Smart Investing @ your library articles about financial planning
1. EE Bonds for the Beginning Investor
I was in my safe deposit box at the bank the other day, to get the title to a car we were trading in. It was a walk down memory lane as I looked at the treasures I have stored there: marriage certificate, birth certificates, …and then I saw the EE Bonds. They belonged to my children who are now married and having kids of their own. I had forgotten they were there. Some of these bonds had been sitting in my safe deposit box since their birth. They were gifts from their uncle.
Savings bonds have been one of the most popular investments, partly because they are very secure. Series EE savings bond are issued by the United States Treasury to help raise money to fund the government, allowing investors to buy bonds in small denominations.
Things have changed, however; paper bonds are no longer issued. It’s all electronic now, and electronic Series EE savings bonds are sold at face value (unlike the past). If you want to invest $50, you will receive a $50 electronic Series EE savings bond and it is worth full value plus interest when eligible for redemption. Electronic Series EE savings bonds can be purchased in amounts of $25 or more. Set denominations are no longer required: if you have $342.15 you want to invest, you can do that, making these a great choice for small investors. Purchases of electronic Series EE savings bonds are limited to no more than $25,000 per calendar year and are issued to a designated account. The current rate of interest for the Electronic EE Bonds can be found on the TreasuryDirect.gov web page. You will receive no physical paper. The paper bonds that are sitting in my safe deposit box are still good, of course, but as of January 1, 2012, new purchases are all accumulated in an electronic account which you establish.
You purchase EE Savings Bonds online at TreasuryDirect.gov, online at financial sites and institutions or through the Payroll Savings Plans through some employers. They make great investment toward a child’s education. ~
2. Silver Linings
It is surprising how many dark clouds can turn out to have silver linings. Even in a job loss, some good can be derived from the situation.
One way you can gain a “silver lining” benefit from reduced income is through income taxes. In a year where your income is notably lower than normal (especially if it is low enough to have zero taxable income) you may be able to transfer funds from a “traditional” IRA or 401k to a “Roth” IRA — without paying the income tax you would normally pay on that conversion.
The only drawback to putting retirement funds into a Roth account is the fact that you pay income tax on the amount you deposit. In every other way, Roth accounts are advantageous, since you don’t pay any income tax on qualified withdrawals, and you have complete flexibility about whether and when to withdraw funds in retirement.
Consider a married couple family of 4 in 2011: if their income was below $26,400, then they would have ZERO taxable income. If their adjusted gross income was $22,000, then they could roll $4,400 from a traditional account into a Roth account and owe NO tax at all on the rollover. They get all the benefits and none of the cost of that Roth.
No one seeks a reduction in income. But if it happens, you might as well take advantage of that silver lining, right? ~ Note: even if you are not in a situation where you’ll owe zero tax, any reduced tax bracket may make it advantageous to convert a portion of a traditional account into a Roth account.
3. Cost of Baby
Preparing for a new baby – especially a first baby – is an exciting and nervous time for many reasons! Sooner or later, most expectant parents will consider the money question: “How will we cover all the costs of this new baby?”
The first expense that comes to mind may be all the “stuff” - equipment, supplies, clothes,… . In truth, though, these one-time costs are comparatively small, and may be reduced by purchasing some items second-hand, or receiving some as gifts. Depending on insurance coverage, medical costs may also be substantial — families need to plan and save for medical costs.
I’d like to draw attention to two costs that need more attention:
1) Lost income during maternity leave. If mom (or dad) must take leave without pay, that’s a major financial cost. Advance preparation and saving will be essential to get through that period.
2) On-going costs after baby arrives — child care, diapers, formula… evolving and expanding for the next 18 years (or more).
When the baby arrives, priorities will change — some things that used to seem important will become unimportant, as the baby’s needs rise to the top. Why not prepare your finances by making that shift in priorities before baby arrives?
In a two-income household, consider living on just one income during the pregnancy. If that’s not possible, or in a one-income household, try living on less (and saving the extra) during pregnancy. That allows time to adjust spending patterns and build up some savings.
Does it seem impossible? Well think about it… when the baby is here, you will somehow MAKE it possible. You won’t have a choice but to spend less in some areas, to make up for baby expenses. The adjustment will be easier if you get a head start, and build up some savings to cover medical costs and provide an emergency cushion.
4. Women: Never too early to build financial security
I have gotten used to hearing women say “I wish I’d learned all this years ago!” after a workshop focusing on building financial skills and security. Usually the comment comes from women in their 50’s, 60’s or 70’s.
But one time I was shocked — I turned to look at the woman and asked “How old are you?” As I suspected, she was still very young – only 27. But she STILL wished she had learned this years ago — because she saw that she had missed out on 5-10 years when she could have been building a stronger financial foundation.
This true story highlights the benefits of paying attention to finances while you’re young — even though you’re busy beginning a career or starting a family or paying off student loans At any age, it’s a great way to move yourself forward!
5. The Ant and the Grasshopper
I enjoyed reading my childhood favorites to my kids when they were little. I was reminded of that, this past week, when my daughter shared her opinion of tv programming available to her children. Aesop’s Fables, The Ant and the Grasshopper, has taken on a very different message these days.
As a child, my daughter remembered helping me garden, can and dehydrate food. They had piggy banks for saving money. She pictured herself as the busy Ant preparing for times when food and money may not be as plentiful.
She enjoyed seeing the story animated…until the very end. The singing and dancing Grasshopper, who made fun of the hard working Ant did not suffer the consequences of his lazy actions. Instead, he turned to public assistance. My daughter said, “Books have always been better than the movie.”
According to the 2011 Retirement confidence Survey, there has been a sharp decline in Americans’ confidence about their ability to secure a financially comfortable retirement.
According to AARP, Social Security makes up 50% or more of the income for over six in ten Iowans age 65 and older. Three in ten older Iowans rely on Social Security as their only source of income. Unfortunately, Social Security was never intended to be the sole source of income.
ISU Extension has several programs available to help individuals achieve financial security: Your Money Your Future and Money Talk are just a couple. There is a connection between what you do today and what will happen in the future.
6. Challenges of Young Couples and Finances
In every couple, each partner comes to the table with different values. Those values represent the qualities, situations, and material things an individual cherishes most. Values are a product of your past experiences, present situation, and expectations for the future; they are shaped by your family, friends and mentors; as a result, no two people ever have identical values.
For couples, that uniqueness creates a challenge, because each partner’s values influence how s/he spends money, makes decisions and sets goals. Whether a couple manages money separately or jointly, each partner’s financial decisions affect the other partner. Different values can strengthen a couple by opening up different possibilities for action, but they can also create problems when they cause a couple to stop communicating effectively about money. Trouble can appear in many ways, some of them serious: yelling, controlling, or even hurting each other and others.
Communication breakdowns often occur because the differences in their values about money lead partners to form beliefs about each other. Examples: one partner is too tight with money; or one partner doesn’t tell the truth about spending. Those beliefs are typically over-simplified labels or assumptions, and are not based on a full understanding of why the other partner feels, thinks and behaves in certain ways. Such assumptions can prevent a couple from working together to create a financial life that works for both of them.
To develop healthy financial communication with your partner, begin by discovering and understanding your own money-related values. This improves your ability to explain your financial decisions and preferences to your partner, and leads to a clearer understanding of why you and your partner think about money in such unique ways. Once you have this new insight into each other, those assumptions start to fade away, making room for real financial communication.
7. 529 College Saving Plans
5/29 – the perfect day to open a 529 plan for college savings! (or add to the plan you already have in place…) Congress and the states have created these 529 plans, which offer tax benefits for college savings — it is now up to us to make good use of them.
Remember: even modest savings can be a big help. Let May 29 get you started on the road to college savings for your children, grandchildren or others! -Barb
For more info, check back to my MoneyTip from April 2: http://blogs.extension.iastate.edu/isumoneytips/2012/04/02/saving-for-college-with-529-plans/
Iowa’s 529 plan is found at: www.collegesavingsiowa.com
Links to 529 plans nationwide are here: www.collegesavings.org/index.aspx
8. Need to Hire a Financial Adviser?
I remember visiting once with a client who had fired her financial professional because he was not listening to her needs. The financial professional had originally been hired by her husband, who had since passed away. The advisor apparently failed to adapt to the new situation, not meeting the needs and preferences of his new client. As this woman’s story illustrates, a financial advisor is not a one-size-fits-all commodity; it is essential to hire an advisor who has the skills to suit your personal financial needs.
If you wish to seek help from a financial professional, a first step is to identify two or three possible candidates, and then interview them to make sure their style and experience are suitable for your goals. Do you know the questions to ask?
First, ask about their qualifications.
Find out how long have they been working in this field, and in what different types of positions?
Inquire about their educational qualifications and any designations, licenses, or certifications that they hold. NOTE: if you feel like you are drowning in alphabet soup, be sure to ask them to explain each type of accreditation.
Ask what types of continuing education they receive each year.
Learn about their typical clients and work experiences. You’ll want to choose an advisor with experience that matches your needs.
Ask what share of their work focuses on each of the following issues: Retirement planning; Investment and asset management; Tax preparation; Estate planning; Insurance; Elder and long-term care planning; College education funding; Comprehensive financial planning; or other goals.
Ask about the income, wealth and risk tolerance of their typical clients, to make sure they have experience working with clients whose situations are similar to yours.
Find out what specific services they offer, and how they are paid. Financial advisors are typically paid by either: 1) a flat fee or 2) Commission on financial products sold. Some advisors are paid through a combination of fee and commission, and other payment structures may also exist.
What steps will they take in creating financial recommendations to meet your personal needs?
Will they provide a written plan? What might it look like?
How many times or how often will you meet with them?
Will any potential conflicts of interests be disclosed in writing?
What fee or commission amounts are typically charged for various services?
Do they provide a written agreement which includes fees and services?
By asking these questions of each potential financial professional, you will better understand their qualifications, expertise and form of compensation. Most importantly, you will select a financial advisor who is suitable to your needs.
Find more information at: http://www.extension.iastate.edu/investwisely/documents/news24.htm and http://www.extension.org/pages/11045/working-with-financial-professionals
9. Reinvest CD’s at lower rates
I recently visited with a retired couple who shared that many of their long term CD’s would be maturing this year and they were concerned about losing the on-going income which has been created by the current 5% interest rate.
Interest rates are projected to stay low through 2014. The best rates available on CDs are 1% or less. That means individuals who rely on their CD’s and Treasury notes to generate retirement income (or any kind of income) will continue to see returns that aren’t even keeping up with inflation.
What options are available? The basic strategies available when managing finances are: 1) spend less, 2) increase income or 3) a combination of 1 & 2. If you have already reduced your living expenses as much as possible, then your only remaining option may be to consider investments that will generate a higher rate of return.
Higher potential return means higher risk. To generate increased income, you may need to invest your money in financial products where the principal could diminish in value. If you have been using CDs, which are generally fully insured by the United States government, this may feel uncomfortable. Keep in mind that it is not necessary to take high levels of risk in order to generate greater income; you still have some fairly conservative options available. They are not, however, fully insured.
Reputable sources suggest some alternatives to CDs for those willing to take on modest investment risk, including:
Real Estate Investment Trusts (REITS), and
Before considering these investment options, be sure you are well-informed about the product and the risk generated by the choices. Annuities, for example, should be selected based on guaranteed returns; do not rely on estimated returns, which are best-case scenario projections which make the products more attractive.
It’s better for you to seek out a professional advisor rather than to become involved with someone who contacts you looking for a new customer. Visit your bank and see if they have an investment professional on staff, or if they would recommend someone. Look for professional certification: Certified Financial Planner or an Accredited Financial Counselor. Many times there is no cost for an initial consultation.
Watch for a post from Susan next week on how to choose a financial advisor. And keep in mind that in today’s economy an investment statement that you will receive an 8 or 9% rate of return at no risk might be too good to be true.
10. Why Save Money?
Maybe you would like to build a secure future. Maybe you’d like to sleep better at night.
There are LOTS of reasons to save.
Good money management happen one step at a time. You begin by paying your basic bills on time, building a good credit record, and buying essential insurance. And of course you feed your family. Basic need come first.
After basic needs, the very next step is to save money. Save for:
Emergencies – flat tire, car repair, sick child, injured pet …
Holiday or special occasion gifts – when you plan ahead, you will have fewer credit card bills to pay after the fact. Save $25/month or paycheck to create your own holiday fund to pay for gifts.
Major household items - like furniture or appliances. These big ticket items create a real challenge to people without savings. When a refrigerator dies, there is no advance warning — no “check engine light.” Setting aside a few dollars each month can help build an appliance or furniture replacement fund.
Car – funds saved for car-related needs may be used in many ways: car repairs, tires or replacing a vehicle. All these needs involve substantial sums of money. Saved money is less expensive to use than borrowed money.
Electronic equipment – if you want to have the newest gadgets (computer, I Pad, TV, IPod or …), you’ll need money.
College for you or your children – college is already expensive, and it will only increase in cost as years go by. It’s easier to begin saving early (even small amounts) than to wait until your child is 18 and then try to find the money.
House – the American dream is home ownership, but it is generally possible only if you have money saved for the down payment and move-in costs (along with a good credit history).
The road to wealth begins with saving for short-term goals. Then, invest your savings for long-term goals such as college or retirement. If you make a habit of saving money, it will help you reach your goals.
Face it: you’re much more likely to gain wealth by saving regularly than by winning the lottery!