Financial Tips

When your best friend views your nest egg as a source of start-up funds for his latest business venture, or your nephew hits you up for a car loan, your first impulse may be to reach into your bank account to help. But it's a fact that loans to family and friends often end up straining both finances and relationships. As Shakespeare said, "Loan oft loses both itself and friend." In other words, if you lend money to friends, you often don't get paid back and the friendship itself may disintegrate.

It's best to consider a loan to someone you love as an "arm's length" transaction. If you're pondering such a loan, keep the following in mind:

• You can just say "no." It's your money, after all. Do you really want to raid an emergency fund or dip into your child's college account to finance a friend's business idea? Think like a bank. It's reasonable to ask tough questions about the person's bank accounts, potential sources of income, planned use of loan proceeds, and spending habits before extending credit.
• Consider a gift. If you're comfortable sharing your resources, you may want to provide a monetary gift with no strings attached. In many cases, this is the best solution because neither you nor your friend expect the money to be paid back. Unlike a loan, this type of arrangement can forestall misunderstandings and hurt feelings later on. Of course, you should not give money if doing so would unduly strain your own finances.
• Formalize loans. If you decide to lend more than a small amount to a friend or family member, it's generally best to draft a written agreement. This can be as simple as filling out a promissory note (available online or at office supply stores). Such forms spell out the basic terms of the loan — amount, interest rate, payback period — and provide some limited protection should you and the borrower end up in small claims court. Another recent innovation is the use of direct lending (also called social lending or peer-to-peer lending) websites to facilitate loans between family and friends. For a fee, such sites can prepare loan documentation, send payment reminders, issue regular reports, even facilitate electronic fund transfers.

Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.

Back in your grandfather's day, folks didn't have to worry about the ins and outs of mutual funds, adjustable rate mortgages, and credit cards. Such options simply weren't available, so when people wanted to buy something — a car, a house, furniture — they saved for it. Not so today. In today's microwave, fast food, gotta-have-it-now society, credit cards are widely available and widely used. Though credit (especially for larger purchases) is not as readily available as it was a few years back, many people still find at least one credit card offer a week in their mailbox.

If you choose to open that envelope, fill out the application form, and carry that little plastic card in your purse or wallet, it pays to be careful. Here are three simple guidelines for using credit cards wisely.

• Don't just pay the minimum. You've heard this before. You go on a spending spree and charge $2,500 for a new wardrobe. If you make only minimum payments, you could take up to eight years to pay off your balance. If the credit card company charges an annual rate of 16%, you'll have racked up over $1,800 in interest charges. A good deal? Yes, for the card issuer. To avoid this pitfall, pay off as much as you can afford every month and don't use your card again until the balance is paid off.
• Avoid cash withdrawals. When withdrawing money from an automated teller machine, pull out your debit or ATM card. Using a credit card to get cash (also known as a cash advance) is a bad idea. Interest rates on such advances are typically higher than rates for purchases, sometimes several percentage points higher. The same holds true for those offers of "free money" in the mail. ("Just sign this check and the money's yours.") In reality, such checks are loans with high interest rates. A good place for such offers is the shredding machine.
• Don't overspend. Many studies have shown that people tend to spend more when using credit cards than when paying with cash. So be careful. If you can't really afford that big screen television this month, do the prudent thing and save for it.

We can't turn back the clock to our grandfather's era. But we can learn from him to cultivate wise spending habits, especially when using credit cards.

If you're a vacationer considering alternatives to high-priced hotels — say you just want a place to hang your hat, prepare an inexpensive meal, and mingle with the locals — home swapping may be the ticket. For a few weeks you relinquish your house keys to another family and, in exchange, take up residence in their home — maybe in a different country, maybe elsewhere in the U.S.

Sound a little scary? True enough, home swapping is not for the faint of heart. But following a few simple precautions can help ensure that your house remains safe and secure during your absence. And by avoiding costly hotels in expensive tourist areas, you may even return with a few extra dollars in your bank account.

If you're contemplating a home swap, here are a few things to keep in mind:

• Search for a suitable swap partner. Several websites — for example, homexchange.com — will let you list and post photos of your house and allow you to search thousands of available houses for trade. Before handing over fees to any agency, however, be sure to follow up with the Better Business Bureau and, if possible, contact others who have used the company.
• Check insurance policies. Make sure your home policy covers house swaps and your car policy allows you to add a named driver (if you plan to let the swap partner use your vehicle).
• Watch for extra charges. These might include fees for using the Internet or emergency repairs to the vacation home.
• Ask about the neighborhood. Is it safe to take a walk at night? Are there grocery stores, retail shops, and parks nearby? You want a pleasant vacation, not an excursion to a combat zone.
• Call, e-mail, Twitter — communicate! Build a relationship with your swap partner before trading homes. You'll gain a sense of the family who'll be staying in your house, and they'll build trust in you.
• Check references. Don't take their word for it. If the family has swapped homes before, it's reasonable to contact previous swap partners to ask about their experiences.
• Confirm all arrangements in writing. Written agreements should include exchange dates and an outline of expectations. If something goes awry, a written contract can prevent misunderstandings.

If you're pondering a new adventure or just looking for a low-cost vacation alternative, home swapping is worth considering. Just use caution.

Your child is approaching 16 years old and for the past several years, he or she has reminded you (daily, it seems) of this inevitability. You, on the other hand, have been trying to expunge the thought that a teenager — a teenager! — will soon be driving one of your vehicles.

Of course, there's at least one good reason for putting this thought out of your mind: the near certainty that your insurance premiums will spike upward when your son or daughter starts driving. Insurance companies can marshal an impressive array of statistics showing that the younger the driver, the greater the risk. In fact, teen drivers account for almost 13% of fatal accidents and the crash rate for 16-year-old drivers is nearly three times as high as for 19-year-olds. From an insurance company's perspective, insuring a teenager increases the risk of having to pay claims. To compensate for this higher risk, insurers charge higher premiums — sometimes 50% to 200% higher.

When it's time to insure your teen driver, here are five ideas for keeping car insurance premiums under control:

• Add the new driver to your policy. Unless your driving record isn't stellar or all your cars are new and expensive, it's generally cheaper to add a son or daughter to an existing policy.
• Assign the cheapest car to the teen. By linking the teen driver to your least expensive car, the insurer's risk is mitigated, which should result in lower premiums. Just make sure your son or daughter uses the assigned vehicle exclusively.
• Require good grades. Many insurers provide discounts for students who maintain a B average or better, a policy some parents have leveraged to good effect: keep your grades up or the car stays in the garage.
• Opt for a higher deductible. The higher the deductible, the more you pay out of pocket if there's an accident. If you have the financial wherewithal to cover the cost of fender benders, your premiums can be lowered by as much as 35% by, say, increasing your deductible from $500 to $2,000.
• Keep adequate liability coverage. Some people try to lower premiums by decreasing liability coverage. Bad idea. Remember, teen drivers are high risk. They're more likely than adults to involve other drivers in accidents. Without sufficient liability coverage, you could end up pulling money out of retirement savings to cover another driver's hospital bills.

Studies show that women often lag behind men when it comes to saving for retirement. That's especially troubling when you consider that, on average, women outlive men by three to seven years. One study, for example, found that a female retiring at age 65 can expect to live three years longer than a man retiring at the same age.

Women may accumulate less in a retirement account for a variety of reasons. For one thing, a woman's career is more likely than a man's to be interrupted to care for family members. Also, women are more often employed in part-time jobs. They may work for small businesses that don't offer retirement benefits, or in industries with low pension participation rates (such as the retail sector). When they do contribute to retirement plans, women tend to contribute less: 6% of gross income for women versus 7% for men, according to one survey. Women (again, on average) tend to invest more conservatively than men. Historically speaking, lower risk translates to lower investment returns and a smaller retirement fund.

What's a woman to do?

• Stay informed. Even if your spouse handles the family finances, discuss expected sources of retirement income, including pensions, life insurance policies, and social security. Make adjustments as needed to ensure that all expenses will be covered, even if your spouse precedes you in death.
• Save more. If still working, contribute as much as possible to your employer's retirement plan.
• Don't quit until you're vested. If you stick with a company for a specified time period (five years is common), you may be “vested,” meaning you're entitled to benefits even if you leave that particular employer. It's important to know your company's vesting policies. Sometimes women mistakenly quit a job before being fully vested in the company retirement program.
• Open a spousal IRA. Even if you're not working outside the home, open an individual retirement account in your own name. Your spouse can contribute to that account, up to $5,000 a year ($6,000 if you're over age 50).
• Review life insurance policies. Make sure you're named as the beneficiary on your spouse's life insurance policy. Also, review ownership of the policy to eliminate unexpected tax surprises.

For guidance in your retirement planning, give us a call.

If you want to contribute to a tax-advantaged retirement account that's outside your employer's plan, you have two main choices: the traditional Individual Retirement Account (IRA) and the Roth IRA.

These two IRAs differ in their provisions for deducting contributions and making withdrawals. With a traditional IRA, you're allowed to deduct current contributions from your income (subject to certain income limits if you also have an employer's plan). So today's income tax bill is reduced. With a Roth IRA, contributions aren't tax-deductible, but are made with after-tax dollars. Earnings on a traditional IRA account will be taxed when the money is withdrawn. With a Roth IRA, you're allowed to withdraw both contributions and earnings tax-free if you meet certain requirements.

The choice of which retirement account to use is not a one-size-fits-all proposition. If you assume you'll be in a higher tax bracket during retirement, nontaxable Roth withdrawals look pretty good. Some experts argue that Congress will almost certainly raise future tax rates to pay for a variety of government expenses, from economic stimulus programs to health care for baby boomers. If that happens, you may be glad you contributed to a Roth IRA because withdrawals aren't subject to taxes. Others note, however, that higher tax rates are by no means certain. Even if higher rates are enacted into law, they argue, most people will not generate enough income in retirement to see much effect on their tax bill. These experts prefer traditional IRAs, which put more money in your pocket today.

A Roth IRA is often seen as a good fit for younger workers. They're in lower tax brackets now, but may expect higher income in retirement. On the other hand, if you're approaching the peak earnings years (often ages 50 to 65), your income is more likely to diminish in retirement. Because a lower income generally means fewer taxes, the advantage of tax-free withdrawals becomes less important for older workers.

Also, the tax-deferral benefits of a traditional IRA may allow savers to lay aside more money today. For example, because of taxes you may have to earn $8,000 to put $5,000 into a Roth IRA. With a traditional IRA you may be able to sock away more money now, which could lead to a bigger pot of money in retirement.

Fortunately, it's not an all-or-nothing decision — you can contribute to a variety of retirement accounts. If you'd like help with your retirement planning, give us a call.

One of Shakespeare's oft-quoted lines — "Neither a borrower nor a lender be" — is sage advice, especially for many cash-strapped Americans. But perhaps you haven't followed Shakespeare's wise counsel. If credit card payments are taking a big chunk from your paycheck, you may wonder if it's a good idea to use your home equity to consolidate high-interest credit cards into a more affordable monthly payment.

First, a little background. Home equity is the difference between what your home is worth and what you still owe. If your home could sell for $200,000 and your mortgage balance is $100,000, you have $100,000 in equity. Banks and other financial institutions will often grant loans or lines of credit based on that equity. A home equity loan is essentially a second mortgage. By pooling credit card balances into a single home equity loan, you're not getting rid of debt — you're trading one type of debt for another.

Is this kind of debt consolidation a good idea? It can be. For one thing, a lower monthly payment can free up cash. Also, trading variable rate credit cards for a lower fixed rate loan can help with financial planning and bookkeeping, and may save you interest in the long run. In addition, interest on a home equity loan or line of credit may be tax-deductible.

With your credit cards paid off, lots of available credit could soon be staring you in the face. As Hamlet put it, "There's the rub." If you fail to modify the spending habits that dragged you into debt in the first place, you may end up making payments on a home equity loan and credit cards.

Another thing to remember with this kind of debt consolidation scenario: your home is on the line. Why? Credit card debt is generally unsecured. That means it's not collateralized by anything but your good name. If you don't make credit card payments, you may be hounded by bill collectors, but they won't foreclose on your home. Not so with home equity loans. They're secured by your house. If you default, you may find yourself looking for new digs.

Shakespeare also said, "To thine own self be true." In other words, don't kid yourself. If you're prone to impulse buying and likely to dive into debt again, think twice about taking out a home equity loan to pay off credit card balances.

Sometimes "luxuries," such as family trips and entertainment, get lopped off in the budget-slashing process. But we all need time to recharge, to have fun, to enjoy our families and friends apart from the daily grind. Without some of these so-called frills, we can work ourselves into ill health or just plain boredom.

Fortunately, you can enter the work-free zone of vacations and fun and still stay within a reasonable budget. Here are some ideas.

Vacations

• Travel off-season. You'll probably find the Caribbean or other warm locations more humid in the summer months, but cheaper rates can keep your vacation budget from overheating.
• Don't park at the airport. That's what friends are for, right? If you know folks who live close to the airport, ask to park your car at their home during your vacation. As an alternative, check out "park and fly" packages at nearby hotels.
• Take the airport less-traveled. Speaking of alternatives, you can often find cheaper rates by flying into an airport that's not as busy. Research fares to find which airport is cheaper for your vacation. Just make sure the distances to your hotel don't offset cost savings on air travel.
• Eat for less. Many hotels provide free breakfast, saving you the cost of at least one restaurant meal per day. Buy groceries and eat in your room once in a while. When you dine out, look for smaller neighborhood markets and eateries away from the high-priced tourist areas. They're often more affordable (and may be more authentic).

Entertainment

• Be patient and save. Instead of standing in line to view that must-see blockbuster, wait a few weeks and watch it at the discount movie theater. Or wait a little longer and rent it on DVD.
• Buy a family pass. If your home is near a zoo, aquarium, or museum, purchase a season pass for the family. You'll recover the cost in just a few visits and won't feel the pressure to see it all in one trip.
• Watch the amateurs. Enjoy high school or community college sports once in a while. High-priced professionals are, well, high-priced. Minor league games can also provide great family-friendly entertainment without breaking the budget.

With a little creativity, you can still enjoy delightful outings — even when money's tight.