Money Management

Some of the world’s most renowned and respected financial planners and investment advisors have begun to recommend that investors – even ordinary ones just trying to save for retirement – forget about playing the stock market, investing in bonds, or using the old tried and true method of diversifying through a strong mutual fund. Instead they are suggesting that the only way to ensure real diversification and balance while investing in the stock market is to rely on index funds. These are kind of like mutual funds that instead of investing in individual stocks or companies instead invest in whole indices like the S&P 500 or a broad selection of global stocks.

 

This method of investing exposes the individual investor to more than just one stock, a dozen stocks, or even a hundred different stocks. Instead by buying into the index fund you participate in the action of thousands of stocks. So index funds are really huge baskets of stocks. Some focus in North America or Europe, while some of the most popular and successful ones buy large swathes of stock all over the world.

The reason so many experts believe that these are the way to go is that in today’s market it is virtually impossible to time the market cycles or protect oneself from volatility. The international stock markets of the 21st century move at warp speed and professional investors on Wall Street are able to trade billions of dollars worth of stock – and hundreds of thousands of different shares – within a fraction of a second. Many of these professionals move hundreds of millions of dollars a day while buying and selling options and other exotic types of investments all over the planet. Ordinary investors – even the ones who do extensive market research – cannot effectively compete in that kind of high-tech arena dominated by mega corporations and hedge funds.

 

But by buying into an enormous basket of investments all at once – which is possible through an index fund – a single investor can ride these huge waves of financial success without being unnecessarily exposed to catastrophic risk. To learn more about index funds and how to buy them, just consult any legitimate stock broker or financial planner. You may find that by buying an index instead of an ordinary stock or mutual fund that you get more leverage, and that could translate into higher returns over time.

Warren Buffett is not only one of the richest people to have ever lived in the USA but he is the most famous and successful stock market investor of all time. His company, Berkshire Hathaway, was started decades ago when he first got into the stock market investments business. Those who bought shares in his company and held onto them all became fabulously wealthy just by letting Warren Buffett use their money to invest his in own select stock portfolio.

 

The problem for most people, however, was that as they got more expensive shares in Berkshire Hathaway did not split and divide the way most other high-flying stocks do. So the price per share kept going up and average investors could not afford to buy even a single share. The stock that sold for $1,000 a share in the 1980s, for example, sold for about $10,000 a share in 2000. The class A or preferred shares now sell for more than $100,000 per share.

 

But this year Berkshire Hathaway is offering less expensive shares. Those who want to can get into the Warren Buffett investment company as shareholders for prices that are much more affordable since the company announced a 50 for one stock split in its “B” class shares. That means that the cost per share was divided by 50, so it became 50 times cheaper to buy into Berkshire Hathaway. As soon as the split happened earlier in the year the stock started selling for around $50 or $55.

 

By March of 2010 it had hit a price closer to $85, so it is already doing quite well for those who bought earlier in the year. But judging from the history of Warren Buffett’s other stock offerings, this newly split stock will likely continue to rise in price until it, too, is selling for prices that are beyond the reach of ordinary investors. Those interested in getting into the Warren Buffett stock to add it to their personal stock portfolio are advised to act soon because the opportunity may not last much longer.

Those who fail to do proper planning for their estate in terms of leaving a last will and testament and clear instructions regarding how their financial assets and other property should be distributed will have their estates handled instead by the courts. Those who die without a will or “intestate” wind up forfeiting about 80 percent of everything they owned to the state government, so it is important to have a will and keep it up to date.

But in this day and age of electronic transactions it is imperative that you leave behind some clues to your digital estate, too, otherwise it puts a huge burden on those whose job it is to execute your will and manage the estate for your survivors. You may have assets that they never even learn about, in fact, because many of us now have bank accounts, stock brokerage accounts, and other deposits of important assets that are all managed electronically with no mailed paper statements. If you hide those assets from cyber criminals then you may also inadvertently camouflage them from those who need to know how to find and access them in the event of your death.

To plan for that eventuality it is a good idea to leave behind a detailed list of all of your assets – including those that are managed online. You may have bills that are paid automatically out of your bank account, and those will arrangements need to be stopped immediately upon your death. You may have an online store where you ship orders or receive payments from customers. Many people have IRA accounts or stocks held in accounts that are all online. All of these assets need to be explained, and you should leave behind account numbers and passwords – including passwords to your email accounts – to make it easier for your heirs to understand and access your assets.

Of course you have to protect this crucial information, so such lists of passwords and accounts should be protected in the safest place possible, which usually means inside a safe deposit box at a bank.

Loans are terribly hard to come by in 2010 because banks have tightened their standards, people are short on savings and income due to the lingering impact of a severe recession, and credit scores need to be higher than before in order to secure a reasonable loan. So many American taxpayers are eager to get any IRS tax refunds that are owed to them because they or their employers overpaid into the IRS fund that takes out estimated taxes on a regular basis. If that estimate was too high – and people paid in more than was necessary to meet their tax obligations – then the IRS does everything in its power to promptly refund the difference owed to the taxpayer. But many tax preparation businesses or other short-term money lenders also offer to give people their refunds ahead of time, in exchange for an added cost, so that taxpayers can essentially enjoy a cash advance on their upcoming IRS refund.

These short term loans are also called “tax refund anticipation loans,” and they are making a big comeback in 2010 because so many people are short on cash and want to use the tax refund loans to get their refund money early. They are convenient loans, but the downside to them is that the interest charged on them can run as high as 500 percent for a $300 loan over a 10-day repayment period, according to the study from the National Consumer Law Center and the Consumer Federation of America. Another way of looking at these loans is that they carry effective interest rates of 77 percent to 140 percent for a refund loan of $3,000 – which is the average amount of most of these loans.

That may be justifiable if you have a dire emergency and must use a tax refund anticipation loan to cover your expenses in 2010. But otherwise there are many other ways to borrow money at a much cheaper rate, and consumers and taxpayers are advised to first exhaust their more affordable and user-friendly loan options before resorting to a tax refund loan.

The demographic population of senior citizens is the fastest growing one in the USA, and as that segment of the population ages there is more and more need to shop for retirement homes and senior care facilities. Here are some ideas to keep in mind while looking and doing retirement planning:

• Plan for the an Unexpected Future

Perhaps the biggest mistake that people make when paying for membership in a retirement community or assisting living facility is that they fail to ensure a continuum of care. If you live in a great senior community, for example, it might serve you well right now but if you later get sick or disabled it could be no longer appropriate for your needs. Try to buy into facilities that offer a continuum of care that includes independent living, assisted living, nursing care, advanced nursing care, and an Alzheimer’s care component. Otherwise you might have to move later and that be costly – both in financial terms and in terms of your emotional attachment to a particular home.

• Consider the Location

Seniors often become isolated from others like friends and family as those other people get older, die, or move away from home to other places. Try to anticipate this kind of migration away from the senior and locate their home in a place where they will still be surrounded by a close-knit community of people who care about them and can give them the kind of social interaction that every healthy person craves.

• Check References and Financial Information

Since this kind of living arrangement is expected to go on for years into the future, it is critical that the facility you invest in has a solid financial base and excellent client references. Otherwise you could find yourself belonging to a facility that goes bankrupt or sells out to a larger or more impersonal company, and that could be a game changer.

So whether you are a senior looking for this kind of living arrangement for yourself or you are a younger person who is helping a parent or grandparent look around for the best kind of senior living situation, you will do well to keep these points in mind.

Nothing is harder during tough economic times than to set aside money for some future date that may be years and years away, and that is why everyone should establish a system that automatically saves for their retirement. Once you get some money into your account or hands, you have to decide what to do with it, and that usually means that you will spend it on whatever bills or purchases happen to be staring you in the face at that particular moment in time. Retirement seems far away and less important, but before you know it you will be facing a retirement without an adequate nest egg to fund you after you stop working. To avoid that scenario, just set up an automatic system of retirement saving that requires no thinking or deciding.

The easiest way to do this is to open some kind of individual retirement account, and if you don’t have one at work you can easily set up a ROTH IRA – which is a user-friendly type of retirement savings account that grows over time without future tax implications. You fill out a little paperwork and submit it to the company where the account is held, and then every month you designate that a fixed amount of money gets swept from your bank account into this retirement account. It happens before you ever see the money, automatically, so you save every month without having to do anything extra. If you can’t afford much, for instance, you can have $50 or so moved to your retirement fund at the top of each month. If you can afford more, then all you have to do is just designate a higher amount.

Because the savings happens before you have a chance to handle the cash – since it is skimmed off the top as soon as your paycheck goes into the bank – you will probably not notice it or miss it. Soon the habit will grow into a substantial savings, too, because even if you only put in $50 a month that works out to $600 a year. In a retirement account that gains a meager five percent per year that $600 will grow into more than $1,000 over ten years. But since you’re putting in $600 each year – not just for one single year – you’ll have many times more than that within a few years, and a huge chunk of cash to enjoy when you hit retirement age.

Each year we read tax tips about how to legally pay less in taxes. But another thing to stay informed about if you want to avoid trouble with the IRS is red flags or warning signs that might potentially trigger closer looks from the tax authority and even an IRS audit. Here are some ways you can help ensure that you stay beneath the IRS radar.

• Don’t be a Loser

The IRS expects that during difficult economic times many people with file negative returns or returns that show that they either broke even on the year or lost money, instead of making money. But if you remain in that status year after year, the IRS will start to get suspicious that you are just saying you lost money in order to avoid paying taxes on your earned income.

• Don’t Take Ridiculous Deductions

Maybe you gave to charity last year, or maybe you had some business expenses. You might have done some travel for your business or taken some extra continuing education classes and the tuition will qualify as a tax deduction. That’s great, and you deserve deductions. But when you start filing deductions that are preposterous – like saying you gave $30,000 to charity but you only made a gross income of $50,000 – then the IRS is probably going to take a closer look at your accounts.

• Don’t Forget Your Marriage or Divorce

There can be tax advantages for filing as a single person, and in other situations it can be financially beneficial to file as a married person. But you need to file based on your actual marital status according to the rules and guidelines of the IRS. If you conveniently forget whether you are married, single, or divorced just to save some money on your taxes, the IRS will probably notice and give you a rude reminder.

Another red flag is to fail to acknowledge income that you have. The IRS will see your income information because it will be sent to them by banks, brokerage firms, employees, and others who paid you. So just because you don’t mention it does not mean that the IRS does not know you earned it and owe taxes on it.

Now that the tax year 2009 is over and the new year is here, many Americans are starting to make plans for tax preparation and filing of IRS form. Soon the April 15th deadline will be here and many people – despite their best efforts to get organized in time – will be faced with a deadline they cannot meet. But if you find yourself in that situation, don’t panic. There is a legitimate system for dealing with delayed tax filing, and every year thousands of taxpayers take an automatic extension on filing their taxes – a step that is perfectly legal and okay with the IRS.

 

You cannot simply skip the deadline without notifying the IRS, however, and if you do that you can expect to pay stiff penalties. You might even get audited if you forget to pay on time or miss the deadline due to your procrastination. But filing later is permitted, as long as you follow the rules.

What you want to do if you are going to need more time to prepare your tax returns is to file a form that the IRS provides for an automatic extension. You can get an automatic six-month tax extension – so that instead of filing in April you file six months later – by filling out and submitting an IRS Form 4868. You must file this Application for Automatic Extension of Time to File U.S. Individual Income Tax Return on or before April 15th in order to avoid the late filing tax penalty. After completing the form you should then mail it to the IRS Service Center where you normally send your tax returns.

Filing late – or getting the automatic extension – does not permit you to avoid paying your estimated taxes. You need to go ahead and pay those on time, otherwise you will be charged interest for any unpaid taxes, and that interest will be calculated from the April deadline, not the extended October deadline. For details and more information about how to qualify for the extension and file properly, just contact your local IRS office.

During the recent economic recession many investors watched as the stock markets crashed, wiping out many of their gains and erasing profits from the stock and mutual fund portfolios. But there is a silver lining to the cloud, because those who have lost money on stocks can often offset those losses somewhat by using them to reduce the amount of taxes they have to pay to the IRS.

Although the rules and regulations are somewhat complex and are often changed through new legislation, tax guidelines generally allow you to deduct losses incurred in the stock market. If you bought some shares of a stock at $100 a share, for example, and held them for a year only to discover that the share price dropped to only $10 a share, you have a loss of $90 – not counting stock broker fees. In most cases you can deduct that $90 loss from your annual gross income. By doing so you reduce the amount of income you have to pay taxes on, and that can translate into a significant savings.

Another way to approach tax time in relation to stock investments is to pair whatever losses you have experienced with gains. That way the amount of taxes you are required to pay on your capital gains can be lessened due to the losses. Let’s say that you made a profit of $500 on one smart investment. You’ll be expected to pay taxes on that profit. But if within the same tax filing year you also sell some other stocks for a $500 loss, the two calculations will essentially cancel each other out and you’ll have to pay no taxes on those stock transactions.

In order to qualify for tax losses you have to sell before the end of the tax year, and there are other details and guidelines that apply – depending upon your particular situation. So, as with any tax matter, it is a good idea to consult a qualified tax specialist or financial planner before making assumptions about savings or taking steps to sell assets like stocks. But most tax professionals can help you leverage those terrible stock market losses into savings at tax time. Especially if you plan ahead and sell strategically while keeping track of gains and losses by holding on to important stock transaction documents, stock market disappointments can often be transformed into tax time benefits.

Fees for real estate brokers can be a substantial portion of overall costs, and especially during a buyer’s market like the one we’re in now, homeowners should weigh their options regarding For Sale By Owner – nicknamed FSBO and pronounced “fizz-bo” as a cost-cutting alternative.
But before choosing which way to go, it always helps to consider these four  practical points.

#1 There is More Value at Stake Beyond the Commission
Selling yourself means a commitment of time and energy, and time is money. So decide ahead of time whether you are prepared to sacrifice your valuable time – and whether it is worth it compared to what you would pay a Realtor to set appointment, deal with clients, and field phone calls about your listing.

#2 You May Still Have to Pay a Partial Fee
As a FSBO, if a Realtor brings a qualified buyer and a successful purchase offer you will still need to pay a finder’s fee. The cost could be approximately 3 percent of the sales price, and that should be figured into your preliminary calculations before you decide whether to do a FSBO or hire a pro. Of course you can refuse to work with Realtors, but you may be handicapping your marketing efforts since they have access to most of the qualified and eager homebuyers.

#3 Negotiators are Worth their Fees
Negotiating is one of the most compelling reasons to hire a Realtor. The value of a professional negotiator is underscored by the fact that many experienced and highly trained real estate professionals still hire other Realtors to represent them when they sell their own homes. Third party negotiations are generally more successful, more objective, and more readily accepted by buyers – which means they accomplish better results in terms of higher prices and more favorable terms.

#4 Going the FSBO Route Doesn’t Mean You Have to Go it Alone
You can pay a small fee to include your listing in the Realtor MLS database, for example, and you can also cooperate with professional real estate agents and pay them a finder’s fee for helping sell your home. You can even hire a staging company to set up your listing so it shows like a model home, and there are even services to help you manage your appointments and marketing campaigns.

Whether you go it alone or avail yourself of the services of a professional property broker will depend on your particular circumstances as well as your own level of experience. Remember that you can always change your mind and go FSBO after trying a Realtor – or hire a Realtor after experimenting with the do-it-yourself approach.