Saving for College

Putting a child or grandchild through college is NOT CHEAP! Therefore, it is important to plan ahead if at all possible. Two of the most popular ways to save for college is a 529 Plan or an Education IRA. I will briefly discuss 529 Plans today and the differences between the two tomorrow.

529 Plans are great, provided they have low expenses. They are excellent for grandparents who want to take money out of their estate and do something for their kids and grandkids at the same time. The grandparent is the owner of the 529 Plan and the grandchild is the beneficiary. If the child gets to college age and doesn't want to go to college, the grandparent can change the beneficiary and give the money to someone else.

For those interested,check out SavingforCollege.com. This is a very nice website dedicated to the 529 Plan.

I'll be back tomorrow!

Full text! AllThingsFinancial has moved!

Website(s) of the Day (10/21)

This post is basically a continuation of yesterday's "Kids & Money" post.

One of the best writers on kids and money is Neale Godfrey. She has a really nice website at Children's Financial Network. I urge all parents and grandparents to check it out. For those interested, books can be purchased directly from the site.

I got an email yesterday from the David McCurrach, owner of the Kid'sMoney.org telling me about a new book he has written called Allowance Magic: Turn Your Kids Into Money Wizards and AllowanceMagic.com. I haven't yet had a chance to read the book. I'll review it and post my thoughts as soon as I get a copy.

Please check out those sites and let me know what you think by sending me an email.

Full text! AllThingsFinancial has moved!

Kids & Money

One of the best gifts we can give our kids is a solid understanding of the handling of money. Unfortunately, most parents do not talk about money with their kids, leaving the kids to either follow in their parent's footsteps (whether good or bad) or fend for themselves. This can be a recipe for disaster.

So, what's a proactive parent to do? First off, get an education. There is a wealth of resources on the internet that can help parents teach their kids about money. One such site is iVillage's "kids and money" website. They have put together a very nice website, full of articles and information that should be of interest to parents. Another nice website is David McCurrach's Kid'sMoney.org. Parents of older kids will especially like the Kids' Making Money section.

Secondly, parents should help their children come up with their own budget. Understanding and practicing the "live within your means" philosophy can put kids on the highway to financial success. Because the child can see where their money comes from and where it goes, they get a sense that money is very real and very important.

Finally, once the child has come up with a budget, parents should help them set some goals to work towards. Perhaps it's a new bicycle or a Playstation. Let the child decide. Then, figure out how much the goal is going to cost (remember to add sales tax). Write down the amount and decide on how much money the child is going to put towards that goal each pay period. Then, make them stick to it. Fulfilling that goal will show the child the power of goal-setting and hopefully help them start a habit that will last a lifetime.

I urge ALL PARENTS to start teaching their kids proper money management skills. It just might save your child from committing some serious money mistakes.

Good luck!

Full text! AllThingsFinancial has moved!

What are Exchange-Traded Funds?

Stated in the simplest of terms, Exchange-Traded Funds (ETF) are index mutual funds that trade like an individual share of stock. There are ETFs for practically any sector or market imagined.

The advantage to using ETFs is that if a person doesn't want to index the broad market, they could buy individual ETFs that cover the areas they are interested in. For instance, a person could just buy an ETF that covered biotechnology. Although it is risky to buy just one sector like biotechnology, it is less risky to do so than just buying a couple of biotech stocks.

To learn more about ETFs, go to iShares. IShares is one of the biggest providers of ETFs. They have put together a really nice website to help individuals understand ETFs. Another good website to check out is Ameritrade's ETF section. They have a ton of information regarding ETFs to help people make informed decisons.

Now before running out and buying an ETF, it is important to understand that since the ETF is essentially a "stock," buying shares will require a transaction fee. In other words, there is no free lunch. Therefore, it might be prudent to use ETFs in a long-term buy and hold strategy rather than trying to trade them. Also, regular index funds may be better for those people who are trying to build wealth by dollar-cost averaging since most index funds don't charge a fee every time a purchase is made (as long as their minimums are met).

Good luck!

Full text! AllThingsFinancial has moved!

The Beauty of the Roth IRA

Personally, I think the Roth IRA is a wonderful gift from our government. To put it simply, if a person opened a Roth IRA at age 25 and put in $3,000 per year and received a 10% annual rate of return for 40 years, they could have over $1,400,000 by age 65. And, they could access this money tax free!

To put that in perspective, imagine taking withdrawals at a 5% rate ($70,000) annually starting at age 65. If this were taxable as income, a person might expect to pay taxes in the 20%* range, which would be $14,000, leaving $56,000 to live on. In other words, in a 20% tax bracket, a person would have to withdraw $87,500 in order to have $70,000 to live on. That's the power of the Roth IRA.

That's not it, in addition, there is also the flexibility of not taking a withdrawal if it isn't needed. A person does not have this same flexibility with other retirement plans. With other retirement plans, the IRS insists that a person must take withdrawals beginning the year after the year in which they turn 70 1/2. The Roth IRA is MUCH less confusing.

I haven't discussed all the intricacies of Roth IRAs. In a future article, I'll talk more in detail about the Roth IRA and how it compares to other retirement plans. In the meantime, for those interested, they may want to read "The Retirement Time Bomb and How to Defuse it" by Ed Slott. It is an excellent resource for understanding IRAs and other retirement savings vehicles. Mr. Slott also has a website called IRAhelp.com.

*I used the 20% tax bracket for easy math. Individual brackets may vary from the one I listed.

Full text! AllThingsFinancial has moved!

Website of the Day - 10/15

One very nice website for personal financial advice is Scott Burns' site at the Dallas Morning News:

http://www.dallasnews.com/business/scottburns/

New users will have to register with the Dallas Morning News (which is free) before they can have access to Mr. Burns' site.

It is a site that you will want to bookmark and refer back to periodically.

Full text! AllThingsFinancial has moved!

What is "Fee-Only" Financial Planning?

According to the National Association of Personal Financial Advisors (NAPFA) website, a fee-only planner is "...one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product."

Basically, the fee-only compensation structure allows for the consumer and the advisor to be on the same team. The advisor gets paid for their knowledge and time and for telling the consumer what is best for them. Fees can either be paid on an hourly or project basis, or the advisor can charge a management fee based on the assets that the advisor manages for the client.

Why is this important for consumers? The main concern with commission-based advisors is that the client may only be offered products or solutions that compensate the broker the best. I've known mutual fund companies to offer trips to those brokers who sell the most of their mutual funds. One can only imagine how many clients were sold mutual funds simply because the broker was trying to win a trip.

This does not mean that ALL commission-based advisors are bad. But, consumers need to be aware of the pitfalls of dealing with this type of advisor. Before a consumer signs anything, they should find out how much the product is going to cost them and how the broker is compensated.

So, does working with a fee-only planner guarantee success? Not necessarily. The compensation structure doesn't mean a thing if the advisor is incompetent. In a follow-up post, I'll give some pointers on what consumers should ask a prospective advisor.

Full text! AllThingsFinancial has moved!

Which is better: 15-year or 30-year Mortgages?

The quick answer is: it depends. The main factors to consider when deciding which mortgage is best are:

1. The interest rate on the mortgage.
2. The rate of return that can be received on the money that would have gone towards paying off the mortgage early.
3. Personal financial constraints.

For example, let's say someone has a choice between a $100,000 mortgage with a 30-year fixed rate of 6% or a 15-year mortgage at 5.5%. Let's also assume that the house appreciates in value at 3% per year. We know from a historical perspective that the stock market (using the S&P 500) has returned on average about 10% per year over the last 30 years. The following steps can be used to calculate which mortage looks better on paper (there are other factors to consider that I will discuss later):

1. The 15-year mortgage would have a monthly payment of $817 while the 30-year mortgage has a monthly payment of $600 for a monthly difference of $217 ($817-$600=$217). This $217 we will assume is saved in a Roth IRA and invested annually in the stock market and getting an average return of 10% per year. We will also assume that $817 per month will be saved after the 15-year mortgage is paid off (also in a Roth IRA and getting a 10% return per year).

2. Calculate the total amounts paid towards principle and interest over the two time periods.

(15 years X 12 payments per year) X $817 payment = $147,075

(30 years X 12 payments per year) X $600 payment = $215,838

The 30-year mortgage results in $68,763 ADDITIONAL interest expense. Most people stop here and proclaim that the 15-year mortgage is the best way to go. However, they are missing one VERY IMPORTANT factor.

3. Calculate the investment earnings on the monthly difference.

$217 monthly savings X 12 = $2,610 savings per year invested annually in a Roth IRA.

$2610 invested per year and getting a 10% rate of return will be worth $472,334 in 30 years. For those interested in the math the formula is [$2610 X (1 + .10)^30].

4. Calculate the investment earnings on the monthly savings ($817) after paying off the 15-year mortgage.

$817 monthly savings X 12 = $9,805 savings per year invested annually in Roth IRAs (this amount of money would require 2 Roth IRA accounts).

$9805 invested per year and getting a 10% rate of return will be worth $342,682 in 15 years. The formula is [$9805 X (1 + .10)^15].

5. Now compare the two scenarios to get the full picture. In 30 years, the home will be worth $242,726 ([$100,000 X (1 + .03)^30].

To find the net worth under each scenario simply add the home's value and the investment balance:

15-year mortgage: $242,726 home value + $342,682 investment balance = $585,408 net worth.

30-year mortgage: $242,726 home value + $472,334 investment balance = $715,060 net worth.

So, in this example a person gains an additional $129,615 in net worth by going with the 30-year mortgage instead of the 15-year mortgage.

How is this possible? Well, since the mortgage rates are 4 - 4.5% lower than the assumed rate of return on the stock market, going with the 30-year mortgage and investing early allows for 15 years of additional compounding. This is the difference maker. But, this ONLY WORKS if the person is dedicated to investing the difference and not spending it on something else like a car note.

Now, even given all that, are there still reasons to go with a 15-year mortgage? I suppose there is a certain peace-of-mind in knowing that the house is paid for. Also, there is no guarantee that the stock market is going to return 10% per year for the next 30 years.

So, there it is. Each person has to decide what is best for them.

Good luck!

Tags: Mortgage Comparisons

Full text! AllThingsFinancial has moved!

The Purpose of this Blog

Hello all,

I decided to start a blog (short for Web Log) dealing with all things financial (hence the name AllThingsFinancial).

The internet has created a wealth of financial information. This is both good and bad. The good part is that most of this information is free. The bad part is there is SO MUCH OF IT! So, my goal is to post what I think is important in one convenient place.

This is a "community" effort. If you have any suggestions, please let me know

Full text! AllThingsFinancial has moved!

Website of the Day

One of my favorite economic/political writers is Thomas Sowell. He has a way of cutting to the chase when it comes to economics. He writes articles at least weekly and is well worth checking out.

To check out his latest, go to:

http://www.townhall.com/columnists/thomassowell/archive.shtml

Enjoy!

Full text! AllThingsFinancial has moved!