Guide For Building A Diversified Investment Portfolio

Diversification is a time honored risk reduction method used in constructing investment portfolios. Usually it is recommended that the small investor own at least 5 stocks in 5 different sectors. While the concept is sound for the small or individual investor there are three problems. First, one may pick a stock that underperforms in an other wise strong sector. Second, stocks can be like time bombs. A major, unexpected blow up in one stock can lead to a major devastation of up to 20% of an investment portfolio. Third, working with individual stocks can be time consuming. To be done properly keeping up with developments in 5 stocks can take up 5-10 hours a week. That’s fine if you have the time, but if you have a demanding job and family it just may not be practical. Further, there are people who lack the temperament or skill set to properly research and utilize available information. For many people a practical alternative is called for.

One solution is to build a portfolio using closed end funds. Closed end funds have a fixed number of shares. Their price is determined by what people are willing to pay for them on the open market. They may trade at a premium or, more frequently, a discount to their net asset value per share.

Here is a sampling of closed end funds that could be used to build a diversified portfolio of closed end funds. Factual data is from and is accurate as of close of business 01/07/2010.

Tri-continental Symbol: Ty Price: $11.84
Established in 1929 this is the granddaddy of closed end funds. It invests primarily in large cap United States stocks. In a conservative portfolio it would probably be the largest holding.

Royce Value Trust Symbol: RVT Price: $11.13
This is a fund that invests in small cap United States stocks. Small cap stocks are a growth engine in a portfolio and typically about 20% of stock investment dollars would go into a fund like this.

Latin America Equity Fund Symbol: LAQ Price: $40.68
Foreign stocks should generally make up about 20% of a portfolio. It’s possible to invest in closed end funds that focus either on general regions or specific countries. The regional approach provides additional diversification.

Templeton Dragon Fund Symbol: TDF Price: $27.93
This fund invests in the Asia.

Central European And Russia Fund Symbol: CEE Price: $35.06
This fund invests in former Eastern block countries.

Spider S&P Emerging Middle East Fund. Symbol: GAF Price: $64.24
This fund invests in the Middle East and Africa. Investment opportunities in Africa are highly llimited and this is one way to play the last continent that is largely undevloped.

Cohen & Steers Total Return Real Estate Fund. Symbol: RFI Price:$9.75
This is fund that invests in a variety of real estate investment funds. About 10% of a portfolio belongs in real estate and this is way to diversify easily amongst numerous classes.

Full Disclosure: I am not employed in any fashion by any firm in the securities industry nor do I have a business relationship of any type with the companies mentioned. As of this writing I do have a small holding in LAQ. This is not an offer to buy or sell any security, nor is it a recommendation. These are simply my thoughts on these securities. Please consult your own investment advisor and research any security thoroughly before making any investment.

Basic Methods For Financial Growth

When we have several thousand dollars just sitting around it’s not always the smartest thing to just go ahead and pay off your debts but people do recommend you to do so. Personally I think it’s better to invest and slowly pay off your debt than to pay off your debt right away because when you do need the money, you’ll just put yourself in debt once again. Here are a few ideas:

Start a Business

If you’re interested in being an entrepreneur then why not start your own business? There are many different things you could do and there’s no reason to do anything that’s a new way of doing things. Sometimes the older ideas work better than having brand new concepts. People do things that have been proven to make money. Internet businesses are just standard businesses but with a world-wide interface. Do things you’d normally do in a business but use the internet to innovate how you do it.

Invest in other business ideas

Businesses become successful only with some support from the outside community and sometimes they need investors. You could do that, invest for a small percentage of their business or a high return of interest. Sometimes it’s smarter to do the latter because the business might fail in the long run however if the business is a great idea and you feel confident that having a percentage will pay you off much more than the high interest rate in the long run, it’s a better idea.

Bank CDs

Some people prefer to invest into CDs and feel safer doing it that way. CDs are not complicated but have a minimum to invest in them. Sometimes they do have a maximum as well so be sure to do your research and figure out which CD would fit your needs best. The time period for the CD is also set so when you put money into a CD, often times you can’t take it out. Don’t put too much money into a CD because you might need that money before the CD is done.

Pay off Student Loans/Debt

If you are absolutely not sure what you want to do with that money, the best bet is paying off your student loans or debt. If you want to pay off or reduce what you owe, you’ll have lower monthly payments and that’ll help you in the long run. If you don’t have any debt then just put your money somewhere safe until you decide what to do with it.

Investment Tips For Couples

Question: My spouse and I just tied the knot this year and I’re eager at the prospect of sharing our lives together. One of the things I want to achieve now as a couple is to be financially secure. I would like to invest our funds together. I would like to know of any tips or advice you can offer for couples who are investing? – Mark

Since you are asking about investing, I assume that you have funds tucked away already. This can provide as your starter money pot which you can put to work.

If you don’t have funds built up yet, make sure that you establish an emergency fund first. THIS IS A MUST. Ideally, your emergency fund should be able to sustain six months’ equivalent of living expenses. This amount will guarantee that you and your family will be all right if something undesirable happens, such as a accidents, job loss, illnesses etc.

With an emergency fund out of the way, you can take a more active role in investing. Since you are going to invest as a couple, below are steps you should follow:

1. List common goals. Spend an hour or two with your wife and map out financial targets for the family. Some of these goals may be for the medium term (such as a new house) or for the long term (such as a worry-free retirement). If you are planning to have kids, you must also take into account financial goals to meet their educational expenses.

2. Have the same opinion on a time horizon for investing. Based on your goals, you can set a time frame to achieve them. With a concrete goal and a specified time frame, you are more likely to achieve your goal. For instance, you can say that you’d like to have your dream home in 10 years. You can then prioritize saving for the building expenses of your house, or saving for the down payment of a house and lot purchase in the next ten years.For your nest egg for retirement, start saving as early as now so you won’t have to catch up and put in big amounts later in life. Compound interest will make your money increase over time.

It may be useful to discuss with a financial planner together to plan an investment strategy considering your goals, time horizon for investing, and your investment personality.

3. Be sincere about your individual assets and liabilities. By clearing this up early on, you will keep yourself from anxiety and potential disagreements later on.

4. Commit to talk about investment selections before arriving at a decision. Being the head of the family does not mean that your wife cannot share her own ideas in investment decisions. Make investing a mutual activity and settle on on your options together.

5. Get to know each other’s willingness to take risks. In investing, there is always a certain level of danger. Investments with lesser risk, such as time deposits and money market instruments, may be good for people who are old-fashioned and are cautious of risking their money. Investments with higher risk, such as stocks or equities and real estate are well-suited with those who are more aggressive. There is a middle ground, investments like bonds and bond mutual funds or bond unit investment trust funds, for instance, for those who are prepared to take just a slight more risk in the anticipation of earning a profit, but are hesitant to go “all the way” in investing.

Find out at what level of risk you and your wife are comfortable with. Take investments suitable for that level. In case you differ in your appetite for risk, find a common ground.

6. Organize the number of investment accounts. Don’t swell out your investments much among multiple banks, brokers, or financial institutions as it will take time to keep track of everything. Keep things simple!

7. Analyze your investment portfolio on a regular basis. Evaluate your investment’s performance against your financial targets. Fine-tune your approach if needed.

8. Store vital papers safe. Have your documents kept in a safety deposit box in a bank or in a well-protected safe at home. Keep copies in a classified file which you and your partner can only reach. Let each other know where vital docs are so these can be effortlessly retrieved in case of an urgent situation or upon the unfortunate death of any of you.

Tips For Managing Your Cash Flow

Before I can really talk about managing your free cash flow, you’ve got to know what it is and how you can acquire some. Wikipedia defines free cash flow as:

cash flow available for distribution among all the security holders of a company.

As I’ve talked about before, if you view your personal finances as a business, you’re the sole shareholder of your “company”. Therefore all of the free cash flow belongs to you.

Essentially, it is the money that is available to you from your income after you’ve paid all necessary expenses. If you’re budget is constantly tight, you’re not going to have much cash flow to manage and you’ll need to come up with ways to increase your free cash flow. This can be accomplished in one of two ways: by increasing your income or reducing your expenses. It sounds simple enough, but coming up with specific action plans for this can sometimes be difficult.

I’d also like to mention that I’ve seen far too many people concentrate solely on reducing their expenses. While this is good to do, it leaves out the other side of the equation which would help speed you on your way to your ultimate financial goals. Don’t forget to also spend some time trying to increase your income as you also focus on reducing your expenses.

Once you have managed to free up some cash flow, you’re going to need to know what you ought to do with it. This is where so many people get in trouble because their are so many choices and everyone is vying for a piece of what you’ve got. I break down all of these choices into four basic categories to simplify things:

  • Pay down debt
  • Save
  • Invest
  • Spend

These aren’t in any particular order, but I wouldn’t put Spend near the top of the list, although that’s what most people do with it. You’ll have to decide what is best for your personal situation to do with the money that’s available to you. Establishing an emergency fund may be high on the priority list for some, while others may look to invest because they’ve already got an emergency fund. You may choose to allocate your funds equally among all of the categories so that you’re making headway on all fronts. Whatever you do though, make sure that it’s a conscious decision with your goals in mind.

If it helps you, try to think of your finances like a business. By doing this you’ll want to increase and manage your free cash flow so that it provides the most growth and benefit to your overall finances. So take some time to figure out what your current cash flow looks like and how you can increase it so you can allocate it how you best see fit.

What Type Of Bond Should I Buy?


Most bonds are issued by one of three groups:

  1. the U.S. government or federal agencies;
  2. state and local governments, and
  3. corporations.

Here’s a breakdown of the types of bonds you can purchase from each institution:

Bonds issued by the U.S. government are called “Treasurys”…because, as you guessed, the U.S. Treasury issues them. There are four types of Treasurys:

Bills – maturities from 90 days to one year

Notes – maturities from 2 to 10 years

Bonds – maturities over 10 to 30 years

Savings bonds – redeemable without penalty after 5 years

All Treasurys carry the full faith and credit of U.S. government, which means that the U.S. Government has promised to pay you back. Another nice added benefit is that you don’t have to pay state or local taxes on any interest income you make on Treasurys. You can buy Treasurys on-line directly from the government. Savings bonds can be bought in very small amounts and are designed for small investors. For other Treasurys the minimum is $1,000.

Municipal Bonds

Bonds offered by state and local governments, or municipalities, are known as municipal bonds, or “munis.” Any interest income you make on munis is free from federal income taxes, and some states will also drop state and local income taxes (in that case your interest income is “triple tax free”). The trade-off for the tax break is that often you’ll get a lower interest rate than you may find with other taxable bonds. How much the tax break is worth to you depends on your income tax bracket and the state in which you live. The Bond Market Association provides a calculator to determine “equivalent taxable yield” on municipal bonds for you. Go to for this information. But don’t buy munis for an IRA or other tax-deferred account where you already have a tax break!

Corporate Bonds

Corporate bonds are considered riskier than Treasurys and most munis because all companies are susceptible to competition, economic conditions and even mismanagement that can lead to uncertainty about their ability to pay bond holders and other creditors. The upside is that you will be compensated for taking this somewhat higher risk. The lower the company’s credit quality, the higher the interest rate you’ll be offered for buying the bond.

Corporate bonds come in three maturity ranges:

Short-term – 1-5 years

Intermediate term – 5-15 years

Long-term – 15+ years

Zero Coupon Bonds

By now you’ve grasped that coupon means interest. So why in the world would anyone invest in a “zero” coupon bond? Investing in a zero coupon bond doesn’t mean that you’ll earn no interest. It just means that you won’t receive your interest payment on a twice-yearly basis like regular bonds. Instead, the bond is sold to you at a discount – meaning you can purchase it for less than its face value. Then, when the bond matures, you collect true face value, that is, all of the interest plus principal in one lump sum. Why would someone want to buy a zero coupon bond? Well, for one thing zeros are more attractively priced than other bonds. And they’re useful for investors who are looking for a set payout on a given date instead of a steady payout stream over time.

Examples of investors geared for zero coupons? Someone investing for a child’s college tuition or looking for a lump sum upon retirement. One drawback is that unless your zeros are held in a tax-deferred retirement account or education IRA, you will have to pay taxes on the interest before you receive it, which may be a financial burden for some investors.

Why Should I Invest In Bonds?


  • Financial Security Who doesn’t like the sound of “financial security”? There’s a reason that a bond is called a “fixed-income” security – not only are you highly likely to get back your principal but you can also count on receiving interest on your investment.
  • Portfolio Balance & Diversification Bonds can be great financial “buffers.” When the stock market is on a roller-coaster ride, bonds can help steady your pulse because they’re a very safe financial tool to help balance the risk in your overall portfolio.
  • Tax breaks Who doesn’t want a tax break? One of the not so well known facts about bonds is that they’re very often free from many taxes. For example, most bonds issued by state or local governments (also known as “municipalities” or “munis”) are exempt from federal income taxes. All bonds issued by the U.S. Government (also known as “Treasurys”) are exempt from state and local income taxes. Some municipal bonds (“munis”) are free from all three – city, state and federal taxes – a condition known as being “triple tax free.”
  • Weighing the Risks Probably the first thing you’ve heard about investing is that it’s never risk-free. True enough. And although highly-rated bonds are considered one of the safest ways to invest your money, you should still take the risks into account before making any decisions.
  • Bankruptcy Bond issuers are not some mysterious “Wizard of Oz”-like entities. They’re companies and units of government. And, sad to say, companies and sometimes even local governments can go bankrupt and default on their loans. Bonds with high credit ratings very seldom default and U.S. Treasury securities are considered essentially risk-free. But it’s a fact to consider. Even bonds (except Treasurys) aren’t risk free.
  • Your bond is “called” Some bonds can be paid back early – what’s known as your bond being “called.” If you own a callable bond and it is called you will still be paid back your initial investment and any interest you’ve earned so far, but you will not receive the future interest you would have otherwise gained. From our example, let’s say your 9% bond was called after 8 years. You would be repaid your initial $1,000 investment (the principal), plus the $720 you had accumulated in interest. However, you would not receive the additional interest you were expecting when you made your initial investment for 10 years. Most important, if the company decided to call the bond, chances are that interest rates are now lower and you won’t be able to find a similarly rated bond paying as high as the original 9% interest you were receiving.
  • Rising inflation If inflation rises, the interest you make on your initial investment will look low compared to bonds currently being issued. And with your money locked in a bond, you could lose some principal if you sell it in order to move it into another investment that could give you a higher rate of return.
  • Selling your bond before maturity If you decide you need your money back earlier than the date that your bond matures, You’re taking “a chance” that you may get more, or less, than you paid. This depends mostly on the interest rates at which new bonds are being issued. That’s why individuals who invest in bonds typically plan to hold them till they mature. And that’s why it’s important to determine when you’ll want, or need, to reach your financial goal in order to purchase a bond that matures at that same time.Now that you understand the benefits and risks, you should better understand the importance of bonds as part of your overall portfolio – they add some safety and stability to your investment plan. Next let’s look at your bond buying options.


What Is An Annuity?

Annuities are widely promoted by financial institutions as a retirement planning tool. They are not always as simple as they sound, however, and they are not always the best choice for every investor. If you are considering investing in an annuity—or if someone else is trying to convince you that you need one—take care to understand the benefits, costs and risks before you invest.

Annuities are investments that you can use to turn savings into a dependable income stream for retirement or to provide financial support for your loved ones after your death. 

An annuity is a contract between you and a life insurance company. The contract requires you to save and invest money in the annuity now or on a regular basis until you reach retirement age.  Then the insurance company will pay you in regular installments for life, or for a defined term, when and if you decide to “annuitize” or start withdrawing your money in regular payments over time.  You can begin annuitizing, or withdrawing money out of the investment right away or at a later time.  If you are not taking income right away, your investment in the annuity will grow on a tax-deferred basis, meaning you do not have to pay income tax on the money that your investment earns.  You may also be able to withdraw your money in a lump sum after a period of years if you choose not to annuitize, depending on the terms of the contract.

Annuities are sometimes described as an investment program wrapped in an insurance policy, and that is essentially what they are.  You will pay a premium (annual fee) for the investment and the money beyond the premium price will be invested in the annuity will be invested either in fixed-rate assets (such as bonds or bond mutual funds) or variable-rate assets (such as stocks, stock mutual funds, or real estate).

Typically, an annuity will offer several different types of guarantee—or insurance—as part of its features. The most common guarantee is a death benefit, or a sum of money that will be paid to the person you name as your beneficiary in the event of your death.  This might be a defined amount, or it might be the net amount of the money you have saved through the annuity, minus any costs or fees.

Other guarantees might insure that:

  • the income from your annuity continues for a defined term or for as long as you or your survivors live (even if the amount of that income can change under certain conditions),
  • your survivors will get back at least the amount that you put in (otherwise known as your principal) even if the investments have not performed well
  • you will receive a minimum rate of return regardless of market conditions.

Annuities carry both benefits and risks.  The benefits are the guarantees and the investment choices.  The basic risk is that your money can be locked up for a long period of time, and you may have to pay big penalties if you need it sooner.


Only people who hold a license to sell insurance and mutual funds can legally sell annuities. These people may work for different financial institutions—banks, brokerage firms, financial planning companies—or they may be independent licensed financial advisors. 

Every annuity has a life insurance company behind it making the guarantees. Sometimes this insurance company is part of the company that is trying to sell you the product. Or it may just be paying a sales force to distribute its product.

Annuities are not insured by the Federal Deposit Insurance Company (FDIC) the way bank accounts are. It’s important to know that the life insurance company behind any annuity you are considering is financially healthy enough to stand behind its guarantees when it comes time for you to collect your money.

Life insurance companies are rated by three different agencies (A.M. Best, Moody’s and Standard & Poor’s) on the basis of financial strength, claims paying record and other management issues. While ratings can be complicated, the letter “A” is the thing to look for. The more “As” a company has, the more financially strong it is. AAA is the best rating. You can also check on the company and the person selling the annuity through your state insurance department.

There are many different kinds of annuities designed for investors:

  • of different ages
  • with different life goals,
  • with different investment needs and
  • in different tax brackets.

Most annuities available today have some combination of these features:

Single Premium or Flexible Premium

With a single premium annuity, you invest one large lump sum, perhaps money you have received through an inheritance, divorce or your employer’s retirement plan.  Flexible premiums mean you can pay smaller premium amounts in installments over a defined period of time.

Immediate or Deferred

With an immediate annuity, you convert your savings to income right away.  With a deferred annuity, you don’t start taking the income until some point in the future, such as retirement age.  With a deferred annuity, the underlying investments grow tax deferred (meaning the investment returns are not subject to income tax) until they are “annuitized” or converted to income. With an immediate annuity, there is no benefit of tax-deferred growth.

Variable-Rate or Fixed-Rate

These terms refer to how the money you save in the annuity is invested.

Variable-rate annuities typically offer a choice of mutual funds, usually stock funds or combinations of stock and bond funds, whose returns will vary with the stock market.  You may be able to choose where you will invest your money from several different funds, or to allocate percentages of your money to different funds.  You may or may not be guaranteed a minimum rate of return on your investment.

Because at least part of your annuity’s return depends on stock market performance with a variable-rate annuity, it also has the increased earning potential.  However, in exchange for the potential of making more money you also take the risk that the value of your money could decline.  Over the long-term, the stock market generally rises, but in the short-term it can rise and fall, sometimes quite dramatically.  In general, variable-rate annuities are better for people who do not need their money for at least 10 years and can leave it invested even if the stock market loses value for a period of time.

With a fixed-rate annuity, your money is invested in bonds and other fixed income investments, and the rate of return or a minimum rate of return may be guaranteed by the life insurance company.  Fixed-rate annuities offer more earnings certainty, but less growth potential than variable-rate annuities.  Fixed-rate annuities are generally better than variable-rate annuities for people who need their money soon, and cannot or do not want, to take the risk that it could decline in value.

Let’s look at an example.  Joyce is 45 years old and just received a significant amount of money through an inheritance from her father.  She would like invest a portion of the inheritance in something that she can as supplemental income when she retires.  She doesn’t anticipate retiring for another 20 years so she doesn’t need to access the money right away.  A single-premium, deferred variable-rate annuity might be a good choice for Joyce.  If the value of the investments in the annuity decline because the stock market drops, she still has time to wait for the market to recover and the value to rise again.

In contrast, Tony is 65 and has chosen to take a lump sum from his retirement plan.  He will need income right away to supplement his pension, savings and Social Security.  For Tony it might make more sense to purchase single-premium, immediate fixed-rate annuity that pays out a set monthly amount beginning in the near future.  He needs a dependable amount of income right away and may not be able to afford to have its value fluctuate with the stock market.

Different Options When You Annuitize

With every annuity, you will likely reach a point—probably at retirement age or later—where you want to “annuitize” or begin taking income from your annuity.  Different contracts offer different options for you to receive your income.  You may be able to schedule your annuity payments:

  • On a set monthly, quarterly or annual schedule
  • As personal income or the rest of your life or for a defined number of years
  • As regular income or a lump sum to go to your surviving spouse or beneficiary if you should die before collecting your entire annuity.

The amount of income you will receive depends on:

  • the amount you put into the annuity,
  • the amount your annuity investments earned, and
  • the way you choose to take the income.

Some annuities may pay a fixed-rate of income; some may adjust the income you receive to keep in pace with inflation; and some annuity income may vary with how the annuity’s underlying investments increase or decrease in value.


Any investment choice depends on many factors including your personal circumstances, your age, the amount of risk you feel comfortable taking, the amount of time you have before you need the money, and your other assets, investments and financial realities. 

When you are young, it’s typically better to take advantage of other types of retirement savings programs such as 401(k) plans at your job and IRAs—which have more tax benefits—before you consider investing in annuities.  If you end up needing the money you have invested in an annuity before you reach age 59 1/2 you will probably have to pay some penalties for early withdrawals.

As retirement gets closer, annuities might seem more attractive because they offer the option to “annuitize” or convert your savings into regular income, which you will most likely need or want when you stop working.  You will need to decide if the benefits of an annuity outweigh their risks and fees.

There are some people who may find annuities attractive, including:

  1. Working people who are already making maximum contributions to their 401(k), IRA or other qualified tax-advantaged retirement plans but still have surplus cash they want to devote to saving for retirement.  Because annuity premiums are not tax-deductible, it’s usually better to take full advantage of these other options first.
  2. People who are confident they will not need access to their money for a long time or until they are ready to change their savings to regular income, usually at retirement age.  Many annuity contracts impose heavy penalties of for withdrawals taken in the early years of the contract, and an additional 10% tax penalty applies to withdrawals taken before age 59 1/2.
  3. People at or near retirement age that have a lump sum of money they want to, or need to, convert to predictable income over a period of years.  An annuity can make this process easier because an insurance company does all the calculations to determine how much income you can regularly receive while still having enough money to last in the annuity for as long as you need it.  The insurance company also usually guarantees the income for the term of the contract.


The costs of owning an annuity can include:

  • annual fees for the insurance company’s guarantees and administrative services
  • annual or periodic management fee charged by the mutual funds or other underlying investments and
  • the sales commission paid to the salesperson.

These fees will usually be quoted as a percentage of the total amount you invest in the annuity.  Some fees will be deducted before your money is invested; others will be deducted from your account on a regular ongoing basis.  You should ask for a detailed list of these costs, and anyone selling you an annuity should be willing to provide it.

If the annuity has a guaranteed death benefit, the insurance cost will likely be higher for an older person.  This is because life insurance companies price their guarantees based on a person’s statistical life expectancy.  Life insurance gets more expensive with age.

Annuities are considered long-term investments and there are usually stiff penalties for withdrawals in the first five to seven years of the contract.  You may not see any benefits from the investment returns earned during that period.  Annuities commonly impose “surrender charges” on people who decide to cancel their contracts in the early years.  These charges can range from five to seven percent of the annuity value and decline over time to zero in year five or seven.   Some contracts allow owners to withdraw up to 10% of their principal each year without penalty after a certain number of years, or they might waive withdrawal penalties if the case of serious illness.

The risks of owning annuities include:

  • The possibility that you will need the money sooner than planned and will have to pay a penalty if you have to withdraw your money before the annuity term.
  • The risk that the investments made for variable-rate annuity do not perform as well as intended, leaving you with less income than you originally planned on.
  • The risk that the insurance company behind the annuity runs into financial trouble and does not fulfill its guarantee when the time comes for you to collect your money.


Questions You Should Consider With Annuities


  • Does buying an annuity fit in well with my overall retirement savings plan that includes IRAs and employer-sponsored 401(k) plans first?
  • Am I maximizing my contributions to other tax-free retirement investment options first? Unless you have a special need that only an annuity can fill, such as a death benefit or immediate income, you are likely to get more tax advantages at a lower cost by making tax-deductible contributions to these other plans.
  • Am I missing the full advantage of an annuity’s tax-deferred investment returns by investing in an annuity through an IRA or other account that already lets you defer income tax on the investment returns in the account? It’s usually better to invest in an annuity outside of an IRA to get the most benefit from both the annuity and the IRA.
  • Do I understand all the costs and risks of the annuity I am considering, including all the fees and possible penalties involved in the annuity itself, as well as any risk in the underlying investments?
  • Do I know specifically what is – and what is not – guaranteed under the annuity contract?
  • Have I considered that it might be more cost-effective to purchase life insurance and invest in mutual funds separately rather than “bundling” the combination in an annuity? This could be especially true if you are young and healthy.
  • What isthe rating of the life insurance company behind the annuity?
  • Is the person selling me this annuity legally licensed to do so?
  • Do I understand how I will get my money out of the annuity as well as how I will put it in?
  • What will my choices be when I reach retirement age? How much income can I expect to receive?
  • If I decide not to annuitize, can I get my money back in a lump sum? Will there be any penalties?
  • What happens if I die before or after I annuitize? What will my beneficiaries receive?
  • Am I entitled to a “free look” period? Some states require companies to allow you to review an annity contract for 10 days before you invest.




10 Tips To Grow Your Savings

The summer can be a good time to review your finances and think about how to begin taking small steps toward reaching your financial goals. One way to build your money confidence is to look over your budget or your current finances and see if you can carve out some savings – even just $10 or $25 a month is a great place to start!

Regardless of your age, how much or how little you already have saved, or how little you feel like you can save, it’s never too late to start saving for your future. Every little bit – at every stage – can add up to a significant amount.

By applying savings toward your first financial priority you’re going to:

  1. build your confidence about managing your finances, and
  2. invest to help create a more secure financial future.

Following is a suggested list of 10 smart places to consider applying your savings. Take a minute to think about your financial goals, to see where you could begin creating some savings, and then consider one or more of the following options for how to make your savings work for you:

  • Pay down your debt. Did you know that paying off your credit card debt is one of the smartest financial decisions you can make? Most people would jump at the change to invest in something that pays an interest rate of 18, 19 or 21%. When you pay off your credit card debt it’s like paying yourself back that much interest by not having to pay it to your creditors. So why not direct some savings toward paying down one or more of your credit cards? You could try tackling the credit card that carries the highest interest rate, and then when you have paid off that card, start making headway on paying off the next credit card you own that has a balance. Or maybe you want to boost your confidence by paying off another card that has a lower balance first, closing that account, and then working toward paying off another card.
  • Fund a college savings plan. Use some savings to open, or increase funding to, a college savings account for yourself, a child or relative. There are a variety of accounts such as 529 plans, UGMA and UTMA accounts that enable you to save for college and lower your taxable income at the same time. Learn more about your options to save for a college education.
  • Begin saving for retirement. Open an Individual Retirement Account (IRA) or another retirement savings account. By law you can invest $3,000 tax-free in an IRA each year to use for your retirement, and an additional $500/year if you are 50 years or older. Regardless of how close you are to retirement, it’s never too late to begin saving. Use our online retirement calculator to determine your retirement income needs and to see how your retirement savings can begin adding up to give you the kind of secure retirement you have always wanted!
  • Increase your retirement savings. See if your employer allows additional employee contributions to your 401(k) retirement savings plan.
  • Save automatically for emergencies. Check to see if your employer, credit union or bank offers an automatic savings plan. It can be much easier to begin saving on a regular basis if you make it automatic. You might be surprised to see how much you can begin saving when you authorize your bank or credit union to automatically withdraw a set amount from your paycheck and direct it to a savings account. If you’re already having some money automatically deposited into a savings account, consider increasing that amount. You can use those savings as your emergency fund – an account where you keep enough money to cover 3-6 months’ worth of expenses in the event of an emergency. Having an emergency fund can give you peace of mind if the unexpected happens and can prevent you from having to put everyday or one-time expenses on your credit card during an already difficult time.
  • Examine your insurance. Review your insurance coverage (i.e. life insurance, health insurance, car insurance, long-term care or disability insurance, homeowners’ insurance, etc.) and consider whether coverage is adequate for your current life situation. If not, decide what you need to do about it and create a plan for socking away some savings to afford the increased coverage costs.
  • Check your PMI. If you are a homeowner and you have at least 20% equity in your home (meaning that you have paid down at least 20% of your home’s appraised value), then you no longer need to maintain private mortgage insurance. If you took out a loan for more than 80% of your home’s value (which was appraised when you purchased the home), your lender required PMI. In that case, you have been paying PMI since you began paying on your mortgage. Lenders are required to drop your PMI requirement automatically when you reach 80% equity, but sometimes that doesn’t happen. Check with your lender to see if you are currently paying PMI and if you still need to. If not, cancel it and have that amount automatically redirected to a savings account instead of spending it.
  • Lower your mortgage principal. If you are a homeowner, consider making one extra mortgage payment a year. You can do that by writing one additional check a year to your lender and writing “to principal” in the memo portion of the check so your bank will know you want to apply the entire amount to your principal. Or you can change to paying your mortgage biweekly. That doesn’t mean you pay the full amount twice a month – it means that you just split your normal monthly payment in half. By making payments biweekly instead of monthly you will automatically make one additional payment a year which can take nearly seven years off your mortgage – and save you the interest you would have paid on that amount as well!
  • Create a down payment fund. If you’re not currently a homeowner, consider starting a savings account to accumulate a down payment to purchase a home. Visit our “Home Buying 101” section to learn more about the process of buying a home and how to make the dream of homeownership a reality for you.
  • Create a “fun” fund. Why not put take some savings and create a personal “fun” fund to pay for those little extras like visiting an amusement park, going on vacation, going out to eat, buying birthday gifts, etc.? If you have kids or others that will share in the fun, let them in on your plan. By creating a designated fund for those expenses you can budget ahead of time to know how much you can realistically afford to spend, pay cash instead of using a credit or charge card — and not be surprised by unanticipated credit card bills.

Taking just one manageable step can inspire you to take the next step, until you begin to see how a small amount of savings can make a big difference in the long-run!


What's The Difference Between Saving And Investing?

Saving means to put some money aside for later use. When your kids are little, you encourage them to put some of their birthday money in their piggy bank. When they get older you may open a savings account for them to deposit some of the money they earn from jobs. It’s the same way for adults. Saving means taking some money and putting it aside for later – maybe saving for holiday gifts or for vacation or for longer-term goals like paying for college, buying a house or saving for retirement. You can save your money at home or you can save money and deposit it in a savings account with a local bank. Investing means taking money that you have saved and using it to buy or participate in a business venture that offers the possibility of profit, or interest. You could invest by taking some of your savings and purchasing a savings bond, buying stock, or depositing money in a certificate of deposit (CD).

To plan ahead for your future, it’s a good idea to making saving a priority. Even if it’s saving just $10 from each paycheck or a little bit of money you get from occasional work or an unexpected check and putting it in a savings account, every little bit counts. Want to know how? Say you save just $20 a month, or $10 from each paycheck (if you get paid twice a month). At the end of one year, you will have saved $240. If you continue saving that same amount for 5 years you will have saved $1,200! Once you begin saving you’ll want to make that money work for you by investing it wisely. Why? Because when you invest money you have the opportunity to earn something called interest.

What is interest?
Interest is a fee. It’s the amount of money you either earn on an investment or the money you owe on a loan. When banks or other financial institutions give you credit, such as when you borrow money to buy a home or a car, they’ll charge you interest, or a percentage of the amount of money you borrow, for using their money. On the other hand, you can also make money by earning interest when you invest your money. Examples of investments where you can earn interest include depositing money in an interest-bearing checking or savings accounts, bonds, Treasury bills or bonds, certificates of deposit, money market funds, stock or bond mutual funds, or individual stocks.

Earning interest on savings
Over the past few years, Oscar has managed to put a little bit of money aside from paychecks, odd jobs, and gifts to save $1,000. Recently he learned that he could deposit money in a savings account at his local bank. He heard that his money would be protected by law and that he would earn interest for opening an account. He deposited his $1,000 in a savings account at ABC bank in an account that earned 3% interest annually. At the end of the year Oscar had earned $33 just for opening the account and leaving his money untouched.
Earning interest on an investment

Laura and Roberto received cash gifts from relatives for their wedding and combined it with some personal savings to accumulate $7,500 in savings. They weren’t ready to settle down right away but knew that they wanted to buy a home in 3 or 4 years. They met with a personal financial advisor and decided to invest $7,500 in a stock mutual fund. The funds’ interest varied each year, but after 4 years they had earned approximately 7% interest annually and saw their original $7,500 investment increase to approximately $9,800.

Paying interest on a loan
Carla and Jose just moved to a new apartment. They could barely afford the monthly rent, but they needed furniture. They charged furniture using a three-year finance plan at a local department store. They ended up charging nearly $5,200 in furniture at an interest rate of 14%. By signing a long-term loan at such a relatively high interest rate they’re actually going to end up paying an additional $1,032 for the furniture. A better idea would have been to get a lower cost personal loan through their bank or company’s credit union, to have borrowed money from family members, or to shop for lower cost, gently used furniture they could afford to pay for in cash.

The biggest loan that most people ever take on is a home mortgage. Say for example that you sign a 30 year fixed rate home mortgage for $50,000 at 10% interest. Your monthly payment will be $439. That means that for 30 years you’ll pay $439 per month for your home loan. Over the life of the loan that 10% interest that you’re paying will add up so that by the time you’ve paid the loan off 30 years later you’ve actually paid the bank $157,965 – more than 3 times the amount you borrowed to buy the home!

Although that sounds like a lot, it’s just meant to demonstrate that interest adds up. One way to is to make even just one additional mortgage payment toward principal on your loan each year. By making that one additional payment toward your principal you can cut the life of your loan by 9 years and save over $38,000 in interest!

What difference does the interest rate make?
Even a small difference in interest rates can make a big difference in how much you’ll owe or you’ll earn. The key is when it comes to debt you want a low interest rate and when it comes to saving and investing you want a high interest rate. In other words, you want to pay the least amount, or find the lowest interest rate when it comes to borrowing money and you want to earn the most, or look for the highest interest rate you can get, when you invest your money. How do you find the highest rate? Ask the loan officer at your local bank how much interest you’ll be charged. If you’re depositing money in a savings account or investing money in instruments like stocks, bonds, or mutual funds, ask how much interest you’ll earn. Take that information and call or drop in to other banks and ask them the same questions. Compare what interest rate you’re offered.

Small differences in the interest rates charged on debt can add up. For example, if you’re buying a home and you’re offered an $85,000 mortgage at 9% your monthly mortgage payment is $684. The same mortgage at 7% would lower your monthly payment to $566. Even though 2% doesn’t seem like a big difference in interest, it adds up to savings of over $120 a month.

The same holds for credit cards. Check what interest rate you’re being charged on your card(s). For example, if you used a calculator on, you might see that:

  • Let’s say you’re carrying $1,250 in debt on a credit card charging a 12% interest rate. If you stopped using the card today (meaning you didn’t charge anything else), and began paying the debt off at $50/month it would take you 29 months to pay off the debt entirely. After 29 months, in addition to the $1,250 you originally owed you would have also paid $178.89 in interest, for a total of $1,428.89.
  • Let’s raise the interest rate on your card to 18%. If you owed the same $1,250 on the card and paid the same $50/month, it would take you 31 months to pay off the card completely and you would have paid an additional $121 in interest, for a total of $298.74 in interest. In total you would have paid the credit card company $1,548.74 for making $1,250 in charges.

Shop around. Before you open an interest-bearing savings account for your savings, or invest your money or take out a loan, ask specifically what interest rate you’ll be earning or paying. Compare interest rates that you’re offered by various banks in the area.

You’ve worked hard for your money and by saving and wisely investing, you can make it work for you. Knowing how much interest you’ll be charged for a loan, or how much interest you can make on an investment, is an important part of managing your money.

Will I get the same interest rate everywhere I go?
No. Banks and financial institutions set their own interest rates. Car dealerships, check cashing stores, department stores, credit unions…the interest rates they offer for purchases vary. It’s important that you compare interest rates when you want to borrow money, earn money by depositing money in a savings account, or when investing money. Call area banks and ask a loan officer what interest rates they charge for their various loans or what interest rate they offer for their savings accounts or for their various investment options. You can use the Internet to do some research as well.

Remember that investing your money is really about you loaning your money to someone else. When you’re comparing different investment options, such as bonds, stocks, mutual funds, and CDs, you’ll want to see how much interest they either guarantee to pay out, for example, on Treasury bills, bonds, or CDs or how much interest they’ve paid out in the past (stocks, mutual funds) that might be an indicator of how much interest they’ll pay out in the future. Remember that investments such as stocks do NOT guarantee how much they will appreciate, or grow in value. You are not guaranteed to make money when you invest in stocks. You can only know how much money investors have made in the past by owning the stock.

Whatever investment you choose, the higher the interest rate offered, the more money you’ll earn on the money you invest. A note of caution: typically the higher the interest rate the greater the risk.

Remember that under law, you cannot be discriminated against when applying for a loan. That means that not only can you not be denied a loan on the basis of race, sex, religion, or national origin, but you also can’t be charged a higher interest rate.

What is a subprime loan?
“Subprime” loans carry a higher than average interest rate and typically charge more fees than traditional loans. You can get a subprime loan when applying, for example, for a home mortgage or a car loan.

If you have a less than perfect credit history (such as paying bills late, filling for bankruptcy or being foreclosed on, carrying a high level of debt or having an unstable employment history) you may be offered a subprime loan. How will you know if it’s a subprime loan? The loan may:

  • Carry a higher interest rate than the standard interest rate offered by the bank or financial institution you’re working with
  • Have a lower loan limit, meaning that you may not be able to borrow as much money as you would like, or as much money as you could if you had better credit. How much difference does the higher interest rate on a subprime loan make? Consider the example of two brothers – Greg and Ray.
  • Greg manages an auto parts store. He has been putting aside 5% of every paycheck into a savings account monthly since he started work and pays his bills on time. When Greg goes to apply for a home loan he qualifies for an $110,000 mortgage at 7%. His monthly mortgage payment will be $732.
  • Ray is a claims adjuster. He frequently pays the minimum amount due on his credit cards, periodically forgets to pay his utility bills on time, and has accumulated a high amount of credit card debt. Because he has a poor credit history he qualifies for the same $110,000 mortgage but at 12% interest. That means that Ray will pay $1,132 a month FOR THE SAME MORTGAGE AS GREG. That means that Ray is going to pay about $400 more A MONTH than the same mortgage as Greg simply because he doesn’t qualify for a loan with a lower interest rate.

If you have poor credit, like Ray, you may only qualify for a subprime loan. However, if you have good credit you should not feel pushed into a subprime loan, especially if you suspect it’s simply due to your race or gender. The Equal Credit Opportunity Act (ECOA) prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance. If you are denied a loan, or offered a loan that charges a higher interest rate than is advertised, you have the right to find out why.

To make sure that you’re getting the best, most fair loan you qualify for:

  • Shop around. Check for at least three different options when borrowing money. Call banks, credit unions, look online, or talk to a nonprofit counseling agency to make sure you’re getting a loan with the lowest possible interest rate with the loan terms you want.
  • Get the entire contract in writing and read it. Know exactly what you’re paying for. Be on the lookout for additional costs such as life insurance, warranties, and ask about anything else that is added into the contract that you’re not sure of.
  • Ask questions. If there is anything you don’t understand in the loan documents you’re signing, ask until you are clear on the terms and conditions of your loan.
  • Don’t ever feel pressured to sign anything you don’t understand or aren’t comfortable with.
  • Don’t agree to anything over the phone or by someone making door-to-door sales calls. Ask them to leave or mail information to your home for you to review instead.
  • If you do begin to turn your financial habits around to improve your credit (i.e. paying your bills on time, reducing the number of credit cards you use, etc.) talk to your lender about refinancing your loan. The bank may lower the interest rate on your loan, which will save you money.

How can I make interest rates work for me?
Again, the key is to make sure that you’re earning the most interest possible on money you’re saving and investing and that you’re paying the least interest possible on money you’re borrowing.

Before you deposit your savings in a savings account or before you invest your savings, you’ll want to call around or do some online research to find out which bank or financial institutions will you offer the highest interest rate on savings accounts or on various investment options such as certificates of deposit (CDs), bonds, stocks, or mutual funds.

When you’re borrowing money, do a periodic interest rate check-up. Pick a date, maybe once a year, and take a look at the interest rate you’re paying on your credit cards, loans, or mortgages. You should be able to find the interest rate easily by looking at a recent statement. If you’re not sure, call your bank or credit card company and ask them to look up your account. They should be able to tell you, over the phone, what interest rate you’re being charged. Do a little research to compare it with current rates offered by other cards and banks.

You may be able to save a substantial amount of money by refinancing your home mortgage, auto loan, even your student loan. The general rule of thumb is that you should consider refinancing if your current interest rate (the interest rate you’re paying on a loan) is more than 2 points HIGHER than the current rate being offered. So, for example, if you have a 30-year fixed rate mortgage at 9.75% and the current interest rate is 7% you should think about refinancing. But you’ll also want to consider a few things in addition to the interest rate being offered like application fees and closing costs. You’ll want to add up the total cost of refinancing before signing papers to refinance your loan.

In many cases you can also transfer your credit card balance to another card offering a lower interest rate. Or call your current company and ask if they’ll lower your rate if you’ve been a good customer. Again, before transferring your debt to another credit card, check to find out what fees you’ll be charged for the transfer and check the interest rate you’re being offered on the new card and that it’s not a “teaser” rate – meaning that it will only be good for a short period of time (i.e. 30 or 90 days) and then will increase significantly without you realizing it.

Save To Invest

Saving and investing. Those two words can dredge up fear and frustration in the hearts of even the most well-educated, competent adults. Why? The list of reasons is long. See if any of these ring true for your situation?

“It takes more time and expertise than I have to figure out where to invest,”
“My paycheck barely covers my current expenses, how can I possibly think about saving?”
“A budget is too restrictive. I’ll earn more money later in my career and I’ll invest then.”
Whatever the excuse, there’s no way of getting around the fact that saving and investing are the two keys critical to your future financial security.

It used to be that people worked hard at their careers for 40+ years, put a little money aside, and then retired comfortably off their savings, Social Security and maybe a pension at the age of 65. No longer. Today Americans live longer, need more money to maintain their lifestyle as they age, and yet save less than any other industrialized country. On top of all that, fewer people these days have fixed-amount pensions to count on. The reality is that you’ll need to make your hard-earned savings work for you by investing that money wisely, with both your short and long-term financial goals in mind.

Saving and investing will give you the upper hand when faced with unexpected problems. It can cushion the emotional and economic blow of a divorce or accident. It will enable you to take advantage of opportunities you may otherwise have missed out on, like actually taking that second honeymoon instead of just talking about it. In a word, saving and investing gives you options.