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

FNBO Direct Provides Great Rates and Great Service

With interest rates continuing to be slashed across the board, finding attractive yields on savings accounts is becoming even more difficult. At the very least, you’d like to have your savings try to keep up with inflation, but even that can be a tall order these days. Of course, interest rates aren’t everything, and you also want a bank that is secure, provides great service, and has a useful online interface. Luckily, FNBO Direct is a great opportunity to receive a competitive interest rate, remain FDIC insured, and have access to a pretty nice online interface.

FNBO Account Features

• No account minimum
• 3.25% APY as of this writing
• FDIC insured

Just like opening an account with most online, or even traditional banks, you will need to provide some information in order to sign up, verify your identity, and link to other existing accounts. To open an account with FNBO Direct, you’ll need:

• Your Social Security or Tax ID Number.
• Your Driver?s License or ID card issued by a state DMV.
• Employer information.
• Information about any loans or mortgages that you may have to help us confirm your identity.
• For instant funding, you will need your current bank account and routing numbers.
• If a joint account, the other applicant’s information.

Sign Up Today

There are obviously a lot of choices when it comes to savings accounts, but with rates continuing to decline, making sure your money is working its hardest is increasingly important. While I’m not a big fan of rate chasing, I think FNBO Direct is a good place to stick it out. In the past, they have been one of the last banks to drop rates when it was time for a rate cut, and the rates are consistently at the higher end of the spectrum. So, sign up today for your own FNBO Direct account.

FNBO Direct Savings Account Review - High-Yield Savings at 3.25%

Well, it’s been a while since I’ve had the time to post a weekly recap, but I’m bringing it back today. Given the market conditions over the past few weeks, my job has become incredibly difficult, and the last thing I want to do when I get home is to read about, or talk about finance. But, I had some time at a remote location earlier this week which meant sitting in a hotel room by myself with only a few channels on TV, so I had some time to get caught up on everything and see what everyone is talking about these days.

And since tomorrow is going to be the biggest day for college football in many years, the last thing I’ll be thinking about tomorrow is finance or the economy. I need my Spartans to pull off something special and beat Penn State. Then, in a bittersweet turn of events, to clinch a Rose Bowl spot we need our sworn enemies, the Wolverines to upset Ohio State. I’m a bit torn, because I’d like to see the Buckeyes tear Michigan apart, but considering we haven’t been to the rose bowl since 1987, obviously that would be quite special. Of course, odds aren’t in your favor anyway when you need to beat one of the top teams in the nation, and you need one of the worst teams to upset another great team. But, it makes for an exciting Saturday!

Common Job Interview Questions -With unemployment on the rise, you might find yourself looking for a job in the near future. If it’s been a while since you’ve interviewed for a job, it can take a little time and practice to brush up your interview skills. Here are some common interview questions and how you should approach them.

Matt Furey: 101 Ways To Magnetize Money -Would you like your money to act like a magnet and pull in more money? That’s the first thing I visualized when I read the title of this post and book with the same name. Lazy Man reviews Matt Furey’s book to see whether or not it will help you make more money.

What is ROWE and How Does it Affect the Workplace? -What is ROWE? I had no idea, so I had to read this one. It was interesting to see that this business management strategy is used by Best Buy, and I hate that store more than anything. Maybe it’s because I know more about the products I’m buying than the people that work there and understand I don’t need $500 worth of Monster Cables to go with any audio/video product.

E-Trade Online Savings Account Opening Process -Have you thought about opening a savings account with an online bank, but was unsure about doing something like that online? Well, nickel gives a step-by-step outline of what this process is like with E-Trade, complete with pictures. This should give you a better idea of what to expect when opening your account.

Quick and Easy Ways to Start a Savings Plan Today -When times are tough and money is tight, saving money might seem impossible, but it’s during times like these that you need to have savings, and need to be disciplined. Frugal Dad has some great tips to help you get started with a savings plan today, and it won’t hurt that much.

Last Minute Gift Ideas and Shopping Tips For Holiday Procrastinators -I’m a big advocate of shopping early, mainly because I hate dealing with idiots on the road and at the mall. Unfortunately, I haven’t started any shopping yet! The clock is ticking, and the stores will only continue to get busier in the coming weeks. There are some good ideas on this list I can probably take advantage of to save me a headache or two.

Are You Ready to Lose Your Job? -Most people aren’t really “ready” to lose their job, but being mentally and physically prepared can make a job loss that much easier. If you know how a job loss will affect you, what benefits you’ll lose, what you’ll gain, and what your prospects are, you’ll be in a better position to get back on your feet.

100 Money Saving Tips for the Holiday Gifting Bonanza -Do you want to save money this holiday season? If so, this is probably the only post you’ll need. Jim has 100 great ways to save money, not only during the holidays, but at any time. It is quite a list!

Debt Reduction 101 - Beginner?s Guide To Debt Reduction -Are you trying to get out of debt but don’t know where to start? Don’t worry, we have NCN to the rescue. Here is a great beginner’s worksheet to help you start your quest to becoming debt free.

Transfer A Brokerage Account: How Much Does It Cost? -There are a lot of different brokerage options, and finding the best account with low fees is great, but it can come at a cost. Transferring out of an account often costs money. So, finding out what it will actually cost and help you determine whether or not it’s worth the move.

Five Things You Don?t Want to Hear From Your Financial Planner -This is a guest post by Jeff Rose, a CFP over on Moolanomy’s site. But here are 5 things you probably don’t want to hear your financial advisor tell you. Sadly, I’ve had to tell people all of these things quite a bit in the past few months. Of course, most people already know they need to do these things, but they just never admit it, or take action to fix it.

S&P 500 Down Nearly 50% in 2008 -I had to include at least one really depressing post. The S&P is down almost 50% this year. It sucks, I know. Be thankful you don’t have to work with clients who come to you for answers on a daily basis.

Friday Finance Findings for November 21st

If you’ve purchased a used car from a dealership in the past few years, you’ve undoubtedly encountered the extended warranty option. To be clear, while most of these are described by the salesmen as warranties, most are actually service contracts. A warranty is built into the price of the vehicle, whereas a service contract costs extra and is purchased in addition to the vehicle itself. A warranty and service contract both generally achieve the same goal, just keep in mind that if you have to purchase it on top of the vehicle itself, it’s probably a service contract.

On the surface, the added protection of covering your vehicle for an extended amount of time seems like a good idea, but before you jump in, make sure you understand what you’re getting yourself into. These are products that are pushed because they make money for the dealer and salesperson. There are times when buying the service contract can be a great idea and save you money, but there are plenty of situations where it is completely unnecessary and will just end up costing you money. And worst of all, there are actually some companies that are little more than scams.

Consider Your Situation First

Before you decide on whether or not you could use an extended warranty or service contract, consider your situation. First, does the vehicle you’re intending to buy have an existing manufacturer’s warranty that will carry over to you? If so, how many miles or years are left before it expires? Many auto manufacturers are including longer warranties that in most cases are transferable. So, if you’re buying a car with a 70,000 mile existing warranty and it has 15,000 miles on it when you plan on buying it, that’s entirely different than buying the same car with 65,000 miles on it. In the first scenario, buying the extended warranty would be a bad idea with so much life left in the existing warranty, whereas the second scenario might point to an opportunity.

Consider the Cost

To be blunt, many of these service contracts are expensive. That doesn’t automatically mean they are all a rip off, but you do need to consider the likelihood of needing repairs, what those repairs would cost, and then determine if it makes sense. Depending on a number of factors such as what is covered (i.e. is it comprehensive, or just powertrain?), the deductible, and the length of contract, prices can vary from just a couple hundred dollars to a couple thousand dollars.

What you’re ultimately doing is placing a bet that you think your repair costs over the length of the contract will be more than you paid for the contract itself. For instance, if you paid $800 for coverage that will last you about two years, you have to ask yourself if there is a good chance that over the course of those two years you’ll need to have $800 or more worth of work done. If it isn’t very likely, you might as well save your money. But if you think that is clearly a possibility, it might make sense. It’s like buying insurance. You never know if you’re going to need it, and if you don’t use it, it feels like wasted money. But if you do need it, you’re sure glad you have it.

Other Benefits to Consider

Another thing to consider with these types of service contracts or warranties are the possible other benefits. Many will offer a free loaner car when you have to bring your vehicle in for service. That can be extremely helpful if you’re in a situation where you need a car or don’t have many options for sharing a ride. Some may also pay for the cost of a rental car as well. So, if you’re in the shop for a few days, this can be a nice benefit to have.

In addition to getting a spare car when yours is in for repairs, some contracts also provide free towing service in the event you break down. While this isn’t as big of a concern if you have AAA or some sort of roadside assistance, if you don’t have these, it can be a fantastic benefit. Again, it’s something you hope to never have to use, but if you do, you’ll be thankful you have it.

Dealership Repairs vs. Mechanic

One thing you need to consider is the cost difference between dealership repairs vs. having your local mechanic handle it. Obviously, the dealership is going to charge more for parts and labor. It’s what they do. And if you buy a service contract, that generally means you have to take it to the dealer, or at least an approved location in order to have the work covered. Of course, if you have the coverage, you’re not paying for it out of pocket, so you don’t think much of it.

But, that’s where you have to decide if it’s really a value or not. If you’re shelling out money for additional coverage, what would happen if you took your vehicle in to a local mechanic instead? You would have to pay out of pocket, but since you’d be paying less for the same repairs, it still might end up cheaper than buying the service contract to begin with.

My Personal Experience

I’ll give you an example with a personal experience I’ve had with used cars and service contracts. We have two used vehicles. In one case, it was clear that buying additional coverage would be a waste. With the other, it was a little bit harder of a decision. With the second car, it had 23,000 miles, and the manufacturer’s warranty only went to 30,000. Since I would be the one driving and I put on around 18,000 miles a year, the prospect of running out of coverage after just three months from the purchase was the first indication we might want to consider adding coverage.

Then we had to decide what type of coverage we wanted. Just powertrain coverage, or something more comprehensive that covered everything from a broken door latch to the electrical system. Looking back at my scenario, I do a lot of driving, on rough roads, and harsh winters. The chances are pretty good that there will be more than a couple repairs needed over the coming years, so comprehensive was looking like a better option, but that all depends on price.

After all said and done, we were able to get a 100,000 mile service contract for $1,500 with a $50 deductible. Sound expensive? Yep. But, that’s where you have to decide whether or not you think you’ll need $1,500 or more in repairs over the course of 77,000 miles, or in my case, a little over four years. If you’ve ever had to pay for car repairs out of your own pocket, you know just how fast things can add up. So, I felt it was a pretty safe bet given the situation.

Sure enough, after about 8 months, we had a problem with the transmission. Total bill? Around $1,200. A year later, a few more problems developed. The radio wasn’t working right, the seat didn’t recline properly, and just a few other little misc. problems. Another $500. And just a few weeks ago, took it in for a terrible clicking problem with the master relay, a rapidly deteriorating wheel bearing, a leaking axle seal, and a leaking exhaust manifold, for another $1,800.

Now, that $1,500 + $150 in deductibles doesn’t look so bad considering the $3,500 in repairs, and the loaner car for about the 10 total days it’s been in the shop. Could the work have been done cheaper than that by taking it somewhere other than a dealer? Probably. But I also would have been in a situation where I would have had to rent a car, and a small shop may have required more time to get the repairs done. Of course, we could have been “lucky” and the car could have never had any problems, and it would have felt like throwing money away. You just never know.

The Verdict?

You have to be very careful. Any dealer is going to try and sell you one of these. They will make it sound like a great deal, but it’s up to you to do the research to determine whether or not it’s really worth it. I’d say that for most people, given the cost, these warranties or service contracts aren’t going to be worth it. But, if you do the math and find out that it could be beneficial, then it might be worth considering. But don’t let the salesman bully you into a contract.

A better option for most people would be to set aside a “vehicle fund” to work as your own extended warranty. If you put $1,000 or $2,000 into a high-yield savings and sort of earmark that for unexpected vehicle repairs, your money can actually earn interest while it’s there and ready in the event you need it. While you might miss out on some of the added benefits of buying coverage, you’re in better shape if you’re fortunate enough to have a car that doesn’t need any, or only minor repairs.

The bottom line? Generally, these are unnecessary and costly. In some cases, if your situation warrants it and the price is right, it can be worthwhile. Just make sure you know what you need, how much it will cost, and what you’ll actually get out of it before rushing into a decision. And most of all, read all of the fine print! Make sure you know what’s covered, what isn’t covered, and what all of the limitations are. This is where a lot of inexpensive contracts snag you. They offer a good price, but you find that a lot of stuff isn’t really covered and you really are just throwing money away.

Is an Extended Warranty on a Used Car Worth It? The Good, Bad, and Ugly of These Service Contracts

With the whole mortgage meltdown and ensuing credit crisis, there is plenty of blame to go around. Even with shady lenders, complex loans, and loose lending requirements, most of this could have been avoided if people took the time to read, and more importantly, understand what they were signing. Most people simply don’t want to spend the time to sit there and read all of the fine print and those who do actually read it may not fully understand everything.

Don’t Be Embarrassed if You Don’t Understand

When someone explains something technical or difficult to grasp and then asks, “Do you understand?”, the response is typically “yes.” Either it is because you want to get through the process quickly, you don’t think it is very important, or you don’t want to feel embarrassed that you don’t understand a concept. This could end up being a costly mistake. If you don’t understand something or if you see conflicting information, it is in your best interest to stop and ask questions. It’s much easier to take a moment before signing to get clarification than to learn the hard way at some point in the future.

Information Included in the Fine Print

Most people are concerned with a few key areas of a loan such interest rate and length of the loan, but it is within the fine print of the promissory note or security agreement that contains the information that can really cost you money. The most common information included throughout the text will include:

• The promise you make to pay the lender a certain amount of money plus the agreed to interest rate.
• Whether the interest rate is fixed or variable — if variable, when does the rate change and by how much.
• The payment schedule.
• Charges for late payments.
• Any applicable grace period.
• If the loan can be paid off early and if any penalties are incurred for doing so.
• Whether or not security or collateral is required.
• Whether or not the loan can be extended.
• What happens if you default.
• What happens if you pay with a bad check.
• Can the lender take money from other accounts you may have with them to repay the loan.
• Who pays legal fees and collection costs.

Don’t Sign Anything Until You Completely Understand

While it pays to make sure you get a good interest rate with good terms, it is equally important to make sure you understand everything about the loan even if you don’t think it will ever apply to you. You have nobody to blame but yourself if you make a late payment and find out there is a $40 late fee. It would come as no surprise if you took the time to understand what you agreed to. In the event of a problem with your account, ignorance is not a defense. It may seem like a waste of time to spend an extra ten or fifteen minutes to read multiple pages of small text, but it could end up saving you money or problems somewhere down the line.

And finally, don’t feel pressured by the person sitting across the table who’s urging you to sign. Not everyone is out there trying to trick you into a shady loan, but you shouldn’t feel rushed if they are just trying to quickly get you through the process. They can wait, and you should take as much time as you need. If they brush off certain sections saying it isn’t important, just explain that you want to take a moment to look it over. A couple extra minutes will ensure that you aren’t missing some key terms on the loan and help you completely understand what to expect, and what the consequences will be if something goes wrong.

Read the Fine Print Before Signing Any Loan - You Might be Surprised at What’s in There

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

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

After a little over a year of constant downturns in the economy and stock markets, some discussion is coming to light in terms of people reconsidering what retirement means, and how they are going to get there. I know I’ve seen this in my practice, as I’m encountering many more people who are approaching retirement in 10 years or less and they are seriously thinking about extending how long they work, or even changing their retirement plans.

It’s understandable that if you’re just a few years from retirement and you had a large stake in the stock market, the losses experienced this year are enough to rattle even investors who are typically risk adverse. But, what about the younger generation that typically reads this site? The bulk of readers here are in the 25-45 year old range, which puts a typical retirement at anywhere from 20-40 years away. With a longer time horizon, I wonder if the recent economic climate has forced younger people to begin thinking more critically about their retirement expectations.

Is retirement still too far off to really worry about at this point? Are you reconsidering how your investments for retirement are structured after what’s happened? Do you plan on working longer, or change your retirement goals?

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Poll: Have Recent Economic Conditions Changed Your Expectations for Retirement?

If you’re covered by a health plan, you’ve probably encountered the words deductible, co-pay, and co-insurance a number of times when examining your bills, paying your doctor for a visit, or simply looking at the benefits package from your employer. These terms can be a bit confusing, and with all of the limits, maximums, and different coverage options, it is important to understand what they mean so you can obtain the best coverage for the right price.

When looking at your health insurance options, it’s important to go beyond the premium. The premium is the amount you pay each paycheck or month just to have the coverage. Obviously, you want the lowest premium you can get for the coverage you want, but you really need to look beyond that. Saving $20 a month on your insurance premium may end up costing you hundreds of dollars in co-pays or out-of-pocket expenses. So, let’s take a look at how you can make sense of all these terms.

Defining the Terms

Deductible

This is probably the most straightforward, and easiest ways to change the premium on your policy. The deductible is the amount that you need to pay for a claim before the insurance kicks in. If you have a $50 deductible and you are billed for $500 in services, you’d need to pay $50 out of pocket before the remainder is sent off to the insurance company.

Obviously, the higher the deductible you choose, the lower your premium will be since you’ll be covering more of the expenses out of pocket. So, you have to be careful. If you choose a high deductible in an effort to keep premium costs down, a period of poor health or unexpected medical treatments could add up quickly.

Don’t forget the maximums. Deductibles usually have an annual maximum, for both individuals and families. When comparing plans or options within your plan, determine how likely it would be that you’d reach those maximums, and if two plans have different maximums, think about which one provides the best cost-to-benefit ratio.

Co-pay and Co-insurance

The co-pay is probably another common term you’ve heard, and have probably paid a number of times without thinking much of it. Co-pay and co-insurance are basically the same thing, but cover different items. In either case, this is the amount of money you have to pay for a claim or service rendered. The difference is that a co-pay is typically a flat dollar amount for a specific item such as an office visit, exam, or prescription. Co-insurance is typically based on a percentage. This means that you’re responsible for a certain percentage of a claim, and the insurance provider is responsible for the rest.

Again, when comparing plans, the co-pay amount or co-insurance percentage can play a big role in how much your premium is. A plan with an 80/20 co-insurance (insurance company pays 80%, you pay 20%) will have a higher premium than a 50/50 plan, and so on.

Compare All the Numbers

So, when you’re exploring your health insurance options, it pays to look at more than the premium. While the premium directly affects your bottom line, saving a few dollars on the premium could cost you much more in the long run, and paying a higher premium for coverage you might not need may also cost an unnecessary bundle.

This is especially important if you have a certain condition that requires specific tests or drugs, or if you are planning on having a baby, as the amount of coverage provided for these items may require digging a little deeper than glancing at your premium. So, take the time to completely understand your health benefits, and you can be sure that you’re getting as much coverage as you need, and paying no more than you have to.

Comparing Deductible, Co-Pay, and Co-insurance When Looking at Your Health Insurance Benefit Options

With the economy in recession, the stock market down, and companies trying to turn a profit, a lot of employers have started to cut back. For some, it might mean eliminating the company Christmas party, while other companies are making massive layoffs or cutting pay.

I’ve noticed a few things getting cut from our regular company expenditures this year, and after talking to friends and family, I’m hearing of even more. For instance, our annual conference was canceled. We generally all head somewhere warm for a week to round up all of the employees in our division, hold workshops, get updates on the company, and do some team building. That’s out. In addition, there have been some little items eliminated such as holiday gifts for some clients. So, while it isn’t anything drastic, there are some cuts being made.

From others I’ve talked to, I’ve heard of canceled Christmas parties and other holiday events. But some are even going a step further and making changes to expense reimbursement limits. In some cases this is a lower limit allowed for expensing meals, or cutting back on mileage reimbursement. Depending on how much of your job involves traveling, this could become a significant burden.

So, I’m just wondering if anyone else has noticed any cutbacks where they work. If things are being cut, are they just little things, or will these cuts directly affect your bottom line?

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Poll: Are You Noticing Any Cutbacks at Your Job?