Home

Are You Middle Class?

Livin the Dream

When you listen to Senator McCain and Senator Obama talking about what they want to do for the middle class, it sounds pretty good. Senator McCain wants to repeal the Alternative Minimum Tax for middle class families. Senator Obama wants to simplify tax filings for middle class Americans and offer more tax breaks. Wow, so whichever one wins the presidency, I can rest assured that he is looking out for me! Or not. Am I middle class? Are you? What does middle class mean?

Unfortunately, there is no definite answer to this question. While economists have some consensus that middle class American families are those that earn between $30,000 and $100,000 per year (that’s per household, not per person), politicians are slippery about owning up to who they are referring to when they talk about the generous gifts they plan to heap on this vague “middle class.”

Senator Obama recently hinted that households making $97,500 are not part of the middle class because only 6% of Americans make that amount or higher. Does that mean that a New York couple, in which both parties make $50,000, are “rich” and therefore deserving of punitive tax hikes due to their evil richness? (By the way, Americans earning more than $85,000 already pay about 80% of all U.S. taxes.)

To be fair, Senator McCain is trickier to pin down on this issue of exactly what group of people would benefit from his middle class policy proposals.

Then there’s the interesting American phenomenon where most people, no matter what their incomes, define themselves as middle class. They could be making $20K or $200K, but they think of themselves as middle class anyway.

Maybe this happens because to most of us, the term “middle class” conjures up a lifestyle and not a dollar amount. It’s that American dream lifestyle that includes home ownership in a good school district, two cars, one vacation per year, a little savings, and a college education for little Suzie and Billy so that they too can become middle class. “The company” takes care of the retirement savings and most healthcare costs, so mom and dad can rest easy. Swell.

There are some places in the country where that lifestyle can still be had for $50,000. There are other places like New York City and Washington, D.C. where that lifestyle is hard to come by, even for couples in which both parties make six figure salaries. Overinflated home prices certainly contribute to the elusiveness of the middle class scenario. But there’s also the fact that we have to pay for a lot of expensive stuff that previous generations didn’t have to worry about-such as high health care costs, crippling student loans, and retirement savings.

Clearly everyone wants to be part of the middle class-that’s why we all say we ARE middle class. Lower-income folks want to feel that their hard work has paid off, while wealthier people want to feel likeable, down to earth, and all that. Plus, almost everyone feels pinched or like they have to make compromises, no matter where they sit on the economic ladder. Plus, none of us want to be cut out of those great perks promised by political candidates to only the “middle class.” But perhaps this is a bad thing. Perhaps it’s okay to NOT be middle class, as we currently think of it. Perhaps wanting to be middle class and live that dream is what got us into this sub-prime loan mortgage crisis. Maybe that’s what gets so many people our age into credit card debt. Maybe that’s why so many people haven’t saved or invested enough for retirement, because they’re too busy trying to have that “American dream” lifestyle.

Maybe it’s time for a new American dream - one that fits in with today’s realities. Maybe it’s time to redefine the middle class and make it a new target to strive for-a lifestyle that focuses on financial security and smart decision making rather than one that depends on material possessions like houses and cars. How about this definition: debt-free, maxes out retirement contributions, fully insured (health, life, disability, auto, etc.), and has a little extra left over at the end of the month for a pleasure purchase of choice-shoes, a nice evening out, a gift to charity, or whatever you can afford that makes you happy.

Do You Really Need an Emergency Fund? Maybe Not.

So Many Liquid Assets, So Many Beaches To Enjoy

We all know we’re supposed to have an emergency fund with enough to cover 6-12 months of living expense. We know it’s supposed to be a highly liquid account-either a high-interest savings account or money market fund-something that we can tap immediately if there’s a medical emergency, or if you lose your job, or if your husband loses his job, or if your car dies, or if you decide that you must go to Tahiti-NOW!

My husband and I have such a fund. But I’m thinking about getting rid of it, and you might want to consider it, too.

I know this sounds like blasphemy against the fundamentals of sound financial planning, but here’s what I’m thinking. Six to twelve months of living expenses is a lot of cash. If you have that much money set aside, you could be making a lot more money off of it if you invested it in a more aggressive vehicle rather than a ho-hum savings account making 3% (if you’re lucky).

But is it the right choice for you to put your money cushion where you can’t immediately access it? Ask yourself these questions: If there were truly an emergency, what other resources do you have available? Could your parents help you out in the event of a medical emergency? Would your health insurance cover most of it? If your car died, could you carpool with someone, lease another car, or buy one on a payment plan? Could you (gasp) take the bus? If you’re married or in a committed relationship, could you both live off just one person’s salary if the other person lost his job? If not, are there expenses you could give up (like cable or eating out) if you really had to that could allow you to live on one salary? Could you crash on a friend’s couch? If you couldn’t cover the rent/mortgage for some reason, could you move to a cheaper apartment or rent your home?

I guess the key takeaway here is that there are other kinds of financial cushions besides thousands of dollars in a bank account. There are cushions you can build into your life by knowing what you can live without and who you can turn to, and by planning for emergency situations beforehand by buying the right insurance (medical, life, auto, homeowners/renters, long- and short-term disability, umbrella). If you are already used to maxing out retirement contributions (401K and IRA) each month, that’s more than $1500 extra that you could divert to personal use if you really needed it (without withdrawing from your existing retirement accounts-just stop contributing for a few months). Plus, if you choose to put your money in a high-yield taxable account instead of a safe but lower-yielding money market fund, you could always withdraw that money and just deal with the capital gains tax. After all, the whole point of an emergency is that is it something that is highly unlikely to happen, but when it does, it takes higher priority over other things (like tax sheltering).

My issue is, if I have the emergency fund just sitting around in my bank account, chances are I will use it to go to Tahiti-instead of for a real emergency.

Post Your Comments

Has anyone out there ever benefited from an emergency fund or known someone else who did?

What was the most drastic lifestyle change you’ve had to make to deal with a financial emergency?

What Happened Yesterday?

Hiding under the covers won't help

The DJIA dropped by 400 points, oil prices shot up by $11/barrel, and unemployment in the U.S. increased by half a percent. What’s going on and what should we do? Oil shot up because the value of the U.S. dollar declined, and because of some “fightin words” exchanged between Israel and Iran. A senior Israeli official used the word “unavoidable” to describe the imminence of an Israeli attack on Iran over Iran’s nuclear program. If you read my post on the factors that influence oil prices, you know that a Middle Eastern war is probably the biggest doomsday scenario for our wallets, in terms of oil and gas prices, and for our investments, because the stock market will TANK if that happens–except sectors like defense contractors, if the U.S. gets involved. P.S. It may be a good time to invest in a bike and some high-quality walking shoes.

Here’s a lovely quote from the U.S. Department of Labor’s Bureau of Labor Statistics May 2008 Report that shows you how dire the situation is for millions of Americans:

“The number of unemployed persons increased by 861,000 to 8.5 million in May, after seasonal adjustment, and the unemployment rate rose by 0.5 percentage point to 5.5 percent. A year earlier, the number of unemployed persons was 6.9 million, and the jobless rate was 4.5 percent.”

What’s going on: The truth is that our American standard of living is deteriorating. For those of us lucky enough to have a job-adjusted for inflation and the low value of the dollar, our paychecks are worth less than the face value. But everything else is getting more expensive, including the staples of living: food and gas. So we’re earning less money and paying more for basic stuff. This less money + higher expenses combo hits women harder than men, because we are still earning an average of 80 cents for every dollar earned by our masculine counterparts.

All of this erodes our confidence in the American economy, and when people lose confidence, or when they lose their jobs, or when they can’t afford to save money because they’re paying too much for basic needs, they either stop investing in the stock market or they pull their money out of those investments. Then the stock market declines even further and people lose even more confidence. Argh!

So what can you do to help yourself in this situation?

1) Continue to invest, because this plunge is temporary. Think of it as a sale.

2) If you have a job, make sure you are being paid what you’re worth. Do some market research on salary.com or at the Bureau of Labor Statistics website, ask your HR department for salary benchmark information on your position, or if you feel comfortable, find out what your colleagues are making. If you’re not being paid enough, ask for what you’re worth. Being underpaid will make it that much harder for you to sock away investment money while dealing with your everyday expenses. This may seem counterintuitive given the nasty job market, but trust me, if you are valued in your current company, they would rather pay you a little bit more (especially if that’s the fair market rate) than have to pay to find a replacement and train her. I tend to think of it this way: How much does my company spend on pencils each year? Am I worth more than-or at least just as much as –pencils? Definitely.

3) Real estate is cheap now, so if you have good credit and are thinking about buying, it may be the right time for you.

4) Think about that bike.

Post Your Comments

Is the economic downturn affecting your life at all?

The Ins-and-Outs of Capital Gains Tax Part II

Uncle Sam Wants a Piece of Your Capital Gains

If you haven’t read my last post introducing capital gains, you might want to do that first. With all these taxes, is it even worth it to invest in taxable accounts in the first place? Especially when you take inflation into account? Well, it certainly shows you why tax-advantaged accounts like 401Ks and IRAs are a wonderful thing. With a Traditional IRA, you can get a tax deduction in the year you invest your principal (if your income falls below a certain limit) and then your money grows tax free until you withdraw it when you retire. With a Roth IRA, you don’t get a tax break now but you will NEVER EVER have to pay taxes on that money once you put it in, and even when you take it out once you’ve retired. Very sweet deal.

BUT with tax advantaged accounts, there are rules about when you can take the money out. Maybe you don’t want to wait until you’re an old geezerette before you put that money to good use. Maybe you have a short-term or intermediate goal, like buying a home or taking a trip around the world. In that case, don’t use your retirement funds for that stuff. Use a taxable account.

Don’t let capital gains tax scare you. If you’re already maxing out your tax advantaged accounts (good girl!) and you want to sock more away to meet your goals, think about the capital gains tax in comparison to regular income. Your regular income is taxed, but that doesn’t keep you from working to earn a living!

If you hold onto the investments for more than a year, the long-term capital gains tax rate is pretty low. What about that pesky periodic distribution tax, which is the same as your marginal tax rate? True, it’s a bummer. But if you think of these tax advantaged investments as an extra income stream, it’s no different than a second job. If you were to go out right now and get another job on the weekend, for example, you would be taxed on that money, probably at the marginal rate. But you’d still end up making more money, and that’s the point, right? Did anyone ever say: “I don’t want to make more money, because then I’ll get taxed more?” Well, perhaps they did, but I wouldn’t turn down a big pay raise even if it bumped me up a tax bracket.

What happens if you lose money with that investment? In that case you have a capital loss, and you can take a tax deduction for that loss up to $3000 for that calendar year. If your loss is more than $3000, you can carry the rest of the loss over in the next tax year and get another tax deduction for the remainder. See my post on what a tax deduction really means to understand how this could impact your bottom line. It’s not like you’re getting all of your money back, dollar for dollar. But it’s just a little something Uncle Sam gives you back to make you feel a little better if you lose, and to reward you for “trying.” Like at the casino, when you lose $5000 and they give you a “comp” dinner.

The Ins-and-Outs of Capital Gains Tax Part I

How Much of That Juicy Pie Can You Keep?

Someone posted a comment asking me to explain capital gains tax. I did a little digging and found an excellent article on SmartMoney.com that sums up the different capital gains tax rates depending on your income, the type of investment you’ve sold, and how long you held it. Some key learnings:

1) If you are currently in the 10-15% tax bracket, you can take advantage of the LOW LOW capital gains tax rates of 0-5% that apply to your gains from the sale of investment securities after one year. Higher wage earners do not qualify for this nifty perk.

2) The famous 15% rate applies to folks in the 25% or higher brackets who sell investment securities after one year. An exception to this rule is if you’re invested in Real Estate Investment Trusts (REITs), which is counted as a real estate investment and is taxed at a rate of 25%.

But this information all pertains to investments that you’ve held for more than a year.

If you own mutual funds in a taxable account, which would be pretty much any account besides an IRA or 401K, you will pay capital gains tax periodically throughout the year while you own the fund, even if the fund has a losing year. The reason for this is that with a mutual fund, individual stocks that make up that fund are bought and sold every once in awhile. If you have an actively managed fund, this could happen quite frequently (this is one advantage to index funds-they tend to hold on to the same stocks for a long time, so there are less capital gains).

Each time the fund manager sells one of those stocks in the fund for greater than the price for which it was originally purchased, that is a taxable gain for all of the folks who own shares of that mutual fund. It doesn’t matter whether you just bought the fund yesterday and the stock that is sold was originally bought two months ago. If you own the fund, you pay taxes on all gains, otherwise known as “distributions.” You also pay capital gains taxes on the dividends that individual stocks in your fund distribute periodically, even if those dividends are automatically reinvested into your account.

One exception to the distributions scenario is with Exchange Traded Funds (ETFs). If you read my post on these interesting little hybrid investments, you know that an ETF is like an index fund because it invests in the stocks that make up a certain defined index, but its shares can be traded actively during the day like an actively managed fund. However, you don’t get taxed on your capital gains until you sell the ETF, so your gains grow tax deferred for a longer period of time. Read more about capital gains taxes on mutual fund profits at About.com.

So what’s the bottom line? If you own a mutual fund that isn’t an ETF, you will be taxed periodically throughout the year on your distributions at your ordinary marginal tax rate (a.k.a. your tax bracket, a.k.a. the short-term capital gains rate), and you will also be taxed when you sell the fund. If you’ve kept the fund for more than one year, your profits will be taxed at the long term rate of 0%, 5%, or 15%, depending on your tax bracket. If you sell in less than one year, you will be taxed at your marginal rate, the same rate that will apply to your periodic distributions.

Is it worth it? Stay tuned for tomorrow’s post, The Ins-and-Outs of Capital Gains Tax Part II, for my two cents on that question.

Spice Up Your Life With International Investments

Could China Be the Key to Your Fortune?

International investments make up half of my retirement portfolio, and I’m thinking of putting even more in this sector. Why? Despite volatility, developing markets are where you find the most growth. Mature markets like the U.S. are already, well, mature.

According to a 2007 study by Goldman Sachs, the combined Gross Domestic Products (GDP) of Brazil, Russia, India, and China (a.k.a. BRICs) will overtake the combined GDP of the G6 countries (currently the 6 largest world economies): U.S. , Japan, United Kingdom, Germany, France, and Italy by the year 2040. In case you forgot from high-school econ class, GDP is the total market value of all goods and services produced by a country in a year, and is a key indicator of a country’s economic health. And coincidentally, the year 2040 is about when I plan to retire.

Just to put it in perspective, according to the Economist’s Country Briefings, the U.S. GDP grew by 2.2% in 2007. China’s skyrocketed 11.9%. India’s increased by 8.7%. See my point?

So how do you get a piece of these rapidly growing, developing economies? Luckily, there are lots of mutual funds that would fit nicely in your IRA or 401K accounts. Check out the “Foreign” Category of Money Magazine’s list of the 70 best mutual funds you can buy.

Post Your Comments

What percentage of your portfolio is in international funds?

Do you have any qualms about investing overseas?

Investing in a Slippery Business

De-Mystifying Those Oil Prices

Why is the price of oil so high? And how can you get a cut of the action?

The price of oil is mainly affected by four factors: 1) demand, 2) supply, 3) the value of the U.S. dollar, and 4) the performance of the stock market.

Demand

Right now demand is high because we all need oil to function. Not only to fuel our cars and planes, but also to create anything made out of plastic. Plus, consumer behavior doesn’t change that fast. Even now that gas costs 4 bucks per gallon where I live, I look around when I’m commuting to work, and all I see are SUVs. Smartcars and Priuses are the exception, not the norm.

And think about it — everything made of plastic has petroleum in it. Take a look around you and count how many things are either made of plastic or packaged in plastic at some point. That’s a lot of oil. Add to this the fact that growing economies like China and India have incredibly high demand for oil that will continue to grow for decades. So even if everyone in the U.S. and Europe switched to Priuses and started using plastic made out of biodegradable corn husks or something, overall global demand for oil would continue to rise because of developing nations with exploding populations.

One more thing about demand - major oil producing countries subsidize the heck out of gas in their own land. In Saudi Arabia, for example, you can buy gas for 45 cents a gallon, and in Venezuela, you can gas up for 25 cents a gallon. 25 cents!!!! So those folks certainly aren’t going to go out and buy Priuses or cut back on driving. Given all of these factors, I don’t see demand for oil decreasing on a global scale any time soon.

Read the rest of this entry »

What’s Better, A Tax Credit or a Tax Deduction?

Keep More of Your Hard-Earned Dough

I often use the word “deduction” to describe anything that might lower my tax bill. But there are actually two ways to save money on taxes: the tax credit and the tax deduction.

A tax credit is a wonderful, simple thing-it lowers your total taxes owed by the amount of the credit. So if you owed $1000 in taxes, but you had a $1000 tax credit, your net payment to Uncle Sam would be $0. Sweet. Check out this list of common tax credits on SmartMoney.com and make sure you don’t miss one.

A tax deduction is a little trickier. With a tax deduction, the amount you get to subtract from your tax bill is the tax deduction amount multiplied by your marginal tax rate. So if you owe $1000 in taxes, and you apply a $1000 tax deduction and your marginal tax rate is 25%, you get to subtract $250 from your tax bill, and you’ll end up paying $750. So what the heck is your marginal tax rate anyway? That is the percent rate where the highest portion of your income is taxed.

If you look at the way we calculate taxes, different amounts of your income are taxed at different rates. Here’s an example from the CNNMoney.com Money 101 section on taxes:

Say you are single and report $80,000 in taxable income for the 2007 tax year (filing in 2008). In accordance with the income ranges defining federal tax brackets for single filers in 2007, the first $7,825 of your income is taxed at 10 percent; dollars $7,826 through $31,850 are taxed at 15 percent; dollars $31,851 through $77,100 are taxed at 25 percent; and dollars $77,101 through $80,000 are taxed at 28 percent.

In this example, the person’s marginal rate is 28%. People also refer to the marginal rate as your “tax bracket.” I think the way we calculate deductions is pretty unfair, because as you can see, the greater your “tax bracket” or marginal rate, the more you get to subtract from your tax bill. If Cassie is in the 33% tax bracket and Helene is in the 25% tax bracket, and they both have a deductible expense of $1000, Cassie will get to subtract $330 from her tax bill and Helene will only be able to subtract $250 from hers, for the same expense.

For most people, the biggest tax deduction is the mortgage interest on their home, but as you can see, the tax benefits of home ownership are highest for those in the highest tax bracket. There’s a huge difference there - the highest earners can subtract 35% of their mortgage interest, while the lowest earners can only subtract 10%.

Of course there is the standard deduction, which is something most people take if they don’t own real estate or don’t have a lot of other deductions. For a single person in 2007, the standard deduction was $5,350, and it was double that ($10,700) for people who were married and filing jointly. Just remember, if you go for the standard deduction, you can’t apply any other deductions. If you forego the standard deduction, you can itemize (add up all your other deductions, like mortgage interest, contributions to a Traditional IRA, student loan interest, capital losses, and some business expenses). Then again, a lot of these individual deductions come with income limits, so you might not be able to take advantage of them at all.

So which is better, a tax credit or deduction? Whichever saves you the most money. If you’re in the 25% tax bracket, a $4000 tax deduction and a $1000 tax credit mean the same thing in terms of your bottom line.

Post Your Comments
Do you love or hate doing your taxes?

Have you ever been blindsided by a giant tax bill?

Which is better - taking 0 exemptions and getting a big tax refund, or taking too many exemptions and ending up with a huge tax bill AND having to pay estimated quarterly taxes?

Are Exchange Traded Funds Right for You?

Are You Ready to Play With the Big Boys?

Today I saw a clip on CNN Money.com with Suze Orman, in which she explained why she’s lost her faith in good old-fashioned index funds and is now a believer in the ETF. Which of course begs the question, what is an ETF?

An Exchange Traded Fund (ETF) is an investment that looks like an index fund but acts like an individual stock. First let’s dissect the name: Exchange Traded Fund. It’s a FUND that’s TRADED on an EXCHANGE (the American Stock Exchange). When you break it down like that, it seems pretty simple. But wait, there’s more.

An ETF looks like an index fund because it is an investment in a group of stocks that make-up a stock index, like the S&P 500, or the Dow Jones Industrial Average, or whatever. See my post on the Dow Jones Industrial Average for more info on what a stock index is.

But unlike a regular old index fund, the ETF acts like a stock because investors actively trade them while the stock market is open. This is different from a regular index fund or mutual fund, which has one price at the end of the day that you would pay if you wanted to buy it. With an ETF, the price of buying or selling shares changes throughout the day. You buy shares of an ETF through a brokerage firm like Vanguard. Anytime you want to buy or sell your shares, you will get hit with a transaction fee. But balancing out the detriment of transaction fees is the benefit that ETFs generally have lower expense ratios than most index funds. In the long run, a lower expense ratio can save you thousands, if not hundreds of thousands of dollars.

Another benefit of ETFs is that you don’t have to pay capital gains taxes on your earnings until after you finally sell the ETF. With a regular, non-tax-advantaged mutual fund, gains on the individual stocks in the fund are taxed periodically, and those costs come out of your investment. With an ETF, your money continues to make money for you as long as you hold the ETF, without the intermittent hits from capital gains tax.

So what’s the bottom line? ETF’s are something to consider if:

1. You’re already maxing out your tax-advantaged retirement accounts (IRAs and 401Ks)
2. You have a large chunk of cash ($10,000 or more) that you want to invest all at once, rather than investing a little bit every month (to minimize transaction fees)
3. You’re okay with holding that investment for a couple of years or more (to activate the capital gains tax advantage)
4. You want to diversify your portfolio by buying a broad mix from an asset class that you don’t already own (such as international, small-cap, or bond funds)

When you’re picking an ETF, be sure it has a super-low expense ratio and that it indeed follows a broad index. Check out this article on ETF fads to avoid. And as always, talk to an investing and tax professional before making this kind of decision.

Shopping for a Home Loan

Shopping Around Can Pay Off

Smart shoppers know when to buy and when to keep looking for a better deal. But can we apply these principles when it comes to mortgages? Originally, when I decided to get pre-approved for a home loan, I thought I’d just head over to my local bank and see what I could get. But then I read this excellent little pamphlet from the U.S. Department of Housing and Urban Development. (HUD) called “Looking for the Best Mortgage: Shop, Compare, Negotiate.” It’s a quick, easy little read that explains all of the different factors you should take into consideration when comparing loan offers. It also has a handy-dandy worksheet that you can take with you when shopping to grill the lender, broker, or loan officer and make sure you didn’t miss any important factors that will affect what you end up paying for the loan. There are approximately 30 different factors to ask about on the worksheet. 30! That’s news to me - I was thinking in simple terms of 1) loan amount and 2) interest rate.

What surprised me most about reading “Looking for the Best Mortgage” was the fact that the offers you get are not set in stone. Of course, they are influenced by the quality of your credit, but you can negotiate and pit lenders against each other to give you a better deal. Sometimes there are different interest rates available during the same day - make sure you get the lowest one! Also, you can ask them to waive some fees. Also, brokers could be holding back because they may have a financial incentive to make you pay more. So play hardball.

Because there’s nothing worse than paying too much for something you could have easily found on sale. Especially if you’re paying for it for the next 30 years.

Post Your Comments

Do you have any tips for women looking at buying real estate, based on your own experience?

Have you gotten a great deal on a home loan? How did you do it?

How to Become a Financial Know-It-All

Easier than college

I know a lot of financial whizzes, mainly those who majored in and work in finance. Easy for them. Fortunately, I’ve found a resource for the rest of us who want to know everything there is to know about investing- with no tuition or 80-hour workweeks required. Morningstar.com’s comprehensive “investing classroom” has 4 curricula: stocks, funds, bonds and portfolio, that take you through online lessons from the 100 level to the 500 level. Everything is written in plain English. As you learn, you earn “credits” toward a free 60 day premium subscription to the Morningstar. To start racking up the credits, you’ll have to register on Morningstar and “sign in” for the free, regular membership content. I’m going to try one “curriculum” per month - and in four months, I’ll be able to hold my own with the best of those bank types at my next cocktail party.

Try it yourself and let me know what you think - and just to give you a heads up–there are quizzes.

Finding a Financial Planner

Who is taking care of your nest egg?

Those ladies who liked my post on “F is For Fiduciary” might be interested in a couple of recent Marketplace stories on Finding a Financial Planner. In one, Chris Farrell first asks the important question of whether you actually need a financial planner. Again, this term gets mixed up with investment advisor all the time. If a financial planner is just going to tell you how you should cut back on your spending, I don’t think that’ s worth it. But, the second Marketplace story interviews several folks who have found tremendous value through working with a planner.

My opinion is that before you go see a planner, you should know where your money is and know how much you are going to set aside each month for investing. Then go see a professional who can advise you on how and where to invest it, if you don’t have time to research that stuff yourself.

Book Review: Smart Women Finish Rich

I think book reviews will be a helpful way for me to 1) Let you know which money books are really worth your time and 2) Learn a whole bunch about investing. I started with David Bach’s Smart Women Finish Rich because two of my friends mentioned it to me. My friend Cynthia said it taught her everything she needed to know about investing and quelled any ignorance or anxiety she had on the subject. My friend Keshia thought it was okay but not “actionable,” meaning she didn’t feel like she could immediately go make an investment decision based on reading the book.

My verdict: skip straight to the chapter called “Step 5.” In my paperback version, this starts on page 106. If you don’t have kids or don’t plan on having them for awhile, just read through the end of Step 6 (up until page 234 in my book). If you have kids and want to read about raising money-smart kids and saving for college, read Step 7. (My personal view is that saving for your kids’ college education is just silly, but that’s another story—scandalous, I know.) There, I’ve just saved you about 4-6 hours of reading.

The “meat” of the book covers such useful topics as estate planning, retirement investment vehicles, the ins and outs of disability insurance, life insurance, stocks and bonds (very basic here, from defining a stock and a bond to explaining the difference between large-cap, mid-cap, small-cap, etc.), mutual funds and index funds, and different types of health insurance. Based on this section of the book, I came to the following 5 conclusions (among others):

1. My husband and I need to set up a living trust instead of a will, to avoid higher estate taxes, legal fees, the publicizing of our financial affairs, and possible claims on our assets by people we don’t like or don’t know.

2. I need to look into my company’s disability insurance policy to see if it offers “owner occupation” or “any occupation” coverage. If it’s “any occupation,” I should complain to my benefits department, raise hell, and get all my colleagues to complain too.

3. If they’re offering a good rate, municipal bonds might be worth looking into at some point because of the tax advantages, after all your tax-advantaged retirement accounts (401Ks and IRAs) are maxed out.

4. Exchange traded funds (ETFs) sound sexy, but they are not the right investment for me – too much active trading. With an index fund, I can buy the same bunch of stocks as what I would buy with an ETF, and just hold them with little time and effort.

5. I should ask my parents whether they are considering buying long term care coverage, and strongly encourage them to do so once they are in their 60s.

What does the rest of the book cover? The first part of the book is meant to be “empowering,” I guess, but it’s just a bunch of scare tactics about how women live longer than men and earn less, so they need to invest more or they’ll end up penniless. Or how husbands who manage all the money get the upper hand during divorce settlements, because the wives don’t know where the money is.

Bach also spends a lot of time explaining the importance of spending less than you earn (duh) and organizing all your information so you know where all your money is. The first one is a no-brainer and the second one can happen in 5 minutes with mint.com.

Quick recap: parts of this book are really worth reading if you’re new to investing and want to learn the basics. Enjoy!

Related posts:

Where It All Goes, Now You Know!

F is For Fiduciary

Pick a Strategy, Any Strategy

You Invest Like a Girl

Post Your Comments

How did you learn about investing?

Any book recommendations or requested reviews?

Don’t Forget Your Umbrella!

Essential for a rainy day

In the course of taking a quiz on my level of financial savvy today, I realized that one topic I don’t know much about is umbrella insurance. This is not insurance to protect valuable umbrellas.

Rather, it is something that can really save your butt (and your family’s butt) if you ever get sued. Let’s face it, we live in a litigious society, and you never know what can happen. You could be driving along, minding your own business, and accidentally crash into a cranky business executive’s car. Then, he could sue you for $1 million for damages to his career, etc. It’s not just that $1 million you would have to worry about–though I’m guessing none of us have that kind of change hidden under our couches-it’s also the massive legal fees. You could lose your home, everything.

The New York Times has a good article that explains what umbrella insurance is all about. According to the article, $1 million in umbrella insurance can cost between $150-$300 per year. Plan on spending an extra $125 per year for each additional million bucks in coverage. I spent twice that amount on restaurants and groceries just last month, so I think it’s a pretty good deal for the peace of mind.

As we build our wealth through investing, we also need to invest in ways to protect all that we’ve worked so hard to grow and acquire. Hopefully, you’ll never have to use umbrella insurance, but it can keep your life from being ruined in case of a rainy day.

F Is For Fiduciary

pbskids.org

That’s good enough for me. There’s a great article in the New York Times about choosing a financial planner, and the importance of choosing one that is a fiduciary. Fiduci-huh?

It means they are legally obligated to put YOUR financial interests first, meaning, ahead of theirs. You are putting your financial well-being in this person’s hands, and practically anyone can sell themselves as a financial advisor, so it’s important to ask them if they’re a fiduciary, get references, and do your due diligence. Basically, make sure they’re not a con-artist or a yahoo. Also, they should charge by hourly fee and not by commission - a commission means they have a financial incentive to persuade you to invest in certain investments over others. Here’s a quote from the article:

What I learned, though, is that while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.

Not that your hair isn’t important, but something to consider. The article has all kinds of great advice and resources for finding a good financial planner, and it also explains the difference between a financial planner, investment advisor, and stock broker.