadly speaking, the load is paid to your broker as a commission for selling the college savings plan to you. Broker-sold plans also charge an annual distribution fee (similar to the “12b 1 fee” charged by some mutual funds) of between 0.25% and 1.00% of your investment. Your broker typically receives all or most of these annual distribution fees for selling your 529 plan to you.
Many broker-sold 529 plans offer more than one class of shares, which impose different fees and expenses. Here are some key characteristics of the most common 529 plan share classes sold by brokers to their customers:
- Class A shares typically impose a front-end sales load. Front-end sales loads reduce the amount of your investment. For example, let’s say you have $1,000 and want to invest in a college savings plan with a 5% front-end load. The $50 sales load you must pay is deducted from your $1,000, and the remaining $950 is invested in the college savings plan. Class A shares usually have a lower annual distribution fee and lower overall annual expenses than other 529 share classes. In addition, your front-end load may be reduced if you invest above certain threshold amounts – this is known as a breakpoint discount. These discounts do not apply to investments in Class B or Class C shares.
- Class B shares typically do not have a front-end sales load. Instead, they may charge a fee when you withdraw money from an investment option, known as a deferred sales charge or “back-end load.” A common back-end load is the “contingent deferred sales charge” or “contingent deferred sales load” (also known as a “CDSC” or “CDSL”). The amount of this load will depend on how long you hold your investment and typically decreases to zero if you hold your investment long enough. Class B shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares. Class B shares usually convert automatically to Class A shares if you hold your shares long enough.
- Be careful when investing in Class B shares. If the beneficiary uses the money within a few years after purchasing Class B shares, you will almost always pay a contingent deferred sales charge or load in addition to higher annual fees and expenses.
- Class C shares might have an annual distribution fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Class C shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares, but, unlike Class B shares, generally do not convert to another class over time. If you are a long-term investor, Class C shares may be more expensive than investing in Class A or Class B shares.
Is there any way to purchase a 529 plan but avoid some of the extra fees?
Direct-Sold College Savings Plans. States offer college savings plans through which residents and, in many cases, non-residents can invest without paying a "load," or sales fee. This type of plan, which you can buy directly from the plan's sponsor or program manager without the assistance of a broker, is generally less expensive because it waives or does not charge sales fees that may apply to broker-sold plans. You can generally find information on a direct-sold plan by contacting the plan’s sponsor or program manager or visiting the plan’s website. Websites such as the one maintained by the College Savings Plan Network, as well as a number of commercial websites, provide links to most 529 plan websites.
Broker-Sold College Savings Plans. If you prefer to purchase a broker-sold plan, you may be able to reduce the front-end load for purchasing Class A shares if you invest or plan to invest above certain threshold amounts. Ask your broker how to qualify for these “breakpoint discounts.”
What restrictions apply to an investment in a 529 plan?
Withdrawal restrictions apply to both college savings plans and pre-paid tuition plans. With limited exceptions, you can only withdraw money that you invest in a 529 plan for eligible college expenses without incurring taxes and penalties. In addition, participants in college savings plans have limited investment options and are not permitted to switch freely among available investment options. Under current tax law, an account holder is only permitted to change his or her investment option one time per year. Additional limitations will likely apply to any 529 plan you may be considering. Before you invest in a 529 plan, you should read the plan’s offering circular to make sure that you understand and are comfortable with any plan limitations.
Does investing in a 529 plan impact financial aid eligibility?
While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid. Beginning July 1, 2006, assets held in pre-paid tuition plans and college savings plans will be treated similarly for federal financial aid purposes. Both will be treated as parental assets in the calculation of the expected family contribution toward college costs. Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment.
Is investing in a 529 plan right for me?
Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses. If you decide that saving specifically for college is right for you, then the next step is to determine whether investing in a 529 plan is your best college saving option. Investing in a 529 plan is only one of several ways to save for college. Other tax-advantaged ways to save for college include Coverdell education savings accounts, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, tax-exempt municipal securities, and savings bonds. Saving for college in a taxable account is another option.
Each college saving option has advantages and disadvantages, and may have a different impact on your eligibility for financial aid, so you should evaluate each option carefully. If you need help determining which options work best for your circumstances, you should consult with your financial professional or tax advisor before you start saving.
What questions should I ask before I invest in a 529 plan?
Knowing the answers to these questions may help you decide which 529 plan is best for you.
- Is the plan available directly from the state or plan sponsor?
- What fees are charged by the plan? How much of my investment goes to compensating my broker? Under what circumstances does the plan waive or reduce certain fees?
- What are the plan’s withdrawal restrictions? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan?
- What types of investment options are offered by the plan? How long are contributions held before being invested?
- Does the plan offer special benefits for state residents? Would I be better off investing in my state’s plan or another plan? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
- What limitations apply to the plan? When can an account holder change investment options, switch beneficiaries, or transfer ownership of the account to another account holder?
- Who is the program manager? When does the program manager’s current management contract expire? How has the plan performed in the past?
Source:
Above is information on 529 plans from the SEC website.
Useful Links:
http://www.savingforcollege.com/
http://www.kiplinger.com/features/archives/2007/08/best529s.html
February 21, 2008
Not Stagflation
The WSJ had a cover page story about stagflation titled "Fears of Stagflation Return As Price Increases Gain Pace" {$$$}. The first three paragraphs sum the situation up nicely:
The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s.
Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high.
The same day brought a reminder of possible recession. The Federal Reserve disclosed that its policy makers lowered their forecast for economic growth this year to between 1.3% and 2%, half a percentage point below the level of their previous forecast, in October. They blamed a further slowdown on the slump in housing prices, tighter lending standards and higher oil prices. They warned the economy's performance could fall short of even that lowered outlook.
The article continues on with a comparison between the economic environment of the 1970s and now. Some of the similarities are rising commodity prices, rising inflation, rising unemployment and slower economic growth. The commodities market has experienced record high prices on oil gold, corn, wheat and soybeans. The UBS Bloomberg Constant Maturity Commodity Index (an index of 26 raw materials) has increased 39 percent in the past year, compared to a 6.8 percent drop in the S&P 500 index. Consumer prices have increased 4.3% over the past 12 months and the Fed has reduced their economic growth outlook to 1.3% to 2%.
Currently the Fed is in a very tricky position trying to navigate between inflationary forces and a weakened economy. The Fed has reduced the Federal Funds Rate from 5.0% to 3.0% between June 2006 and January 2008 in order to spark an economic recovery and easy the liquidity crisis. The expectation is that the Fed will reduce rates again to 2.5% at the next Federal Open Market Committee's on March 18. Unfortunately the lower rates are increasing inflationary pressure without any increase in economic growth. Eventually the Fed will have to increase rates to keep inflation at an acceptable level.
Most likely we will avoid stagflation. However an argument can be made that we are in a period of "demi-stagflation" defined by Barry Ritholtz as a period of "anemic growth and robust inflation". This period has also been described as "stagflation light" .
Identity Theft
The Postal Service has sent out a letter making people aware of identity theft. The letter says that a recent Federal Trade Commission (FTC) survey indicated that only 2% of all victims reported that the theft of their identity was connected to the mail. The letter included a brochure from the FTC with helpful tips to deter, detect and defend against identity theft. This time of year is always a good time for identity thieves because of all the tax documents being sent out. Its not uncommon to hear stories of people's mail being lifted in order to get personal information contain in the tax documents.
A 2006 report listed the following ways a personal information was obtained:
56% Method not known
16% Personal acquaintances
07% Purchase or other transaction
05% Wallet stolen
05% Company had information stolen
02% Mail
01% Computer theft
01% Phishing
07% Some other way
Useful Links:
FTC web site on Id Theft
Id Theft Center website
February 20, 2008
IRS Withholding Calculator
About this time every year some people are probably concerned that they will need to make a large tax payment to the IRS. This could be stressful depending on the status of your finances. Some may not be able to come up with the money required to pay the IRS and end up taking on debt to make the payment. Other people might be looking forward to receiving a large tax refund. While it feels better to receive a refund, you probably could put the money to use. A few people probably have paid just enough through out the year to either owe a little or to receive a small refund. This is the position that everyone should strive to be in on April 15th.
In 2006 the average tax refund was $2,237 and for those that had their refund deposited directly to their bank account the average refund was $2,607. This works out to almost $186 dollars a month of extra tax payments.
Interest Free Loan for the Government
The extra payments to the IRS are a loan to the government in which the lender (you the tax payer) receives nothing in return. The tax refunds are payed back with out interest. If one were to reduce the amount paid to the IRS every month, the $180 plus dollars could be invested to your benefit and yield a higher return. For example if you took the $180 every month and put it into a money market account with an interest rate of 4%, at the end of the 12 months you would have $54.71 dollars in interest income and a return of 2.3% on your total investment.
| Deposits… | |
| Initial investment: | $180.00 |
| Periodic deposit amount: | $180.00 |
| No. periodic deposits per year : | 12 |
| Deposits made at beginning of period? | TRUE |
| Investment Period… | |
| Length of investment (years): | 1 |
| Interest Rate… | |
| Annual interest rate: | 4.00% |
| Calculations | |
| Initial investment | $180.00 |
| Additional deposits: | $2,160.00 |
| Total amount invested: | $2,340.00 |
| Periodic interest rate: | 0.33% |
| Value of investment at end of term: | $2,394.71 |
| Interest earned on investment: | $54.71 |
| Return on investment: | 2.3% |
If you could take the entire amount of money you would have overpaid to the IRS and invested it in a money market account with an interest rate of 4%, at the end of the 12 months you would have $95.34 dollars in interest income and a return of 4.1% on your total investment.
| Deposits… | |
| Initial investment: | $2,340.00 |
| Periodic deposit amount: | $0.00 |
| No. periodic deposits per year : | 12 |
| Deposits made at beginning of period? | TRUE |
| Investment Period… | |
| Length of investment (years): | 1 |
| Interest Rate… | |
| Annual interest rate: | 4.00% |
| Calculations | |
| Initial investment | $2,340.00 |
| Additional deposits: | $0.00 |
| Total amount invested: | $2,340.00 |
| Periodic interest rate: | 0.33% |
| Value of investment at end of term: | $2,435.34 |
| Interest earned on investment: | $95.34 |
| Return on investment: | 4.1% |
IRS Withholding Calculator
The IRS website offers an easy way to determine the amount of tax that should be withheld from each paycheck. The calculator can be found here > IRS Withholding Calculator (as of the date this post was published the calculator was unavailable). The calculator is easy to use and all you need is your tax return from the prior year and your most current pay stub(s). After completing information on your income, tax credits and taxes paid to date, the output will help you complete a new W-4. By running this calculator at the beginning of the year and at the end of each quarter, you should be able to fine tune your tax payments to minimize either your tax payment or tax refund.
Information on the Withholding Calculator from the IRS website:
The purpose of this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4. You may use the results of this program to help you complete a new Form W-4, which you will submit to your employer.
Tips For Using This Program
- Have your most recent pay stubs handy.
- Have your most recent income tax return handy.
- Fill in all information that applies to your situation.
- Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
- Consult the information links embedded in the program whenever you have a question.
- Print out the final screen that summarizes your input and the results, then use it to complete a new Form W-4 (if necessary), and keep it for your records
Who Can Benefit From This Application?
- Employees who would like to change their withholding to reduce their tax refund or their balance due;
- Employees whose situations are only approximated by the worksheets on the paper W-4 (e.g., anyone with concurrent jobs, or couples in which both are employed; those entitled to file as Head of Household; and those with several children eligible for the Child Tax Credit);
- Employees with non-wage income in excess of their adjustments and deductions, who would prefer to have tax on that income withheld from their paychecks rather than make periodic separate payments through the estimated tax procedures.
February 19, 2008
2008 Stimulus Payment Calculator
Below is a calculator from News Hour Business Desk on PBS to estimate the tax rebate one would receive under the 2008 economic stimulus plan.
Another point of the stimulus package that is not often discussed is that it will increase the size of the National Debt. These days the size of the National Debt doesn't seem to be as big of an issue with the electorate. They are probably more worried about their own debt issues. Speaking of an election year, the stimulus plan seems more likely to stimulate re-election campaigns than the economy.
The current problem with the economy seems to be firmly rooted in the credit market and the effects of extending credit without regard to risk. Until the credit market becomes more comfortable with lending money and the risks involved, the economy will stay in the holding pattern it has been in for the past 6 months. But hey, I will take my money back from the IRS.
What will you do with your stimulus payment?
February 18, 2008
Forever Stamps
In light of the Postal Service raising postage for first class mail by 1 cent in May of 2008, the concept of the "Forever Stamp" makes more sense for both the USPS and the end user. The USPS created the “Forever Stamp” in April 2007 as a way for consumers to lock in the price of a first-class stamp no matter how much, or how often, the price increases. The Postal Service described the stamp as "a consumer innovation guaranteed to deliver unprecedented convenience and value to our customers."
For the end user, the "Forever Stamp" reduces the hassle of sending mail after a rate change. It seems that whenever rates change, you always have a partial book of stamps at the old rate. If you want to mail something, you have to track down one-cent stamps to make up the difference. This requires a trip to the post office to either wait 10-30 minutes on line to buy stamps, or you end up with a couple of dollar coins in change from the stamp-dispensing machine. Neither one of these sounds like a great option.
The "Forever Stamp" is like a stock option on the increase in postal rates and inflation. The great thing is that this option is always in the money, you are guaranteed to make a "profit". If you buy the "Forever Stamps" as a cheap as possible and hold them longer the larger the profit. Granted the annualized rate of return will probably be something like 2%-4%, not including inflation. Most of the "profit" would come from a reduction in the hassle factor.
The great thing about the "Forever Stamp" for the Postal Service is it that fewer man-hours are required to implement a change in postage rates. When rates change the Post Office probably spends quite a bit of time returning letters that have the incorrect postage on them. If they can get the majority of mailers to use these stamps, imagine how much time and money they can save not having to return letters. The other potential cost savings could come from printing fewer one-cent stamps to make up the difference in postal rates. Overtime the USPS probably makes up for any lost revenue with the "Forever Stamp" on cost savings from labor.
Prices for postcards, large envelopes and packages, will see price increases between one and five cents in May. The price for shipping services including Express Mail and Priority Mail will be announced in the coming months.
For additional information > Stamps Increasing by One Cent to 42¢ on May 12
2008 Stimulus Payments
Information on the 2008 Tax Rebates from the IRS website.
Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million individuals. The stimulus payments will go out through the late spring and summer.
The vast majority of Americans who qualify for an economic stimulus payment will not have to do anything other than file their 2007 individual income tax return to receive their payment this year. They will not have to complete applications, file any extra forms or call the Internal Revenue Service to request the payment, which is automatic. The IRS will determine eligibility, figure the amount and issue the payment.
Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won't need to do anything else to receive the stimulus payment. For taxpayers who haven't filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.
Basic Eligibility
The IRS will use the 2007 tax return to determine eligibility and calculate the basic amount of the payment. In most cases, the payment will equal the amount of tax liability on the return with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return).
Even those who have little or no tax liability may qualify for a minimum payment of $300 ($600 if filing a joint return) if their tax return reflects $3,000 or more in qualifying income. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans’ disability compensation, pension or survivors’ benefits received from the Department of Veterans Affairs in 2007. However, Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
Low-income workers who have earned income above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive the minimum stimulus payment. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans’ benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.
The IRS emphasized that people with no filing requirement who turn in a tax return to qualify for the economic stimulus payment will not get a tax bill. People in this category will not owe money because of the stimulus payment.
For additional information > Facts about the 2008 Stimulus Payments