If you stripped the wealthy of their riches and literally gave all their money to the middle class and to the poor, who would have it in 15 years. Homeowners are using their mortgaged-to-the-hilt real estate “boxes” as virtual ATMs, putting their homes at risk by borrowing from the equity to satisfy ravenous appetites for material goods.
Winning the Money Game
You are not even entitled to keep your money (as you have witnessed during the last three miserable stock-market years). By using the KISS (Keep It Simple, Stupid) theory of money management and learning how to diversify, you can keep your money healthy and growing.
It’s a Jungle Out There
If you became stranded under an avalanche of snow during a winter ski vacation, what’s the first thing you would do. The old saying, “The bold print giveth, and the fine print taketh away,” is true.
Remember the Golden Rules
If inflation is trotting along at 6 percent per year, you must earn 6 percent (after taxes) on your money just to stay in the same financial place you began the year. Using the Rule of 72, if the average rate of inflation is 6 percent, your money will shrink in half every 12 years (72 divided by 6-percent inflation equals 12 years).
Show Me the Money
Even if you can’t save 10 percent of your net income—the amount I recommend as a target—save something. You can divert the funds either to cash or to your long-term investments as your needs dictate.
Your Piggy Bank
Both Savings and Loan Thrifts and commercial banks can be backed by the FDIC today. Don’t confuse FDIC-insured bank money market accounts with money market mu- tual funds sold by the bank but not FDIC-insured.
The Credit Card: Friend or Foe?
Use the “Credit Card Management Strategy” in the Appendix to make a list of all of your credit cards and monthly installment loans or obligations. Your credit card is accepted most anywhere debit cards are, and you get free use of the bank’s money for up to 30 days.
Insurance: Cover Your Ass-ets
Liability insurance protects you if you are held responsible for another party’s loss or injuries. But in the end, you only get to choose one: If you die, the company retrieves your savings back to them because the cash-surrender value really belongs to the insurance company for the length of your insurance contract. If you are uninsurable at any of these times, your family will suffer if you later die.
If you are not insurable, however, group coverage may be important because it generally requires no medical underwriting. If you are an insurance beneficiary, instead of receiving a death benefit check, you will likely receive an insurance account booklet with check-writing privileges.
Home Is Where Your Money Pit Is
You will save money only if you can borrow a larger mortgage (with all costs and/or points rolled in) at a low enough interest rate for the same period of time or less to compensate for the additional costs of the refinancing. Consider refinancing when the current interest rate is more than 1 percent lower than what you are paying, and when you can recover the additional cost of the new loan (points and closing costs) through lower payments over the length of time you intend to stay in your home. Even if you used the tax break in the past, you can use it again.
If you are single and own your home with someone else (say a child or a companion), each owner who meets these discussed requirement tests can exclude up to $250,000 of his or her portion of the profits. If your office is in your home or if you rent out part of your house (even to your own business), special rules apply (with different tax rates on the sale) for the portion you have converted to your home office.
Your Child and Money
For every dollar your child adds to an IRA Account, you add a dollar of your own (up to a total contribution of 100 percent of earned income for the tax year). If your child’s debt and resulting financial troubles are a result of a drinking or drug problem, the underlying problem must be dealt with. If you own a business, consider hiring your child to do clerical, filing, janitorial, or other work.
But when your child works for you, he or she should not be able to then afford a vacation in the Galapagos Islands. Your child gets to earn some of their own college tuition, and the parent receives a job done well.
The Hassle of the Tassel
The minor does not gain control of the money upon adulthood, and the account owner (adult) can transfer some or all of the funds to another beneficiary in the same family. If you invest in a 529 plan through a broker, be aware you may be subject to sales charges levied upon withdrawals in the first few years. If the trust funds become taxable in the future, you may be left with less money to pay the bills.
Borrowing from an employer retirement plan may be allowed, but the government may become stingier in the future. Even if you have funded another child’s education in the past, don’t feel compelled to do likewise today if your retirement fund is at risk.
On a Clear Day, You Can See Retirement
If you intend to be in a lower income-tax bracket than you are today, you will be living on less money than you are now. If you end up paying less in taxes, you will be eating less as well. What if I die tomorrow?” If you save 10 percent of today’s income for tomorrow, you’ll have 90 percent left over for life’s adventures.
If you outlive your spouse, the insur- ance policy can be directed to your children. If you remain healthy, you may be expected to pay part of the costs for others to whom the facility has promised respite.
Retirement: Pensions, Profits, and Pitfalls
The SIMPLE has few reporting rules and both employees and employers contribute to the plan. If you are terminated or otherwise leave your job, how will you repay the remainder of the loan. But by diversifying, you will cushion any losses attached to the fortunes of your company.
Contributions are vol- untary and tax-deductible primarily because they carry a substantial risk of forfeiture to the worker in the future. Most fund assets are accessible to the claims of the creditors of the public entity.
IRAs: New and Improved
In addition, you can also contribute to last year’s IRA account until April 15, or the tax deadline of the current year. If your company has no retirement pension or if you are not yet eligible to join, you can deduct your total contribution, regardless of how much “bacon” you bring home during the year. Even if you cannot deduct your IRA off your current tax return, you can still contrib- ute to a non-tax-deductible IRA if you have earned income during the year.
You can contribute to a variety of deductible and/or non-deductible IRAs (provided you qualify for all types), including the Roth IRA, discussed later. You can always withdraw funds from an IRA (unlike company retirement plans), even if you are younger than age 59 1/2.
Estate Planning: You Can’t Take It With You
Individual accounts or joint and survivor ownership, with an additional beneficiary registration called payable on death (POD), will avoid probate and directly transfer funds to the named beneficiary(ies) upon the death of the owner or co-owners. Remaining funds are payable to the survivor upon death of one of the joint owners. Upon the death of the individual owner, a Transfer on Death beneficiary will receive the account proceeds and avoid the probate process.
There are three people involved in every insurance policy sale: the owner of the policy, the insured, and the beneficiary(ies). Otherwise, a large insurance policy in one spouse’s name as the owner and the insured could add to the size of the death estate and create estate taxes that could otherwise have been easily avoided.
Myths, Legends, and Truths of Investing
Bond yields rise with the upward direction of interest rates in the economy and as their prices decline. If, instead, you hold 100 bonds through a bond mutual fund, and that single bond should fall off the face of the earth, you are still in the bond business with 99 other issues. Then he demanded refuge from the storm’s onslaught and some of the bread he could smell baking in the ant’s oven.
Even the muffler store owner wants you to take home the most expensive muffler in the place. When one market or part of the economy sours (your chicken gets sick or, worse, dies), you are still in the investment business with the rest of your nest egg.
Investing Strategies: Short-Stop vs. Marathon Money
Excess (uncollected) funds are “swept” daily into short-term securities, similar to a money market mutual fund. A money market mutual fund is a large pool of investor money managed by an invest- ment company. Because the underlying money market mutual fund securities are short-term, their yields are relatively low.
Bank prod- ucts are insured by the FDIC; mutual funds, even money market mutual funds, are not. Relying on the advice of “money gurus,” the media, financial publications, or using the “whatever-my-friends-and-neighbors-are-buying” method of investing is generally unproductive.
Mutual Fund-amentals
Mutual funds have made it possible for ordinary folks to invest in the same instruments as the rich and famous. When folks caught the tech bug in 1999, they piled their money into lottery ticket stocks and mutual funds that contained mainly technology stocks and failed to diversify into different market sectors. Consider mutual funds as a method of prudently managing your money, not as a way to get rich quick.
Mutual funds are ideal underlying investments for a variety of tax-advantaged plans such as retirement IRAs, SEPs, SIMPLEs, KEOGHs, profit-sharing plans, and 401(k) retirement plans. There are nearly as many categories of mutual funds as there are types of investors.
