I bet this whole financial mess has made everyone of you open your eyes and question your wants, question your income, question your money management (or the lack of it), question your expenses, question your investment strategies, question your job security, question your $10-per-workday lunches, question your credit card statements, question your insurance coverages ….. sort of made you question your attitude towards money.

For those of you who still have your jobs, I bet you feel fortunate (and generally crib less about being less paid, etc.) - and I bet you are putting in extra efforts to make sure that someone higher up notices your hard work before you get into the to-be-laid-off list.

It has made people question their governments, and governments question their respective policies.

On my part, I have convinced at least half a dozen young people (close friends and relatives) to open their minds about saving more and/or investing in the stock market (on the argument that it’s a good time to buy stocks, develop good money saving habits, etc.). It’s a happy feeling (almost a proud feeling) when these guys and gals discuss interest rates, stocks, ETFs, and portfolio diversification over lunches and other casual meetings.

Of course there is much suffering and stress, but hopefully most of us will come out of it with several lessons for life. Hopefully, adversity will bring out the best of our efficiency and adaptability.

As it is, we have to read/hear bad news everyday … just thought I should throw in a pinch of positive out there.

1. Bring your ads to the store. Many stores offer “lowest price” guarantees, but you need to bring proof to get your product for a lower price.

2. Ask for a gift receipt. If you’re buying somebody a present, this is a big deal. No gift receipt means people might get stuck with a gift they don’t want/need.

3. Early bird discounts. If you’re going to save “big” money, the only way you’re going to do it is to show up early. Usually stores have the huge deals 5am-11am or so.

4. Don’t feel obligated to buy something. If you get to the store too late and all the items you wanted are sold out, don’t feel the need to still buy something at a regular price. That’s the big “scam” of Black Friday. Stores have a handful of items at low prices, then want you to buy everything else at the regular price once they’ve got you in there.

- Edwin, CashTheChecks.com

Today the Senate passed a $300 billion housing rescue bill aimed at turning around the flagging housing market, helping homeowners avoid foreclosure, and propping up Fannie Mae and Freddie Mac. The fact that Senators came in on a Saturday to vote on the bill is an indicator of the importance that Capitol Hill places on the issue.

It remains to be seen who will benefit from this legislation, but one group of folks that surely are breathing a sigh of relief are the shareholders of Fannie and Freddie. It’s unlikely that these two publically traded stocks will return to their previous levels anytime soon, but this intervention at least makes it more unlikely that they’ll go belly-up.

Nationwide, foreclosure rates continue to skyrocket. RealtyTrac yesterday reported that foreclosure activity was up a whopping 14 percent in the second quarter, a rise of 121 percent over the second quarter of 2007.

It is hoped that the passage of this regulation will soothe Wall Street’s frazzled nerves. Oil prices (too high) and housing prices (falling too fast) are surely the two most troubling elements in our fragile economic situation. Both are complex and have deep reaching tentacles. The reassuring thing about the housing picture is that, unlike oil, it is an American market – therefore Congress may have some success in turning the ship. Washington hasn’t produced any legislation on energy– neither to curb speculation nor to increase offshore drilling. Lawmakers take some lumps from the public for their inaction, but it’s probably just as well since neither approach has the potential to improve the situation. The US controls a tiny percentage of global reserves, and traders move a small percentage of barrels traded, which leads us to a troubling conclusion: the U.S. economy is just one piece in the global puzzle, and things that happen outside of our borders are going to hit us in the pocketbook here at home.

But even if we’re struggling with our oil addiction, it’s hopeful that this piece of legislation might help the housing market. Much of the impact may be psychological, however. Democrats estimate that around 400,000 households might benefit from the bill, but last quarter alone saw almost twice that number of foureclosures – around 740,000 according to RealtyTrac. But we can hope that this bill shows that Congress is willing to act if necessary, and that might be enough to get banks lending again. And that might lead to fewer foreclosures, more buyers buying, more sellers selling, a shrinking housing inventory, and eventually a recovery in prices.

What Happens to My Pension if My Company Goes Bankrupt?

If you’re lucky enough to have a pension through your employer, you’re probably wondering what effect this significant economic downturn will have on your benefit. What happens if your employer goes bankrupt? What does it mean if they freeze your pension? Can your pension benefit just disappear? And where do you go if your employer does go out of business and how can you receive what you’re entitled to?

These are important questions, and if you’ve accumulated a decent pension benefit, you certainly want to be able to get what is owed to you, and understand what companies can and can’t do.

Defined Contribution vs. Defined Benefit

If you take part in a 401(k), 403(b), 457, or other similar employer-sponsored plan, then you’re using a defined contribution plan. This just means that you (and/or your employer through a match or profit sharing) contribute a specific amount of money into the plan. The amount of the benefit is not defined as the investment choices you make and amount you contribute will ultimately dictate how much you receive in retirement.

Pensions are defined benefit plans. These types of plans pay out a defined benefit that is based on a calculation. The calculations usually takes into account length of service, pay, and your age. The benefit that is defined is paid out to you, and it doesn’t depend on how much money you or your employer puts into it or market conditions.

Defined Benefit Plans and Investments

Even pension plans invest in the stock market, and since you don’t make the investment choices, there isn’t much you can do. Your benefit will be determined by the calculation that was established by the plan. So, if the market takes a big hit like it has recently, your pension benefit doesn’t decrease like the value of your 401(k) did.

But, a shortfall in funds has to come from somewhere. Since pensions are funded by the company, a shortage of funds to pay out the benefits could eventually affect you. When a company is forced to inject millions or billions of dollars into a pension plan, it can put strain on an already struggling company. A less profitable company can turn to layoffs, reducing workforce, closing plants, or a number of cost-cutting measures.

In addition, the company may decide to freeze their pension plan. When this happens, any additional service you have with the company wouldn’t be added to increase your pension benefit. You’re still entitled to any benefits you obtained previously, but additional time won’t mean additional benefits. A pension freeze may be temporary or permanent. While it isn’t an ideal situation to be in, at least you will get what you earned prior to the freeze.

If Your Company Goes Bankrupt

Most people assume that if their employer goes out of business, it takes their pension plan with it. In most cases, this is not true. Are you familiar with FDIC insurance for bank deposits and SIPC insurance for investment accounts? Both the FDIC and SIPC insures your money up to a certain amount in the event the company that holds these accounts goes under. Thankfully, pension plans have similar protection.

The Pension Benefit Guaranty Corporation, or PBGC is responsible for insuring your pension benefits. In most cases, your pension benefit would be insured up to certain limits. For 2009, a 65 year old has a maximum insured benefit of $54,000 annually. So, as long as your pension benefit is equal to, or less than this limit, you’d still have your full pension benefit even if your company goes under or the pension plan terminates.

Just like banks pay premiums to obtain FDIC coverage, pension plans also pay premiums to the PBGC, and in the event of a failure, the PBGC would take over the plan and administer it while paying out insured amounts. Some types of benefits are not guaranteed. These include health and welfare benefits, severance benefits, lump-sum death benefits and disability benefits when death or disability occurs after plan termination.

Even in this Economic Crisis and with Failing Companies Your Pension Should be Safe

Even Though Real Estate is Gloomy, Opportunities Will Present Themselves

The negative news in the real estate market continues. Every week it seems like a new report is out highlighting record drops in home sales, lower home prices, and more difficulties in obtaining a loan. For those who already own a home, or are trying to sell their home, this is obviously a difficult time. I don’t want to dismiss the hardship that this crisis has created, but I am glass is half full kind of guy, so I wanted to highlight some of the positive aspects of what is going on.

Looking Ahead a Few Years

When will the real estate market settle down? That is the million dollar question right now, and there are a lot of different thoughts. And to make things more difficult, some areas of the country will begin to rebound faster than others, so without a crystal ball, the best we can do is guess. That being said, I think it’s fair to say that it will be a while before we see any significant improvement. Whether it’s a year or two, or five years from now, it doesn’t really matter. Trying to pick the absolute bottom is like trying to pick the day the stock market bottoms out. If you’re a little early or little late to the party, you’ll still be fine.

So, if you’re thinking about buying a house in the coming few years, you have a tremendous opportunity in front of you. In many cases, you could buy a home right now at a 25% or more discount from just a year or two ago. As prices continue to fall in coming months and years, you should find even steeper discounts. The good news is that there is no rush in buying. Even if home prices do begin to stabilize earlier than expected, they won’t immediately spike back up, especially with the excess inventory out there. This means that you’ll have a pretty long window of time where you should be able to buy your home without being concerned about skyrocketing prices or strong demand.

Start Getting Your Credit in Order Today

Even if you don’t plan on buying a home for another few years, it is never too early to begin thinking about your credit score and the effect it will have on your ability to secure lending. Banks have learned their lessons (at least I hope so), and that means we’re returning to times where credit is harder to get, and those with poor credit will find it extremely difficult to obtain financing, or may pay a significantly higher interest rate. This makes having a clean credit history more important than ever.

When it comes to improving your credit score, it’s important to have time. This is why it’s a good idea to start planning as early as possible. For one, if you have negative marks on your credit report, the only thing that will remove them is time. In most cases, seven years, or ten if a bankruptcy. So, check your credit report and look for negative marks. How long ago were they? If you have a late payment showing up five years ago and think you’ll be buying a house in about three years, it looks like that would be removed, and improve your score once it’s time to apply for a loan.

Even if you do have more recent dings on your score, the good news is that their importance diminishes over time, so that is still in your favor. Just make sure you don’t make any more late payments! In addition, if you have a few years yet and you currently have very little credit, you have time to open or close lines of credit as needed in order to maximize your score. Remember, length of credit history is also very important, as well as what types of credit you have, and the credit utilization. This gives you time to maximize those aspects of your report as well. Use this time wisely, and don’t wait until just before applying for a loan to begin thinking about your credit score. And don’t forget to check out these tips on how to improve your credit score.

Think About the Down Payment

In the past, it was common to put 20% down on a home. In the 90s, with rapidly increasing home prices and easy access to credit, this became less common, and many people were able to get attractive financing with little or even no money down. Of course, when your home is expected to increase in value by 20% each year, it made sense. As we’ve seen lately, having equity in your home from day one has many advantages, especially when it becomes clear that home values don’t always increase each year. Not only that, but putting 20% down can get you out of paying private mortgage insurance, or PMI. This keeps your monthly payments low, and helps you put more money in your pocket.

That being said, more banks are now requiring money down. There are still plenty of offers out there for zero or low down payment loans, but you’ll need even higher credit scores, and might pay a premium for those loans. Bringing money to the table will help you if you have less than perfect credit, and will help ensure you’re getting the best rate.

This doesn’t mean you have to spend years and years trying to scrape together $50,000 or more, but you have enough time to begin thinking about a down payment and to start saving up now. If you’re looking at a home purchase in the next few years, just saving a couple hundred a month can make a good dent in your down payment over time. Again, time is on your side here, and the sooner you can begin taking advantage, the better off you’ll be.

Don’t Screw This Up

If you don’t own a home and want to buy, or are thinking about upgrading in the coming years, this is a tremendous opportunity. You have just enough time to get your financial house in order so that you will be able to take advantage of the decline in home prices. Use this time wisely, and don’t screw it up. If you wait until the last minute, you’ll miss out on plenty of areas where you could maximize your purchase.

And above all, don’t make the same mistakes people have made in the past. Once the economy begins to recover, the stock market takes off, and home prices begin to rise again, it’s easy to forget about what got us into this mess. Remember, you buy a home for a place to live first and foremost. Find a home that is suitable for your needs, and understand exactly how much home you can truly afford. Don’t borrow too much, and don’t put yourself at further risk by taking on an exotic mortgage. And most of all, don’t go into your home purchase expecting the value to double in five years.

If you plan ahead, stick to the basics, and don’t get greedy, you’ll find yourself in a fantastic position. You’ll have a nice roof over your head, you’ll be able to weather future economic troubles, and since you were able to buy at a significant discount, you might even stand to make some money when you sell in the future. Opportunities to learn from past mistakes and to take advantage of relatively low prices don’t come along that often, so make the most of it.

Image credit: TheTruthAbout

Prospective Home Buyers, This is an Opportunity of a Lifetime - Don’t Screw it Up

Times are tough out there and a lot of Americans are getting caught in the squeeze. As real estate investors we feel this in a number of ways: bargain foreclosures to buy (good!), a glut of rental properties depressing rental rates (bad!), fewer competing bids for quality properties (good!), longer waits to sell properties (bad!)...and the list goes on.

One thing I’m noticing is the challenge to get quality tenants. I have some properties that rent like hotcakes w/ zero vacancy time. But others, for some reason, have been more challenging. Like most property owners, I have a number of rules-of-thumb that I follow when it comes to screening tenants. But rules of thumb aren’t written in stone; they’re just guidelines. Every now and then I come across an applicant who I think will make a great tenant, but there is something or other that makes me second guess myself.

The fact of the matter is that good people get caught in bad situations sometimes, and a quality applicant can sometimes appear brandishing a blemished credit report. Don’t get me wrong – my mantra #1 is that renting to a bad tenant is twice as expensive as sitting on a vacancy for an extra month – but what is a landlord to do when her gut tells her that she should take a chance on an applicant? Well here are three steps I sometime take::

• Ask for first and last months' rent upfront, plus one month’s deposit. This does three things for you. First, the applicant will have to cough up three months’ rent upfront before he moves in. If the applicant can do this it is an indicator that he’s not living paycheck to paycheck, a good sign that he will be responsible. Secondly, it mitigates your risk by ensuring the final month is paid. Lastly, that final month’s rent sits in your bank account collecting interest (or, better, is out in the market working for you) for the entire time the tenant resides in the property. I write the lease to state that the last month’s rent paid upfront will be credited to the final month that the tenant resides in the property.  PROs:  will scare off bad/risky applicants.  CONs:  may eliminate some good applicants as well. 
• Shorten the term. Write a lease with a short term; four months or six months. Agree to renew if the tenant pays each month on time; you can put this in writing in the contract if you wish. If there is a problem you’re still going to suffer, but you wont’ have a deadbeat sitting in your property with a contractual right to stick around for an entire year.  PROs:  limits the period you're at risk.  CONs: no financial benefit to the landlord, who is still stuck with evicting the tenant if he doesn't work out. 
• Charge a higher rent. This doesn’t do much for you in the risk mitigation category, but if you’ve trust yourself as a judge of character and you’re willing to rent to an applicant that other landlords have turned away, you should get compensated for the extra risk you’re assuming.  PROs:  higher return on the property, a good thing.  CONs: doesn't lower your risk.

Smart landlords use these strategies in combination. Increase the rent and offer a shorter term. Offer a shorter term w/ first and last month paid upfront (great risk mitigation).

Check out this letter to the editor that was in today’s Wall Street Journal:

In your Dec. 1 editorial “Messing With Malpractice Reform,” you urge the Illinois Supreme Court to “side with the patients and the rule of law” in considering a case that could overturn the state’s cap on damage awards. Yet the editorial never mentions the patient who is at the center of that case.

She is a three-year-old little girl named Abigaile LeBron, whose life has been forever changed by the severe brain damage she suffered as a result of medical negligence. It is likely that Abigaile will have to be fed through a tube for the rest of her life. She will never develop cognitively or physically as her peers do. And she will likely never live independently. It is inarguably a very painful tragedy for Abigaile and all who know and love her.

The insurance industry and its brethren in the tort reform world have argued that Abigaile’s compensation for lifelong disability, pain and suffering should be arbitrarily limited, despite what a jury of average citizens may decide. The question before the Illinois Supreme Court is whether the Illinois Constitution allows Abigaile’s rights to be limited in this fashion to the benefit of insurance company profits. Twice before, our state’s highest court has decided in favor of patients and against the insurance companies that would limit these rights to protect their own profits. No new arguments have been offered by the insurance industry.

You argue that a reduction in malpractice premiums and the return of doctors to the state have resulted from the law containing caps. Nothing could be further from the truth. Not one case has been litigated under the new cap in Illinois. The simple fact is that those positive developments have resulted from strong, long-suppressed insurance reforms in the legislation. That law has now forced malpractice insurance companies to provide greater transparency on rate-setting and payouts that has in turn spurred competition, motivated more companies to enter the marketplace, and lowered premiums for doctors. Important to the discussion for your readers is the additional fact that Illinois’ largest malpractice insurer has reported that payouts have remained flat for the past 13 years. By the way, it’s the same insurance carrier that admitted during the run-up to this legislation in 2005 that capping awards would not guarantee lower premiums for its doctors.

The Illinois Constitution was put in place to ensure individual rights and freedoms. While corporations and profit-hungry executives often stack the decks against individuals in the marketplace and the halls of government, the courtroom can still provide all parties with a level playing field. The Illinois Supreme Court will now decide whether that standard remains in place for patients like Abigaile LeBron. You should let it do its job.

Philip Harnett Corboy Jr.
President
Illinois Trial Lawyers Association
Chicago

Here’s the problem I have with juries being able to award money damages:

They have no concept of how much money they are awarding. It’s not their money so why not be a cheerful giver?

I’m not saying that what happened to the little girl in the editorial isn’t a tragedy. It is.

I just think it would be nice for lawyers to stop hiding behind the sad stories, be honest and say, “I don’t like tort reform because it severely limits how much money I can make!” It’s silly to talk about “greedy” insurance companies when the lawyer gets a nice percentage of the winnings.

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How you see yourself is likely how others will see you as well. Here’s a few examples of how you can implement this to your advantage.

- You’re unemployed. No you’re not. You’re advancing in your career, you’re an ambitious person looking to move up.

- You do freelance graphic design. No you don’t. You’re an artist.

Think of yourself as a product. You’re selling yourself to others. From your clothing to your way of speaking, you are a product to everyone you meet. Everyone from strangers to business owners subconsciously ask themselves if they want to buy you. So sell them your product. If you don’t market yourself or brand yourself in the way you want, others will most certainly do it for you.

- Edwin, CashTheChecks.com

There are two components to each transaction: compensation and risk. While many investment bankers and business owners tend to focus almost solely on compensation, PLG Advisory Group gives equal consideration to the risk associated with each transaction.

There are three primary areas of risk:

(1) Known risks, for example the liabilities set forth on the company's balance sheet, or known regulatory risk;
(2) Unknown risks, for example, unanticipated employee or customer lawsuits; and
(3) Transactional risk, which is the risk that the transaction will be litigated, either prior to or after a closing.

How do small business owners view risk in a business transaction: is price or the reduction of risk the most important component of a M&A transaction?

German Volkswagen Group expects to sell more than 800,000 vehicles in China this year, encouraged by its strong sales in the first half.

The projection, made by Volkswagen's China chief Winfried Vahland, is up from 711,298 units it moved in the world's fastest-growing major auto market in 2006. Its January-to-June sales on the mainland and Hong Kong rose 24.6 percent year-on-year to record 431,369 units, including 379,705 Volkswagen-brand cars, 49,267 Audi vehicles and Skoda 2,274 units.

The German company's record sales figure is likely to help it remain the top seller in China's passenger car segment though its rivals, such as the General Motors Corp. and the Toyota Motor Corp., have yet to disclose their first-half results in the territory. "This (record sales) indicates that our 'Olympic Program' has been yielding good results in China," Vahland said in a recent interview in Beijing.

Volkswagen, the sole automotive partner of the Beijing 2008 Olympics, flagged off the program in 2005 to launch 12 to 14 new models by 2009 in China. The automaker also intends to cut costs by 40 percent by 2008 and to improve sales and service networks.

Vahland predicted that China's entire passenger car market would reach five million units this year, up from the company's previous forecast of 4.6 million units. In 2006, 4.2 million passenger cars were sold in the country. "However, we will not slacken our efforts to cut costs and improve customer satisfaction, although we performed well in the first half," he said. He warned that interest rate rises and soaring oil prices in China are likely to have a negative impact on the car market.

The VW turn signal alerts the automaker to a greener pasture. The German automaker now runs a joint venture with First Automotive Works Corp in the northeastern city of Changchun. The venture is responsible for the production of Bora, Caddy, Jetta, Golf and Sagitar, as well as the Audi A6 and A4. Additionally, the venture will launch a 1.8-liter turbo Magotan sedan next week.

The Mangotan also features Fuel Stratified Injection in nearly every petrol version. It ranges from 1.6 to 3.2 L, but the multivalve 2.0 L TDI is the most sought out version in Europe. In the United States, it features a 200 horsepower 2.0 L turbocharged I4 as the base engine, or a 280 horsepower 3.6 L VR6 engine as the upgrade and six-speed manual and automatic transmissions.

An Tiecheng, the venture's general manager, said that it plans to roll out at least two new models under the Volkswagen and Audi marques annually in the next five years to lure increasingly sophisticated auto purchasers.

The VW Mangotan, also called the Passat, follows the latest design philosophy first introduced on the VW Phaeton luxury car. The new styling is a dramatic departure from the styling of the B5.5 Passat. Although the new design using improved VW parts is somewhat controversial, sales have improved over the old model.

For the full year, VW, which operates car manufacturing ventures with leading Chinese auto maker SAIC Motor Corp. and FAW Group, aims to increase its sales by roughly one-fifth and maintain its 17 percent share of the world's second-largest auto market, a senior company executive said.

The venture will have a "minimum" profit growth of 25 percent this year from 2006, said Joachim Wedler, its vice-president in charge of finance. But Wedler did not reveal how much the firm, in which FAW holds a 60 percent stake and Volkswagen 40 percent, will earn this year.

The Wolfsburg-based company is one of the world's biggest producers of passenger cars and Europe's largest automaker.

About the Author

Anthony Fontanelle is a 35-year-old automotive.buff who grew up in the Windy City. He does freelance work for an automotive magazine when he is not busy customizing cars in his shop.

Do you ever sit down and think about how your life is progressing and where you’re headed?  Laying out a roadmap for yourself can be a valuable experience.

As the post title alludes to, if you haven’t defined your goals, how will you measure your progress towards them?  Having a plan not only makes your efforts more measurable it can give the things you do more meaning and help filter out time wasters.

You may have noticed I was silent on this site over the weekend, I was using the time for some strategic planning in my own life.  My planning process is iterative in nature.  I come up with some goals and plans to meet those goals.  Then I sleep on it and re-evaluate those the next day.  Looking at it with a fresh perspective, I may change around the milestones and tasks a bit.  Needless to say, my planning isn’t complete but it was nice to get a start on it.

Typically I would have provided a list of articles I enjoyed for the week but due to my planning I didn’t publish those.  Instead, I’ll point out a few articles everyday this week, here’s the first few.

– The Digerati Life lists 8 simple ways you can save a lot of money, try $1000.

– The Mighty Bargain Hunter and All Financial Matters take a look at whether it’s worth your time to wait for free stuff.

– Summer is here and My Dollar Plan offers some tips for saving money on weddings.

– Million Dollar Journey gives us a strategy for asking for discounts.

– Brip Blap loves working so much that he’s started the carnival of careers.

– CNN covers how people aren’t canceling their vacation plans this summer, just changing them to be cheaper, reminds me of my series on saving money on vacations.

– eHow article on how to earn extra money seems appropriate for tough economic times:

• Get a part-time job
• Turn a hobby into money
• Get paid for focus groups
• Sell your stuff on eBay

I also took a look at ways to make extra money during a recession.

Thanks to Money & Values and Canadian Dream for hosting the last two personal finance carnivals and including the articles Best Credit Cards for New College Graduates and Three Ways Your Boss Can Save You Money on Gas.

My sister-in-law has cancer.

Last week, a biopsy revealed that Stephanie has a cancerous lump on her thyroid. She’ll likely have her thyroid removed, meaning she’ll need to take medication for the rest of her life. (She’s 37 years old.) She’ll also probably need a handful of radioactive iodine chemotherapy treatments.

Prognosis positive
Jeff and Stephanie have both settled down a bit after the initial scare. They’ve heard from many sources, including Steph’s grandmother, that this form (and location) of cancer is easy to eliminate, and has a low chance of spreading or recurring. Steph’s grandmother had her thyroid removed years ago (due to a growth on it), and she is now 77 years old.

Still, this is cancer, which no member of my family takes lightly. My father died from cancer ten days before his fiftieth birthday. Last summer, cancer killed a cousin at age 47. Other family members have died from the disease as well.

A lucky mistake
A situation like this has enormous personal finance implications. Steph’s case is especially interesting because it demonstrates that sometimes the “right choice” isn’t.

Before the birth of their daughter in February 2006, Stephanie obtained a supplemental hospital/short-term disability insurance policy because she knew she would need a C-section. After Emily was born, Steph tried to cancel the policy, but the agent talked her into switching to a cheaper cancer/accident policy instead.

Inspired in part by Get Rich Slowly, Jeff and Steph have been taking control of their personal finances. This past May, when it came time for her office to renew policies, Stephanie asked to have her cancer/accident policy canceled because she wanted to save the $70 recurring monthly expense.

After the cancer diagnosis came through, Jeff and Stephanie were kicking themselves for having canceled the policy — it would have offset some of their upcoming costs. Then Steph remembered that both of her June paycheck stubs still had the deductions listed. She called her agent to see if her policies were still in force. Sure enough, the official cancel date was July 1st, so the agent was able to revoke the cancelation.

“I don’t know if it will pay out enough to compensate for all the premiums we’ve paid in the last two years,” Jeff writes, “but at this point I don’t care. If it helps with the medical bills that are bound to accrue, that’s all that matters.”

A calculated risk
Stephanie’s situation highlights just how difficult it can be to know how much (and what kind of) insurance to carry. It seemed unlikely that she’d need the cancer policy, so she canceled it. From a Big Picture perspective, this was probably the right decision. But in her individual circumstance, it turned out to be the wrong move.

Last fall, in his brief introduction to insurance, Aaron Pinkston wrote that “insurance is the cheapest and most immediate way for a person to displace risks that are too great to assume individually”. That is, insurance allows groups to pool their money to offset unexpected large individual costs.

But how can you decide how much insurance you need? And what types? Later today, I’ll share a guest post about making informed insurance choices.

Meanwhile, friends and family are ready to help Jeff and Stephanie through this crisis. And although they have bigger things to worry about, it gives them a degree of comfort to know they have a little insurance to help with the financial challenges that loom ahead.

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Related Articles at Get Rich Slowly:

• Ask the Readers: Personal Finance During a Health Crisis?
• Daily Roundup: Bringing Home the Bacon Edition
• Daily Links: My Favorite Stories from the Past Two Years
• Drama in Real Life: “You’re Fired!”
• Get Rich Slowly’s Greatest Hits (2007 Edition)

Could the failure of the “Big 3″ cause a depression?

That’s what a Chrysler executive claims:

“We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press in an interview. “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

I’m not sure about that but I am sure that it’s in this executive’s best interest to paint as bleak of a picture as possible in order to get his bailout. What do you think?

I’m sure failure would not be good. But, as we’ve talked about before, we can’t just give money to the automakers and allow them to carry on business as usual. Big changes need to be made and now is as good a time as any to make those changes. These changes have needed to be made for years but the current crisis really brought them to light.

Please weigh in with your opinion.

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Funny stuff by the folks over at Salon.com:

Well, funny if it weren't so true!

Investing for retirement is one of the staples of financial planning. Almost everyone will either choose to, or be forced to stop working at some point, and having money set aside to fund these non-working years is important. In addition to retirement, there is an increasing trend in saving and investing for college expenses. College tuition is increasing rapidly, and many parents are looking to provide some relief so their children aren’t burdened with tens of thousands of dollars of student loan debt after graduation. With the creation of Section 529 plans, more people are aggressively saving money for college, and now have the opportunity to not only receive tax breaks for doing so, but they can put this money to work with various investments. But with these options and benefits come some drawbacks and things to watch out for.

Understanding Time Frame

One of the greatest factors that determine how you should be invested has to do with time frame, or time horizon. Knowing how long your money has to grow will largely dictate what type of investments you choose. But when it comes to investing for retirement versus college, while it appears simple, there is more to consider than looking at how many years you have left.

With retirement, most people have a lot more flexibility. For one, retirement age comes at different times for different people. Some retire in their 50s, while others work into their 70s. So, just because you’re 30 years old and expect to retire at 65, that means you have roughly 35 years, but it also means there is flexibility. Who knows what will happen over this time, you may retire early, you may be forced to work longer, or you may change careers. Whatever the case, you have the flexibility to take on some risk with your investments.

Looking at college savings, there is much less flexibility and the time frame is more rigid. If you have a child, you know that from birth, you have roughly 18 years until college. On top of that, you know that once they enter college, they probably have around 4 years in which they need to withdraw funds from the account. Sure, some children might get scholarships and not need the money, others might wait a year or two before attending college, or some might go on to earn a graduate degree. But for the most part, there is a fairly specific time frame at work which can limit the amount of risk you’re willing to take.

Why This Affects Investment Decisions

With 18 years of growth, and about four years of withdrawals, most people would see no problem with investing fairly aggressively, especially in the early years. This is to be expected, because stocks generally do produce high returns, and with that much time for the money to grow, you can weather the ups and downs. Even so, when you go back to the flexibility of extending your time horizon or putting off withdrawals, you really don’t have that as a luxury when it comes to college savings. What happens when your child is ready to head off to college and your account is down, are you going to tell them they have to wait a few years before they can start college so your investments can recover? Of course not. And if you wait too long, your window for using that money without taxes and penalties may be gone. You’ll likely have to settle for selling at a loss and maybe even foot more of the tuition bill yourself.

As you can see, even though there is more certainty in regards to how much money you’ll need, what tuition will cost, and knowing exactly how long you have to invest, it doesn’t remove any of the risk. While retirement may yield many unknowns, you at least have options in which you can plan for, and structure your retirement to make everything work.

You also have to consider the withdrawal phase. Like I mentioned above, for most people, withdrawing funds from a college savings plan will take place over a relatively short amount of time. But when you look at retirement, the withdrawal phase can span 20 or 30 years. This allows you to remain invested, at least in part, in stocks even while in retirement because you have another few decades in which you are slowly withdrawing the funds. With college, again, you need to depend on that money over just four or five years on average, so the need to safeguard those funds leading up to, and once the child is in college is very important.

How to Invest Your College Savings

When it comes to investing for college, many of the same rules apply as investing for retirement. But what really changes is the amount of time you spend in each investment phase, and ramping up to a more conservative portfolio earlier. To see why, just take a look at what the past 10 years has shown us. Over the past 10 years, the S&P has a negative annualized return. 10 years may account for half, or even more of your entire time to save for college. That could have a significant impact on how much money you are able to accumulate. So, here are some guidelines:

Birth to Age 5: Just like someone that’s just starting to save for retirement, it’s a good time to be investing in stocks. At this point, a diversified portfolio in stocks would be fine. You’d probably focus on primarily holding domestic large-cap stocks while rounding it out with some international and small or mid-cap offerings.

Age 5 to 10: At this point, you’ll already want to start getting a little more conservative. You’d probably want to think about a 70% mix of stocks and and 30% in bonds. You’ll want to stay diversified across the spectrum of stocks, and probably focus on something like intermediate term bonds.

Age 10 to 15: By now, you’ve crossed the halfway point if you’ve been investing since birth, so it’s time to ratchet things down a bit further. A 50/50 mix of stocks and bonds is going to be the name of the game for the next few years. You’d want to still keep a broad diversification of stocks, but you’ll also want to add some higher quality bond holdings. Of the bond portion, you’ll probably want to keep half of it in low-risk areas like a money market or fixed account.

Age 15 to 18: As you approach the home stretch, you want to make sure that any sudden market declines won’t completely drain your account since your child will be starting college in just a couple years. Three years isn’t enough time to rely too heavily on market conditions, so you will probably want to rely on a 75% allocation of bonds, and 25% in stocks. Now, you should begin to focus a little more on safer, income producing stocks, and shift towards more high-quality bonds. Remember, since you need the money in just a few years, you’d rather have a meager 5% gain than a 5% loss each year heading into college.

Age 18+: Your child is probably ready to start college, and that means the first tuition bills are due. Now is not a time for surprises, so you should be focused on generating predictable income from your investments. At this point, your investments are more or less a savings account that will regularly be tapped into. So, most, if not all of your investments will be in very safe things like money markets or fixed accounts. It’s still fine to keep a little money in the stock market to try and keep up with or beat inflation, but you probably don’t want more than 10% at risk.

Keep in mind that these are just guidelines, and by no means absolute terms. Economic conditions, interest rates, and the number of children you have and what their goals are will largely dictate exactly how you invest. But, this is a good starting point. If you’re able to begin saving and investing right from birth, that’s great. But keep in mind that if you don’t start until your child is older, it can be like playing with fire if you try to accelerate your returns by being more aggressive. Remember, just one or two bad years of returns could wipe out a year’s worth of tuition, and you have a limited amount of time to recover.

I’ve been meeting with a lot of people lately who started saving for their child’s college in just the past few years, and they have 15 year olds while they are invested entirely in stocks. It’s certainly not very fun to see your college fund cut in half in just a year when your child has just a few years to go until needing the money. So, it pays to be a little more conservative, especially in the remaining five or so years leading up to college so there aren’t any surprises.

Investing for College Requires a Slightly Different Approach Compared to Investing for Retirement