Real Estate Investment Trusts Explained

A Look Into Real Estate Investment Trusts

Real estate has always been an attractive asset class.  Some of the primary reasons investors are drawn to this asset class is due to the benefits it can provide such as diversification, income generation, inflation hedge and low volatility.  There are a myriad of ways to invest in real estate:

There is direct ownership through residential, commercial or other properties, and there is the option of purchasing shares in real estate investment trusts or other securities.  Those with smaller portfolios tend to stick to REITs, shares of companies heavily weighted toward real estate, and exchange-traded funds (ETFs) oftentimes based on liquidity needs and preferences.  Index funds have become a popular choice due to their ability to achieve diversification, while avoiding the volatility associated with individual shares, by having exposure to a large group of different REITs.  In this blog post, we will take a deeper dive into REITs, an investment that was once predominantly considered an “alternative asset class,” but now gaining a foothold in mainstream investing and solidifying its place amongst the core asset classes.       

Background of Real Estate Investment Trusts

A “REIT” is a real estate investment trust.   An entity that invests in different kinds of real estate or real estate related assets.  Examples include office buildings, hotels or condominiums, shopping centers, and mortgages secured by real estate. They come in three forms.  The most commonly used is an “Equity REIT,” which invests in or owns real estate and earns income from the rents they collect.  The other two variations of REITs are “Mortgage REITs” and “Hybrid REITs.”  Mortgage REITs typically lend money to owners and developers and Hybrid REITs are basically the two just described above, combined.  

REITs invest in income producing properties and pass on the profit to investors via dividends.  REITs must distribute at least 90% of any profit to its shareholders in order to receive preferential tax treatment.

Evaluating REITs

Investors in REITs look at several things when evaluating REITs:

• The level of compensation of management in addition to the credibility and competency of those managers.
• Make sure a REIT's debt level isn't too high. A general rule of thumb is that the REIT's aggregate loan-to-value rate shouldn't exceed 55 percent. 
• Ability to increase earnings in a reliable manner
• Fast and effective reinvestment of available cash flow
• Strong operating characteristics such as strong tenant relationships and accepted accounting practices.

Investors can buy, sell and trade shares of REITs similar to a normal stock.  When assessing the value of REIT shares, your analysis may include:

•   Anticipated growth in earnings per share
•  Corporate structure and management quality
•  Comparison of dividend yields as they relate to other investments with high income potential such as bonds or dividend paying stocks
•  Comparison of share price to funds from operations (FFO).  Achieved by adding back depreciation deductions to earnings.
• Anticipated total return from the stock
•  Underlying asset values of the real estate or other assets

Advantages of a REIT

• Income is generated from rent received.
• Access to large commercial real estate projects
• Entry and exit is easy
• The correlation of REITs to the major indices is low compared to other industries. Therefore they may be an attractive addition to a portfolio based on diversification.
• The value of the REIT increases as the value of the real estate increases too therefore the share price will go up.
  

Disadvantages of a REIT

• Targeted on one particular sector of real estate. If this sector does not perform well it may lead to a substantial decrease in the investor’s money.
• The dividend payments are not guaranteed and the real estate market is subject to cyclical downturns
• Performance can be dependent on demographic/economic factors.  An overabundance of construction activity may negatively affect performance of REITs in that area.
• With 90% required to be distributed to holders each year, only 10% of annual profits can be invested back into the business.  REITs grow more slowly than the average stock as a result.
  

A REITs Ideal Environment

REITs and real estate in general can do very well in an environment where interest rates are gradually rising as a result of an improving economy.  Their balance sheets are oftentimes shielded from the impact of rising interest rates due to their laddered maturities and limited debt. However, it is important to note that sometimes high-yielding assets are at greater risk of reducing their dividends than ones that already pay lower dividends. The low interest rate environment we have been experiencing has given REITs the ability to enjoy the advantages of long-duration financing, and low interest rates as compared to that of the market.  REITs also own hard assets, which is complementary to an inflationary environment and rising economy, which boosts the value of the real estate serving as collateral due to the fact that as prices rise, replacement cost rises.

Source:REIT Growth and Income Monitor- covers 122 REITs with total market cap of $589 billion, as of the end of June, 2013. 

REITs can be a great tool to have in a portfolio, but investors should be educated as to the limitations and risks associated with this type of investment.  You should consult a registered investment advisor before including a REIT into your investment strategy.   

Why Should I Use Dollar Cost Averaging?

The Ins and Outs of Dollar Cost Averaging

There has been a lot of discussion regarding the effectiveness of dollar cost averaging these days.  The chatter has grown louder especially since the release of reports by investment professionals such as Vanguard, highlighting the benefits of lump sum investing – Click here to read more about the findings. 

The truth of the matter is they are both useful strategies depending upon an investor’s situation and goals.  Although Vanguard researchers and some historical evidence suggests investors may earn more by diving into the market with a lump sum  (primarily due to the fact that overall markets have gone up more than they have gone down), there is still a lot of compelling reasons to apply a dollar cost averaging approach. 

Let’s start with the true definition of this strategy.  Dollar Cost Averaging:  Investing in the market in equal installments at regular intervals.  This is essentially what you do every time a portion of your paycheck flows into your 401k or other employer-sponsored retirement plan every pay period. Let’s look at some of the benefits of this strategy:

°         It is a simple and effective means to placing money aside in an automatic pilot manner. 

°         Forces investors to buy more shares when prices are low and fewer when prices are high, which will generally decrease your average price per share.

°         Tends to be the victor when compared with lump sum investing during volatile or falling markets.

- Vanguard compared investing $1M in lump sum with investing it over time using the dollar cost averaging approach.  Vanguard analyzed over 1000 rolling 12 month periods and found lump sum investors would have seen their portfolios decline in value during 22% of the time, resulting in a loss of $84,000 during that period of time.  Those who employed the dollar cost averaging approach experienced losses 18% of the time, resulting in a typical loss of about $57,000. 

- I can’t give one side and not divulge the other.  During strong markets, dollar cost averaging resulted in about 19% less than lump sum investing, and in a typical market this strategy may cost investors about 3.6% of their holdings. 

°         Dollar cost averaging minimizes regret (Many times investors will drop lump sum amounts into the market right before a market downturn due to the difficulty in timing the markets)  With dollar cost averaging you aren’t concerned with timing the markets and achieving high octane returns.  You are more concerned with being able to sleep at night knowing there is a strategy in place that can minimize downside risk. 

Let’s look at how a portfolio using the dollar cost averaging methodology would react in various markets:

°         In a market where prices are rising steadily, a portfolio using dollar cost averaging, will not do as well because the full gain on the price is captured by the full amount of money invested at the start. 

°         In a market where prices fall steadily, this type of portfolio will lose money, but typically won’t lose as much as the lump sum investing based portfolio.

°         In a market where prices fluctuate but return to their starting point, this strategy will typically gain a positive return.

Again, there are of course benefits to lump sum investing if the circumstances are right.  However, dollar cost averaging is a great strategy to use to keep you engaged in a disciplined investing plan with the added benefit of easing the psychological and emotional strain associated with the ups and downs of the markets. 

It is important to note, although dollar cost averaging can help to reduce timing risks, it does not guarantee a profit and does not guarantee protection against loss. You should consult your financial advisor before implementing an investment strategy.  

Ways to Save Money This Summer

Summer Savings

Saving money is top of mind for just about everyone these days. With vacationing and other summer fun activities front and center, saving is no easy task. Why not explore and take advantage of creative ways to save?  Here is a list of resources and tips that will help you do just that. 

Saving at Home

Cell phones:  Many of us have cell phone plans that don’t fit our needs, but we still don’t take the time to find a more suited plan.  www.billshrink.com and www.validas.com will evaluate your usage to identify where you can save.  www.myrate.com will allow you to compare rates.  You can get free texting service at www.texplus.com. 

Water/Coffee:  Many households rely on bottled water these days.  You would be surprised how much you can save just by purchasing a Brita filter and drinking the filtered tap water instead.  You can now savor the taste of Starbucks’ and Dunkin Donuts signature blends right from your own home.  So why spend $5.00 at the store for the same thing?  Make it at home and save!

Movies/Books/Music: Rather than going to Red Box or paying for pay per view flicks, visit the library. The library is a great place to access free movies, work out videos, books, and music.  Also, take advantage of the free e-books available for download on kindles or other devices.  There are sites such as www.hulu.com and www.crackle.com  that offer free movies to download as well

Computers: You don’t have to pay upwards of $30 for computer protection.  Avast Antivirus and Microsoft Security Essentials is free.  You can also save when troubleshooting computer issues by visiting www.techguy.org.  If you are looking for an online storage solution, check out Windows Live Skydrive.  It will provide free storage space (currently 7 gigabytes of free space), and protects files and photos from crashes or theft. 

Heating/cooling: Ask your local electric or gas utility for a free or low-cost home energy audit. The audit may provide ways to reduce home heating and cooling costs by hundreds of dollars a year.

Groceries: Bankrate has a great compilation of ways to save on groceries.  Click here to read more.

Online shopping: www.freeshipping.org directs you to retailers who offer free shipping on every order and it also gives you coupon codes to get free shipping at other retailers. 

 

Automobile Savings

Repairs/service: Almost everyone has had an experience where they feel their auto service bill is questionable.  Visit www.repairpal.com to see if you are getting a good deal on car service/repairs.  

Car values: If you are in the market for a new or used car, and want to see what others are paying currently for that specific type of vehicle, visit www.truecar.com. www.edmunds.com is another good resource.

Gas:  Gas buddy is an app that helps you find gas stations sorting either by location or price, using GPS technology. 

Click here for more cool apps to make your drive easier. 

Travel Savings

Passports: Instead of paying to have your passport photo taken at the post office or CVS, take a picture with your digital camera and upload it to www.epassportphoto.com. 

Hotels:  Visit www.priceline.com for a searchable database of hotel freebies. Then check out www.tripadvisor.com to read reviews of thousands of hotels.  If you are trying to determine if promotional offers are worth it or not, check out www.dealbase.com.  This site offers a “deal analyzer,” which dissects promotional offers to let you know just how much you’ll really save by going with that deal.

Airfare:  Visit www.kayak.com to find the cheapest fares available.  Then go to Bing’s Travel “price predictor” to help you decide the best time to buy.  It can forecast when the cost of the airfare will go up or down.  www.yapta.com tracks fares for you and will shoot you an email if the cost of your flight goes down. 

ATMs: Check out www.allpoint.com or www.moneypass.com for ATM machines that won’t charge you for using them.

Dining Out:  If you are looking to save while dining out with the family, check out www.kidsmealdeals.com.  This site will find restaurants offering free meals for kids.  Many restaurants have deals like this in place on one specific day during the week. You can also find deals by checking out www.groupon.com and www.livingsocial.com. 

Car Rentals:  www.kayak.com offers deals on car rentals, but click here to see some highly rated apps that can help you as well.  Car rentals.com is another excellent site to search, and they recently came out with their own app as well, which has been receiving great reviews. 

Financial Savings

Credit report:  Don’t underestimate the power of your credit score.  This number will have a huge impact on your ability to obtain loans, and will help determine the rate you get.  Visit www.annualcreditreport.com for your free annual report.  Visit www.creditkarma.com to obtain your free score. 

College:  www.upromise.com turns your everyday spending into money for college education.  Cash rewards for eligible purchases such as groceries, gas, dining out and travel can be automatically transferred into your child’s 529 account.  You can also visit sites like www.fastweb.com to search colleges, look up scholarship matches, get financial aid tips and advice, and more.  A great site to review is http://www.savingforcollege.com/tools_calculators/.  It is packed with calculators, tips, 529 information, and featured scholarships. 

Banking:  Visit www.findabetterbank.com to compare banks and credit unions in your area that fit your needs and preferences such as free checking, online banking, overdraft protection, etc…

Enjoy the summer months, and remember to take advantage of all of the excellent tools and resources available to help you save!

Rising Debt in Seniors, Setting the Stage for Boomers?

There has been an unsettling trend presenting itself, which is becoming more pronounced year after year – Rising debt in seniors.  As cuts and pullbacks threaten the very programs on which they heavily rely, and their nest eggs suffer irrecoverable damage as a result of the recession and low interest rates, many seniors are struggling to stay above water. 

The Numbers Don’t Lie

• According to a Census report released last Thursday, the median level of debt among households led by someone 65 or older rose nearly 120% between 2000 and 2011.  The main cause, rising mortgage debt. 
• The survey also revealed people 55 and over accounted for almost 27% of bankruptcy filings in 2011
• In a recent survey of low and middle income households carrying credit card balances, research and advocacy group demos concluded that people age 65 and up have more credit card debt than any other age group.  The Economic Benefits Research Institute also found the median credit card debt of a typical 75 year old increased 110% during a recent three year stretch.
• Surveys also reveal that over the past two years, there has been a 27% spike in the number of retirees requesting help from the Association of Independent Consumer Credit Counseling Agency. 
• According to the AARP, at least half of all seniors pay for medical expenses with credit cards, and more than 20% use their retirement accounts to cover the credit card bills.
• According to a survey released by Fidelity Investments, nearly half of boomers expect to retire with debt.

The Causes are Widespread

• The increase in home ownership by seniors, and spike in the use of home equity loans accounts for some of the debt.
• The Global Financial Crisis, which wiped out an estimated $16 trillion had a profound effect on the retirement nest egg of many seniors and boomers.
• Providing financial support to multiple tiers of the family tree is causing huge financial strain on boomers and seniors.

§      About 52% of individuals over age 45 who have children are providing them with financial support, some even taking them back in the home due to foreclosure or job loss.

§      35% are providing financial support to grandchildren, according to a Merrill Lynch report.

§      About 16% are providing financial support to parents or in laws, and many have taken on the responsibility of being the primary care giver to their parents.

§      About 10% are providing financial support to siblings

Resources to Help

Downsize Your Debt Before You Retire

National Council on Aging offers Benefits Check up, which is a free and confidential service that helps seniors and their caregivers find financial support for food, housing, health care, in home services, medications, and more.

Medicare offers information on getting help paying costs

IRS offers free tax preparation by volunteers

For help with paying heating/cooling bills, telephone bills, and assistance buying nutritious food, click here.

Red Flags Seniors Should Look For and Ways to Protect Yourself Financially

It is so disheartening to see those who have worked their whole lives and given so much, struggle to just “get by” in their daily living needs.  There are tons of additional resources available to seniors and boomers on the web as well.  If you want to speak with someone directly regarding financial help, there are many reputable registered investment advisors capable of assisting you or your loved ones, us being one of them.  

What You Should Know Before You Start Investing

Financial World – Basic Training

New investors, or investors who simply aren’t seasoned in the areas of finance, sometimes struggle to make sense of the sea of options available to them. 

Before you can create a successful portfolio that aligns with your specific financial situation and goals, you must first have a basic understanding of the investment vehicles (stocks, bonds, mutual funds), as well as concepts such as risk vs. reward and time horizon.  Then you have to have a general idea of what the market is doing, how it is reacting, and what those forces causing the reaction are.  You must then marry this with your own beliefs, predictions, and goals, then continuously monitor all of the above. 

To make it even more challenging, more and more options are becoming available to investors, and our economic and geopolitical worlds continue to shift at an ever increasing pace.  It is no wonder so many are admitting they would benefit from the advice of financial professionals (see survey results from our last blog entry). 

Our first responsibility as financial advisors is to educate investors.  This duty is ongoing, and is at the forefront of our minds every day.  Here is an article which is great for beginning investors.  Written by John DeFeo of the Street.com, it captures some basics and links to very good resources.  Enjoy!

How To Invest and Make Your Money Grow

Financial Literacy Low, Need for Financial Guidance High, and Geier Asset Management Answering The Call To Action

Financial Literacy Survey Reveals the Need for Advisors to Up Their Game

Financial Literacy Month has come to an end.  However we are left with some very powerful data to reflect on.  The National Foundation of Credit Counseling (NFCC) and the Network Branded Prepaid Card Association released the results of the 2013 Financial Literacy Survey.  The survey focuses on American’s attitudes and behaviors relating to finance. 

Not enough savings, not being able to pay financial obligations, health insurance, credit, and job loss were the top 5 financial concerns plaguing those consumers who participated in this survey (about 2,037 adults).  The numbers in these categories are amazing!  However, that was not what concerned me the most as a financial advisor.  The numbers that were even more unsettling were those related to grading their knowledge of personal finance.  40% of U.S. adults gave themselves a grade of C, D, or F, and 78% agree that they would benefit from additional advice and answers to everyday financial questions from a professional.

Click on the link to read the article by Credit Union Magazine, and get access to the actual survey results.   

http://www.creditunionmagazine.com/articles/38392-survey-reveals-consumers-top-financial-concerns

So why aren’t they reaching out to a financial professional?  What is holding them back?  Lack of trust, myths such as “I have to have a lot of money to work with a financial advisor,” not knowing where to find a reputable advisor, fear of sharing something as intimate as your financial life?  Whatever the reason, these numbers are alarming, and need to be reversed.  This serves as a call to action to advisors everywhere.  What can we do to help individuals and families take the next step with confidence and comfort? 

We have decided to offer free one hour financial consultations including 401k and investment portfolio reviews during the month of June.  Even if you just want to come in and ask questions relating to financial planning, retirement planning, saving strategies, refinancing options, or investing in general, we are ready and waiting.  Let’s change the numbers!  Give us a call at (410) 997-8000.  

Roth IRA Explained

The Anatomy of a ROTH IRA

Unfortunately the numbers aren’t real impressive when it comes to the number of Americans who have saved well for retirement.  According to a new Employee Benefit Research Institute survey of 1,003 workers age 25 and older and 251 retirees, 49% of workers say they doubt their ability to afford a comfortable retirement and 28% of employees say they don’t feel confident at all about their retirement prospects.  Saving for retirement seems to be a discussion many need to have.  There are different ways to save for retirement, but we are going to focus on one in particular in this post.

A ROTH IRA is one of the most popular retirement vehicles used today.  It has become a favorite among advisors primarily for its tax friendly benefits. Even if you already have an employer sponsored retirement plan, a ROTH IRA can be another excellent tool to complement your existing retirement savings strategy.  Below are the primary positive characteristics of a ROTH:

• Earnings and withdrawals are generally tax-free
• Unlike traditional IRAs, ROTH IRAs don’t require withdrawals during the owner’s lifetime
• Beneficiaries of ROTH IRAs don’t owe income tax on withdrawals and distributions can be stretched out over many years
• They allow owners to take penalty – free qualified distributions at age 591/2, but the first contribution must be at least 5 years before qualified distributions begin
• After 5 years, up to $10,000 of earnings can be withdrawn penalty – free to cover first time home buyer expenses
• You can contribute to a ROTH as long as you would like

There are a couple of limitations that should be pointed out as well:

• There are no tax breaks for contributions to a ROTH IRA
• Unlike traditional IRAs, ROTH IRAs are subject to income – eligibility restrictions.  Click here for a detailed chart of the 2013 income contribution limits.

If you are interested in opening a ROTH IRA, ask your financial advisor or give us a call.  If you would like to do your own research, check out www.mint.com/ira-center.  It is a great place to compare institutions and view minimum deposits, annual fees, etc…

Being Smart Regarding Debt and Savings

A Little Goes a Long Way

Sometimes it is difficult to visualize or imagine something little having a large impact.  That very mentality oftentimes keeps us from implementing strategies that can help us reach our own financial freedom.  Instead, we may find ourselves overwhelmed, procrastinating, and trying to justify doing nothing as a result of this almost paralyzed state.  It only takes one small act to operate as the trigger for a series of positive financial steps that will unfold in an almost serendipitous manner.  It helps to see examples or have it explained in a plain and simple manner.  I’ve selected three core areas to demonstrate how a little can go a long way.

Mortgage

1.)    Add an extra amount to your monthly payment ($20 or $200…either way it will make a difference).  Doing so will reduce your interest, as more is being applied to your principal, and this will also shorten the length of your loan.

(Make sure the extra is being applied to the principal and read your contract to ensure you won’t have to pay pre-payment penalties).

2.)    Making biweekly payments is a good option to consider if you can arrange to have this done automatically by your mortgage lender without third party intervention and without fees!  By making half of your regular mortgage payment every other week, you are in essence making 26 half payments or 13 full monthly payments at year end.  The extra annual payment can take about 6 years off of a 30 year mortgage.

Visit www.dinkytown.net for calculators that can show how much interest you can save or how many years you can chop off of your loan.

Credit Card Debt

1.)    Pay more than the minimum!  Take a $10,000 balance @ 18% APR – that would work out to be $250 minimum payment, which would cost you an extra $14,423 in interest (not including the $10,000 original balance you owe)

2.)    Use balance transfer cards offering 0 percent interest.  (You will have to pay a transfer fee of between 3-5% but if you know you are going to be making payments for a year or more—it is worth it).

Visit www.calcxml.com/calculators/how-long-will-it-take-to-pay-off-my-credit-card

Savings

1.)    Putting aside a little extra money every week can have a huge impact!  For example, just $20/week will equal to more than $1,000/year.  If you assume a 5% annual rate of return, after 10 years you will have $13,700.  After 20 years that number would grow to $36,100…and on and on.

2.)    Set up an automatic transfer from your checking account to your savings account, or have money automatically flow through to your savings account from a payroll deduction.  This way you are paying yourself without actually having to remember to and without requiring action on your part.

The important point to take away from all of this is that no amount is too small.  Every little bit helps when you take the time to put on your macro lens and view the big picture. 

How To Pay For College

Best Practices for Parents with College Bound Children

College -   it is supposed to be an exciting time, not to mention a proud moment in a parent’s life.  However, the stress associated with financing this endeavor is a heavy burden that many have a difficult time understanding and planning for. 

So what is a parent to do?  First, learn the school’s financial aid process, and complete the free application for Federal Student Aid (FAFSA) form each year.  Next, get yourself up to speed with the various loans available.  Visiting www.FinAid.org will help you compare loan terms, rates, limits and fees on some of these loans:

Education loans

Federal Government loans

Traditional Stafford loans

Federal plus Loans

Home equity loans

Kiplinger’s “7 Smart Ways to Pay for College” is a great read.  Another good resource is FastWeb.com.  This site is packed with information aimed at college planning/financing, and also helps identify scholarships your child may be eligible for.  

There is plenty of information available to parents.  You just have to put the time in to sift through it, and pull out the most credible and relevant data.  

Key Triggers: It May Be Time To Adjust Your Withholding

Withholdings – You Can’t Just Set and Forget!

Every employee must fill out what is known as a W-4 form, which tells the employer the amount of tax to withhold from an employee’s paycheck.  The form is based off of allowances, which are based on the IRS look up tables and used to figure out how much tax to withhold.  Basically the formula is total tax deduction divided by personal exemption amount (acts like a tax deduction because it reduces your taxable income).

As you focus your energy on calculating the amount of tax you either do or don’t owe, the primary area you will be concentrating on is that of withholding. You will be asked to report on marital status, allowances you qualify for, and any extra withholdings to report. 

There are key triggers that typically lead to withholding changes you should know:

• Change in income
• Change in household situation
  *Marriage – your household withholdings could go up or down depending upon whether your spouse is bringing in any income.
  *Divorce – your household income is affected and alimony is factored in.  Whether you are on the  paying or receiving end, there are specific forms to fill out relating to alimony.  Note…if you are on  the receiving end, you will be paying tax on it.

• Birth of children (equals new allowances, which reduce withholding)

A good practice to get into is to have a tax projection run every year to see where you stand from a tax standpoint.  You can project your income and deductions based on what you expect for the upcoming tax year, and then use the tax rates for the corresponding year to predict what your tax will be.  The last thing you want is to be surprised with a huge tax bill!!!!  After that, you can go to the IRS web site to check your allowances using their online calculator.

It is easy to forget to check your withholding every year, but a large tax bill is a painful reminder you could have avoided if you would have taken 30 minutes out of your day to do the math. 

Signs Your Financial Lifestyle Needs To Change

Are You Living Beyond Your Wallet?

According to the Consumer Reports Index, which measures American’s financial health, middle income families experiencing financial struggles rose during the month of January.  This comes as no surprise, as a large part of society has become extremely reliant on credit cards and loans for just about everything.  Despite the recession and depressed values in real estate, many are still chanting “consumption is king,” rather than “cash or saving is king.” 

Our tendency to compare ourselves to others does not help (keeping up with the Jones’ mentality), nor does the avoidance of altering a lifestyle one has become accustomed to (something many suffer from). 

So how do you know if you are living beyond your wallet, and what can you do about it?

• Emergency Fund is non – existent

You have not been able to put away a satisfactory amount to float you through times of trouble such as a lay off, medical emergency, or other unexpected large expense. It is ideal to have 3-6 months worth of expenses set aside to cover this need.

• You are robbing Peter to pay Paul

You find yourself delaying making payment to pay another vendor first because you don’t have enough funds to pay both bills on time

• Your credit score is below 600

Scores can range all the way up to 850.  Missed or late payments, outstanding judgments, total debt ratio, and too many credit cards can all add to this score being low, which will hinder your ability to get good financing rates or any loans at all.

• You exceed your credit limit

A red flag should be going up if you are using 50% or more of the credit available on your credit card, and unable to pay your outstanding balance down on monthly basis.  If you compare your credit card balance from year to year and notice you there has not been much change, there is more than likely an issue that should be addressed.

• Overdraft Fees continue to hit your account

Fees are incurred when money is withdrawn from the account via check processing, etc… and there is not enough in the account to cover it.

Overdraft protection is put in place to cover you when there is not enough money in your account.  It is a checking account feature offering a line of credit to write checks for more than the actual account balance.  While this may help you ward off overdraft fees, it can also be viewed as enabling you to continue to use money you don’t have.

• 35% or more of you income is going into your home via mortgage or rent payments, maintenance, etc…

Be careful not to bite off more than you can chew. What good is a big house if you can’t afford to eat or pay your utilities?

• Inability to save 10% of your pay to put towards retirement

This is one of those general rules of thumb figures.  The point is that you should not be living a lifestyle where you are unable to put money away for your retirement every year. 

Now what can you do about it?

• Create a budget, and while doing so cut back in any areas you can such as dining out, “extras such as caller id” with regard to your phone bill, making coffee at home rather than visiting the local Starbucks, clipping coupons to save on groceries, etc… Also look for ways to save in areas such as water and energy.
• Payoff any outstanding judgements
• Pay down your debt.  If you can’t do it on your own, look into other alternatives such as debt relief plans.  One resource is www.careonecredit.com.
• Limit credit card use and use fewer credit cards. 
• Look into whether refinancing your home or auto loan makes sense
• Stop focusing on the size of your house and focus on the quality of your life and ability to save.  Understand this may mean moving to a more affordable home.
• After your paycheck hits, pay your bills first and then pay yourself!  Take necessary steps to ensure saving such as setting up automatic transfers to your savings account, which can then be used to grow your emergency fund and/or retirement account

Visit our blog post entitled, “Simple Money Saving and Financial Planning Tips for 2013”

Baby Boomer Retirement Tips

Is Your Retirement Stress Booming?

According to Baby Boomer Headquarters, there are 75 million baby boomers in the United States, many of which are contemplating whether or not they are financially prepared for retirement.  Here are some guidelines to follow if you are one of them.

• Create a list of your current income and expenses, and how you think this may change once you are retired.
• Simplify your retirement accounts by consolidating your accounts such as IRAs.  This will help from a tax standpoint as well as RMD (required minimum distribution) standpoint.  After age 70.5, you are required to take annual withdrawal amounts from your 401(k) and IRA accounts.  A penalty of 50% will be assessed (on the amount you should have withdrawn) for failure to do so.
• Create a will and/or living will naming executor, power of attorney, beneficiaries, etc…
• Re-evaluate your current investment portfolio.  In most cases, dialing down your risk tolerance and shifting focus to a low volatility, capital preservation and income strategy makes sense. 
• Delay taking social security until after age 70, otherwise the benefit you receive will be decreased dramatically.
• Give yourself a thorough insurance check up. 

*Sign up for Medicare as soon as you are eligible.  Eligibility takes place 3 months before you turn 65, and lasts until 3 months after.  If you enroll after this time period, your monthly premiums will go up by 10% for each 12 month period you were eligible for.  If you are retiring before age 65, a plan such as COBRA continuation coverage will be needed to cover the time between retirement and age 65, when eligibility occurs. 

*Consider long –term care insurance.  Your state may offer a plan that enables you to keep an amount equal to your insurance coverage and still quality for Medicaid if your insurance benefit runs out.  Without insurance you may end up spending down all of your assets to qualify for Medicaid.

• Consult with a certified financial planner.  This professional can help you determine if your anticipated expenses in retirement do not exceed your inflow of money.  They can help identify specific tax strategies that may make sense for you, and help you devise a plan for how much, how often, and from where money should be pulled from during retirement. Planners can also calculate your estate tax (federal and state, which change based on enacted legislation), and recommend strategies for lessening the estate tax. 

Retirement is supposed to be happily referred to as the “golden years,” not the stressful years.  Give yourself some peace of mind by giving your retirement plan the thought and reflection it requires.  

Money Saving Strategies & Financial Tips for 2013

Procrastination - The Silent Killer

When we hear the term “the silent killer” most of us think of things like heart disease or cancer.   While these ailments have certainly earned their notoriety where health is concerned, procrastination has earned its right to this label within the context of a person’s financial well being. 

How many of us have uttered phrases to ourselves such as, “I don’t make enough to put money away for savings every month,” or “I waited too long to start saving for my children’s college education so why bother now?” 

The truth is we procrastinate more often than not, because we can…not because we don’t have a choice.  There are always ways to save if we are willing to sacrifice in other areas.  No amount is too small when the compounding effect is considered, and it is never too late to start saving or to take more interest in your financial well being. 

Some simple things you can start off doing:

°         Review your monthly income and expenses to gauge whether you are spending more than what you make.  If this is the case, analyze your expenses and cut out or at the very least scale back the ones that are not “necessary” (dining out, new clothing, paper/magazine subscriptions, etc…)

°         Put a formal budget in place and hold yourself accountable by using tools such as quicken or www.mint.com to track your progress.

°         Review your current loans and evaluate whether or not you can get better rates (often times car loan rates can be negotiated down or you can find a better rate elsewhere.  There may be an opportunity to refinance, especially at today’s low rates).  There is a great link discussing this in our newsletter. 

°         If you have credit card debt, focus on paying off the card with the highest interest rate first.  You may even be able to transfer the balance to another card with a zero interest offer (keep in mind there is a fee associated with doing so)

°         Start an automatic savings plan.  This can be done various ways.  (1) Have a portion of your paycheck automatically flow into a savings account or (2) Set up recurring transfers from your checking account to your savings account monthly.

°         Pull your credit report and review your current standing.  Your credit score can affect you in so many ways.  Lenders base your rates off of your score, and your score will also determine the rate you get on other loans.  Everyone is entitled to one free report per year.  You can get a free report at www.annualcreditreport.com.  We also discuss this topic in more detail in our newsletter.  Clickhere to learn more. 

°         Explore opening up 529 plans for your kids.  You can start with as little as $25 per child for the Maryland 529 plan, if it is set up as an automatic monthly contribution from your bank account.  Whether or not this makes sense for you will depend upon your specific situation, and consulting a financial advisor is best.  Two sites we see use frequently are www.virginia529.com and www.collegesavingsmd.org.

(Note: Don’t replace saving for retirement with saving for college.  There are resources like financial aid, scholarships, grants, and specific loans tailored for this cost.  You don’t have that kind of flexibility when it comes to retirement.  Make sure you are putting money into the retirement savings!)

Again, these are just a few simple things you can do to get started off in the right direction.  Don’t fall victim to the “silent killer” – procrastination, and do something NOW.