In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
Tuesday, April 14, 2015
Investment Diversification cont'd - Bonds
When you talk about diversification you hope to spread your money into a variety of investments. By doing so, you are given the opportunity to create the potential for your money to grow while you reduce the risk.
Last week we addressed stocks. This week we'll review the many facets of bonds.
Bonds come in many varieties - both taxable and tax exempt.
With a bond, you are lending your money; it may be to a corporation, a country or a municipality.
Corporate bonds are issued by companies, of all sizes. High grade corporate bonds from major corporations carry high ratings and the interest earned and distributed is taxable. Most high rated bonds are backed by collateral, e.g. inventory, buildings, property, machinery, etc. Because of their relative safety, they will pay a lower interest rate.
High yield corporate bonds pay a higher return because they may be less safe. The company may be having some financial difficulty and the bonds may be backed by a "promise to pay", not real collateral.
Governments issue bonds for many reasons to run their country. Our own U.S. Treasury offers several types of bonds. Sovereign bonds issued by governments outside the U.S. offer international diversification. Because of the solvency of each country, the risk and yield (return) will vary. You will pay taxes on the interest you earn on these bonds.
Municipalities like cities, states, counties, towns all have the ability to borrow money and issue bonds. Again, the solvency of the region will determine how safe your money may be and the interest each will pay. There are several agencies that rate these bonds. AAA is the highest all the way on down to NR, not rated. The U.S. government does not tax the income from these bonds - they are considered tax-exempt.
A bond issued by New York city would be triple tax-exempt to a resident of NYC. He would pay no city, state or federal tax on that bond.
For diversification you would want some taxable and tax exempt bonds.
You would use bonds of different countries as well as different municipalities.
Be $ Smart - use several different types of bonds when building a portfolio.
Bonds can be quite complex. This is a simplified overview.
Last week we addressed stocks. This week we'll review the many facets of bonds.
Bonds come in many varieties - both taxable and tax exempt.
With a bond, you are lending your money; it may be to a corporation, a country or a municipality.
Corporate bonds are issued by companies, of all sizes. High grade corporate bonds from major corporations carry high ratings and the interest earned and distributed is taxable. Most high rated bonds are backed by collateral, e.g. inventory, buildings, property, machinery, etc. Because of their relative safety, they will pay a lower interest rate.
High yield corporate bonds pay a higher return because they may be less safe. The company may be having some financial difficulty and the bonds may be backed by a "promise to pay", not real collateral.
Governments issue bonds for many reasons to run their country. Our own U.S. Treasury offers several types of bonds. Sovereign bonds issued by governments outside the U.S. offer international diversification. Because of the solvency of each country, the risk and yield (return) will vary. You will pay taxes on the interest you earn on these bonds.
Municipalities like cities, states, counties, towns all have the ability to borrow money and issue bonds. Again, the solvency of the region will determine how safe your money may be and the interest each will pay. There are several agencies that rate these bonds. AAA is the highest all the way on down to NR, not rated. The U.S. government does not tax the income from these bonds - they are considered tax-exempt.
A bond issued by New York city would be triple tax-exempt to a resident of NYC. He would pay no city, state or federal tax on that bond.
For diversification you would want some taxable and tax exempt bonds.
You would use bonds of different countries as well as different municipalities.
Be $ Smart - use several different types of bonds when building a portfolio.
Bonds can be quite complex. This is a simplified overview.
Diversification in Investing
In any given day or any given year we have no idea which part of the market will perform well or under perform. The purpose of diversification (not putting all your eggs in one basket) is to have some money in several different areas to take advantage of an upward move and to protect against a downward move.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Monday, February 23, 2015
For Better or For Worse, For Richer or For Poorer...
With all the fuss of Valentine's Day behind us, I thought I'd take a look at love from a financial perspective.
What do you look for in a mate, financially, that is?
There are things you want to find out sooner rather than later. How do you determine your "financial compatibility" early in the relationship.?
Honesty - disclosing all debt: student loans, car loans, credit cards, bankruptcy, etc. Mortgages and student loans are okay; they have positive potential. But credit card debt can be damaging and linger for years.
Attitude - spender vs saver? Live for today or save for tomorrow?
Does he spend everything he earns? Does she borrow from her parents? Is shopping her favorite pass time? Must he have a new car every year? Is the latest iPhone a necessity?
Generosity - sharing both the good and the not so good.
Does she expect you to pay for all dates? Does he ask you for gas money when his car is used for trips? Is he/she a big tipper, skimpy tipper or fair tipper? Does he insist on using your car all the time? Does she offer to pay for half or her share?
$ Savvy - shows responsibility about money. Are his bills paid on time or overdue? Does she always request an extension for paying income taxes? Does he have an investment account? Does she know a CD is not just a compact disc? Has she contributed to an IRA or 401K?
Co-mingling assets could prove problematic if you are not willing to learn the financial side of your prospective mate.
Be $ Smart - Protect your heart and your wallet by watching for telltale traits.
And for the ladies, please remember: "A man is not a financial plan!"
What do you look for in a mate, financially, that is?
There are things you want to find out sooner rather than later. How do you determine your "financial compatibility" early in the relationship.?
Honesty - disclosing all debt: student loans, car loans, credit cards, bankruptcy, etc. Mortgages and student loans are okay; they have positive potential. But credit card debt can be damaging and linger for years.
Attitude - spender vs saver? Live for today or save for tomorrow?
Does he spend everything he earns? Does she borrow from her parents? Is shopping her favorite pass time? Must he have a new car every year? Is the latest iPhone a necessity?
Generosity - sharing both the good and the not so good.
Does she expect you to pay for all dates? Does he ask you for gas money when his car is used for trips? Is he/she a big tipper, skimpy tipper or fair tipper? Does he insist on using your car all the time? Does she offer to pay for half or her share?
$ Savvy - shows responsibility about money. Are his bills paid on time or overdue? Does she always request an extension for paying income taxes? Does he have an investment account? Does she know a CD is not just a compact disc? Has she contributed to an IRA or 401K?
Co-mingling assets could prove problematic if you are not willing to learn the financial side of your prospective mate.
Be $ Smart - Protect your heart and your wallet by watching for telltale traits.
And for the ladies, please remember: "A man is not a financial plan!"
Friday, February 13, 2015
Fafsa Tips to Help Pay for College
These are a few notes I took from a recent article Gateway to College Aid by Jerilyn Klein Bier. Please pass this information along to friends and family facing college tuition payments.
The author quotes Mark Kantrowitz, co-author the of book Filing the Fafsa and publisher of Edvisors.com, a website focused on planning and paying for college. The book may be downloaded for free in PDF format at Edvisors.com.
"It is very difficult to predict how much aid a student might get from year to year."
- one big factor is the number of siblings enrolled in college,
- another factor is the price of a particular school.
Make sure assets and income are positioned before the year your student is a Junior in the spring and a senior in the fall. Fafsa works on the calendar year Jan. - Dec. not the academic year.
He urges families to file as soon as possible after January 1 as many states and schools have deadlines in early 2015 and award aid on a first-come, first-served basis.
He encourages families to file the form online because of faster processing, built-in edit checks and the skip-logic functionality. This means respondents are not asked questions that don't apply to them.
One big change for 2015 is there is little differentiation for parent relationships. Parents who live together, married or divorced, or never married are now treated as married and both must report income and assets on the Fafsa.
Grandparent owned 529 plan distributions reported as untaxed income to the beneficiary (the student) can reduce need-based aid eligibility. A parent owned 529 is treated as a parent asset and is assessed, at most, by 5.64%.
If grandparents do hold 529 plans, it's best to hold off on withdrawing assets until the student will no longer be applying for financial aid - like their senior year.
For example, a $10,000 distribution from a grandparent owned plan could reduce aid eligibility by as much as $5000, while $10,000 in a parent-owned plan could reduce eligibility by a maximum of $564.
Parents of younger children should tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.
No one will give you a loan or scholarship for retirement!
Be $ smart - plan well in advance to qualify for financial aid.
The author quotes Mark Kantrowitz, co-author the of book Filing the Fafsa and publisher of Edvisors.com, a website focused on planning and paying for college. The book may be downloaded for free in PDF format at Edvisors.com.
"It is very difficult to predict how much aid a student might get from year to year."
- one big factor is the number of siblings enrolled in college,
- another factor is the price of a particular school.
Make sure assets and income are positioned before the year your student is a Junior in the spring and a senior in the fall. Fafsa works on the calendar year Jan. - Dec. not the academic year.
He urges families to file as soon as possible after January 1 as many states and schools have deadlines in early 2015 and award aid on a first-come, first-served basis.
He encourages families to file the form online because of faster processing, built-in edit checks and the skip-logic functionality. This means respondents are not asked questions that don't apply to them.
One big change for 2015 is there is little differentiation for parent relationships. Parents who live together, married or divorced, or never married are now treated as married and both must report income and assets on the Fafsa.
Grandparent owned 529 plan distributions reported as untaxed income to the beneficiary (the student) can reduce need-based aid eligibility. A parent owned 529 is treated as a parent asset and is assessed, at most, by 5.64%.
If grandparents do hold 529 plans, it's best to hold off on withdrawing assets until the student will no longer be applying for financial aid - like their senior year.
For example, a $10,000 distribution from a grandparent owned plan could reduce aid eligibility by as much as $5000, while $10,000 in a parent-owned plan could reduce eligibility by a maximum of $564.
Parents of younger children should tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.
No one will give you a loan or scholarship for retirement!
Be $ smart - plan well in advance to qualify for financial aid.
Tuesday, February 10, 2015
Use Tax Season to Put Your Financial House in Order
My least favorite time of year has arrived - TAX season!
It takes days to gather all the 1099's, W-2's, etc. I take over the dining room table with papers spread over every inch. Fortunately, I also have a kitchen table where I eat my meals.
With everything out in the open, this presents a perfect opportunity to organize your finances.
Try to implement one of these suggestions:
1. Use a 3-ring binder to organize statements. Even if you receive statements online, it may be helpful to print the summary page for each financial institution. Use dividers to separate each. This helps you to compare monthly or quarterly values. Are you making money?
2. Create an annual Net Worth statement. List all the assets you own - house, condo, car, 401k, IRA, etc. and their current value. Add them up. List what you owe (liabilities) - car loan, student loan, mortgage, credit card balances, etc. Add them up. Subtract what you owe from what you own. That number is your Net Worth. Each year compare the bottom line. Are you growing your wealth?
3. Increase your savings amount. Pay yourself first.
Are you on track to buy that car or condo? Set up direct deposit from your checking account to your savings account.
For retirement, increase your contribution to your 401k/403b by 1%.
Be $ Smart - Use tax season to build your financial independence.
It takes days to gather all the 1099's, W-2's, etc. I take over the dining room table with papers spread over every inch. Fortunately, I also have a kitchen table where I eat my meals.
With everything out in the open, this presents a perfect opportunity to organize your finances.
Try to implement one of these suggestions:
1. Use a 3-ring binder to organize statements. Even if you receive statements online, it may be helpful to print the summary page for each financial institution. Use dividers to separate each. This helps you to compare monthly or quarterly values. Are you making money?
2. Create an annual Net Worth statement. List all the assets you own - house, condo, car, 401k, IRA, etc. and their current value. Add them up. List what you owe (liabilities) - car loan, student loan, mortgage, credit card balances, etc. Add them up. Subtract what you owe from what you own. That number is your Net Worth. Each year compare the bottom line. Are you growing your wealth?
3. Increase your savings amount. Pay yourself first.
Are you on track to buy that car or condo? Set up direct deposit from your checking account to your savings account.
For retirement, increase your contribution to your 401k/403b by 1%.
Be $ Smart - Use tax season to build your financial independence.
Wednesday, December 31, 2014
U.S. Treasuries
Among the safest investments are U.S. Treasuries. They are backed by the full faith and credit of the U.S government. (Backed by you and me and the taxes we pay.) When you start at the bottom of the investment pyramid, Treasuries are part of your investment foundation along with savings accounts, CD's and money markets.
Essentially, when you buy a Treasury you are lending money to the government.
Because U.S Treasuries are so safe, they earn very little interest as they carry minimal risk.
U.S. Treasuries come in several durations:
A Treasury Bill, or TBill, will mature in under a year,
Treasury Notes will mature in 1, 3, 5, 7 or 10 years and
Treasury Bonds, long bonds, mature in 20 and 30 years.
The most known Treasury is the 10 year which is used as a benchmark (measuring/comparison tool) for the Treasury market and for mortgage rates.
Treasuries may be bought through a brokerage account, at a federal bank and online at www.TreasuryDirect.gov.
Be $ Smart - build your investment portfolio foundation with some U.S. Treasury bills, notes or bonds for safety and predictability.
Essentially, when you buy a Treasury you are lending money to the government.
Because U.S Treasuries are so safe, they earn very little interest as they carry minimal risk.
U.S. Treasuries come in several durations:
A Treasury Bill, or TBill, will mature in under a year,
Treasury Notes will mature in 1, 3, 5, 7 or 10 years and
Treasury Bonds, long bonds, mature in 20 and 30 years.
The most known Treasury is the 10 year which is used as a benchmark (measuring/comparison tool) for the Treasury market and for mortgage rates.
Treasuries may be bought through a brokerage account, at a federal bank and online at www.TreasuryDirect.gov.
Be $ Smart - build your investment portfolio foundation with some U.S. Treasury bills, notes or bonds for safety and predictability.
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