Mar 27 2015

5 Ways ETFs are Different from Mutual Funds

By |March 27th, 2015|Blog, Personal Finance Tips|Comments Off on 5 Ways ETFs are Different from Mutual Funds|

Let me say this up front. I think ETFs, or exchange-traded funds, are super cool. I have nothing against mutual funds – or any product, really – but I do have a thing for ETFs. Undoubtedly, I am not alone in this, but I feel compelled to confess my bias up front.

ETFs and mutual funds offer the opportunity for individuals to take part in larger portfolios of stocks, bonds or other securities, providing easy access to diversity for the smaller investor. Each is sold in shares, whose net asset value, or NAV, reflects the price of the underlying securities in the portfolio. It’s right about here, however, that the similarities end. Their differences are numerous, but here are five of the most obvious:

1. ETFs trade on the secondary market.

This one is simple. Mutual fund shares, for the most part, are purchased from and redeemed by the fund. (The exception to this would be closed-end funds, but that’s another post altogether.) This is the primary market. ETFs, on the other hand, are bought and sold on the secondary market, like common stocks.

2. The price of an ETF changes throughout the day.

Mutual fund shares are valued and priced at the end of the day, which means that an investor who decides to purchase or sell shares will do so at a price to be determined when trading closes for the day.   ETFs, on the other hand, are priced throughout the day, and allow investors to take advantage of short- term gains and losses in the market. (Which is not a selling point for long-term investors. It is merely a difference from traditional mutual funds.) It also bears mentioning that ETF shares purchased or sold at a price that differs from NAV.

Confused over your investment options? Here are five ways ETFs are different than mutual funds and why they're both good investments!

3. Trading of ETF shares has little effect on NAV.

A mutual fund can essentially issue as many shares as investors want to buy, which has performance implications. Mutual funds must purchase securities when money is invested, and sell them when shares are redeemed. This results in trading costs, which are paid by the fund. Also, demand can be an issue for mutual funds. Excess demand can put fund managers in the position of looking to buy, even when, in a perfect world, they may prefer to time their opportunities differently. The same goes for redemptions, when investors sell their shares back to the fund. If the fund gets enough redemption requests, it can be forced to sell securities it would rather hold on to, which can mean the fund misses out on an anticipated gain, or realizes a gain that is taxable to the fund.

Buying and selling of ETF shares does not impact its NAV, since the fund is not involved in the transaction.

4. Most ETFs are passively managed.

ETFs are typically designed to reflect a specific index or even a subset of an index. In this way they do resemble some mutual funds. Changes in the ETF’s composition generally reflect changes in the index, or result from rebalancing to bring the portfolio back in line with the index.

However, many mutual funds are actively managed, where the portfolio manager’s goal is to beat an index.

5. ETFs generally have lower expenses.

After reading number 2, it would be logical – and correct – to conclude that ETFs generally offer lower expenses than mutual funds. ETFs bear little to no trading costs, require less marketing and incur fewer distribution costs than mutual funds. Index mutual funds close this gap a bit, but as a general rule of thumb, ETFs are cheaper.

Comparing ETFs to mutual funds is the logical place to start your education, but there are many additional benefits to ETFs, along with potential downside. Because I believe that responsible investing requires a deeper dive, look for more about these intriguing products, including tax advantages, legal structure and more.

Mar 25 2015

Bonds as a safety net? Choose carefully.

By |March 25th, 2015|Blog, Personal Finance Tips|Comments Off on Bonds as a safety net? Choose carefully.|

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Image credit: epSos.de

Simplified lists that order investments by risk almost universally describe bond funds as less risky than equity funds, and often, this is true. But it isn’t categorically true, and that’s a problem for me. A novice may think he or she has enough information to reasonably conclude that any bond fund will provide the stability to offset any losses from riskier investments. This is because in our effort to simplify things, we sometimes leave out important information.

Critical differences

Equity fund managers invest your money in securities that represent ownership. Most commonly, these are stocks, but there are other types of equity securities.

The risks of equity funds are those related to the price of the securities owned by the fund. Low earnings, market perception and high amounts of corporate debt are some of the many factors that may affect price.

Bond fund managers invest in debt securities, which basically means they loan money. Companies and governments issue bonds to raise capital, and investors (such as fund managers) buy those bonds, in effect lending money to the entity that issued the bond at an agreed-upon interest rate.

The most common risks of bond funds generally fall into two categories: the possibility that interest rates will rise while your money is tied up, and the likelihood that the debt will be repaid. A third risk category would be currency risk, which applies to any security from a foreign country.

Consider what those last two risk categories mean. As the likelihood that a debt will be repaid decreases, another one rears its head: the likelihood of default. Default, as you might imagine, can result in the near-total loss of an investment, and that is a pretty big risk. Also significant is currency risk, since the money will be loaned in the currency of the country where the bond is issued. If an investor is being repaid in currency that declined significantly relative to the dollar after the investment was made, the value of the investment could decline dramatically.

The bottom line

Some bond investments carry more risk than many equities. Bond issuers are graded by creditworthiness. Higher grade, shorter duration domestic bonds are generally safer, so if you’re looking to mitigate riskier investments in other areas of your portfolio, start there.

Mar 25 2015

The Truth About Reverse Mortgages

By |March 25th, 2015|General Personal Finance|Comments Off on The Truth About Reverse Mortgages|

91e4091481414cb08833daad2898d54cA reverse mortgage is defined as a loan, most often government insured, for senior homeowners 62 years of age and older.  With a reverse mortgage, a borrower may be able to convert the equity in their home into non-taxed cash to use however they would like.  At the same time, the borrower may continue to live in their home for as long as they choose, provided they comply with loan terms such as continuing to pay property taxes and homeowners insurance, and maintain the property.  However, unlike traditional mortgages, borrowers do not have to pay a monthly mortgage payment.  These features make the reverse mortgage loan increasingly attractive to many senior homeowners with equity sitting in their homes.

Misconceptions and Truths

Despite the many benefits reverse mortgages provide for retirees and senior homeowners, there are also many misconceptions.  Like any loan, reverse mortgages can be misused and the consequences of past misuse as well as a lack of accurate information can thus breed misconceived notions about this loan.  The following are common reverse mortgage misconceptions as well as their corresponding truth.

Reverse mortgage costs are too high compared to traditional mortgage loans

When a reverse mortgage is kept long term for the duration of a borrower’s life, the costs are not dissimilar to traditional mortgage loans.  And when compared to traditional mortgage loans, the benefits of reverse mortgages outweigh costs since there are no monthly mortgage payments while the borrower to continues to live in the home and receive non-taxed cash.  In addition, the majority of all costs and fees can be financed into the loan, allowing the borrower to avoid many up-front and out-of-pocket expenses that they would usually have to worry about with traditional mortgage loans. 

Borrowers lose title or ownership of the house

Ownership of the home stays with the homeowner as long as they continue to live there.  Just like any mortgage loan, the lender gets a security interest in the property. When a borrower closes on a reverse mortgage, they retain the title and may remain in their home for as long as they like.  One of the ways a borrower may possibly lose ownership of the home is if they default under loan terms, such as failing to pay taxes and insurance.  The loan would then become due and payable and the home may be foreclosed upon.  Another due and payable event is no longer living in the home as a primary residence.  However, if the borrower maintains taxes and insurance and meets other loan terms as they had promised, borrowers should never lose the title or ownership until they leave the home.

Borrowers may owe more than the home is worth

Under the Federally-insured reverse mortgage program, borrowers are protected from ever owing more than the home is worth when sold at loan maturity.  Even if the borrower’s loan balance exceeds the home’s worth, federal insurance will cover the excess amount, and the home’s sold value is all that will be needed to repay the loan.  If you are considering a non-government insured reverse mortgage, check with your advisor about loan terms.

Heirs will not support the idea of their parents getting a reverse mortgage

A National Reverse Mortgage Lenders Association (NRMLA) survey in 2010 showed that heirs are supportive of their parents’ decision to obtain a reverse mortgage.  Heirs understood that reverse mortgages allow their parents to pay all their expenses, and thus allow heirs not to have to worry about them.  In general, heirs usually want their parents to be independent, and they appreciate the freedom and autonomy a reverse mortgage allows their parents.

Heirs will lose their inheritance and don’t have the option to keep the home

Because senior homeowners borrow against their home equity, there is a misconception that heirs will not be able to inherit the property.  However, often homes continue to appreciate over time and will retain enough equity to pass on to heirs.  After the loan is repaid, heirs keep all remaining equity.  Heirs may also choose to keep the home and repay the reverse mortgage, such as by refinancing into a conventional mortgage.

Medicare, Social Security, and pension benefits will be affected

Because reverse mortgage funds are considered loan proceeds and not income, Medicare, social security, and pension benefits will not be impacted.  Do note however that it may be possible for Medicaid and other income entitlement programs such as SSI to be affected.

Criteria to Get a Reverse Mortgage

Now that many misconceptions have been clarified, what are the criteria required for a senior homeowner to get a reverse mortgage?  According to the website for the U.S. Department of Housing and Urban Development (HUD), there are a few borrower, property, and financial criteria one must fulfill in order to secure a reverse mortgage.  Requirements for non-government insured reverse mortgages are typically similar.

Borrower Criteria

Borrowers must be homeowners 62 years or older who live in their home as their primary residence.  The home’s original mortgage must either be paid off completely or a considerable amount must already have been paid down.  Borrowers may not have any delinquent federal debt and must complete a counseling session with a HUD-approved reverse mortgage counselor before loan application.

Property Criteria

Properties eligible for a reverse mortgage include single family homes or a 2-4-unit home with one unit occupied by the borrower.  Manufactured homes and condominium projects may also qualify if HUD-approved and all requirements of the Federal Housing Administration (FHA) are met.  HUD insured reverse mortgages are limited to the borrower’s primary residence, but some non-government insured reverse mortgages may be available for second homes. 

Financial Criteria 

Borrowers must also be financially able to continue making payments on all taxes, homeowner’s association dues and homeowner’s insurance, as required by loan terms.  Unlike most mortgages, usually no escrow account is established under a reverse mortgage to pay these amounts – the borrower must pay these themselves.  Financial assessment requirements going into effect in 2015 will require that lenders verify a borrower’s income, assets, expenses, and credit history to determine if a financial set-aside for taxes and insurance will be required from a borrower’s reverse mortgage proceeds.

The government-insured reverse mortgage loan is only getting increasingly stronger and safer every year and proves to be a great option for many senior homeowners across the nation.  The reverse mortgage industry is also constantly working to clarify misconceptions and educate consumers on the truth about reverse mortgages.  The truth is that for the many seniors who use this loan product wisely, reverse mortgages allow for a financially strategic and more comfortable retirement.

Mar 23 2015

How to Save on Everyday Expenses

By |March 23rd, 2015|General Personal Finance|1 Comment|

7da9f2d4905741a6a225f19d5e9bbb0eLooking to save money on your home necessities? Walgreens, the largest drug store chain in the United States, has a lot of discounts and promos that sometimes it can be overwhelming. It is not only a store pharmacy but it has expanded into bath and beauty products, groceries, personal care items, seasonal decor, and household essentials. If there’s something you need to know about shopping at this place, here’s a couple of things you need to know first:

Sales Cycle

Always keep an eye out for their sales cycle. It usually runs Sunday through Saturday and in addition to weekly deals, Walgreens also offer monthly deals and a Rewards Program.

Coupons

We are not going to go extreme here, don’t worry, but we will cover the basics, just enough to save you money on your purchases. Walgreens accepts the following types of coupons: Walgreen coupons, manufacturer coupons, Register Rewards and internet printable coupons.

When you go to Walgreens at the Groupon site you can see a wide variety of items to choose from. It’s best to have a list on what products you need to buy and then when you find what you’re looking for, get the coupon code or have it printed out if it’s an in-store sale. Don’t forget to include the bar code in the print out, that is very important for you to avail your discount.

If you are using several coupons at the same time, the best tip would be for you to apply the Register Rewards Program first, then followed by the coupons.

Time to re-stock those everyday items at your home? View Groupon’s wide selection of Walgreens coupon and get discounts you won’t believe!

Mar 16 2015

Force Yourself to Save

By |March 16th, 2015|Blog, Personal Finance Tips|12 Comments|

Saving money isn’t easy.

When you get that paycheck on Friday and you’re ready to hit the town and have some fun, it takes a lot of discipline (or a ridiculously huge paycheck) to be willing to save a good chunk of that money.

Some people know themselves well enough that they won’t voluntarily save money, so they come up with ways to force themselves to save. There’s no better illustration of this than my favorite Super Bowl Commercial.

“Will the owner of a white stationwagon, please go #**# yourself?” I’ve watched it a hundred times, and it still makes me LOL. (that’s “laugh out loud” in case you haven’t seen that one before)

If you aren’t happy with how much you’re saving right now, I’ve come up with a few ideas to help you force yourself to save.

Five Ways To Force Yourself to Save

1. Swear Jar
OK, I’m not talking about an actual swear jar like they have in the video (although that could work). Just take any bad habit of yours that you would like to change and turn it into a competition with yourself.

  • If you want to stop cursing, save a quarter every time you say a bad word.
  • If you want to get in shape, save $5 every day you don’t go to the gym.
  • If you want to stop eating out, match your eating out bill with savings. (if you spend $16 at Applebee’s, you have to save $16)

This will either help you save money, help you improve yourself as a person, or a little bit of both. Extra Credit: If you can get Rahm Emanuel to contribute a buck to your swear jar every time he uses profanity, you can retire at a very young age.

2. Buy a CD (Certificate of Deposit)
Maybe you do an alright job of throwing money in your savings account, but always find yourself pulling it right back out when some new overpriced toy comes out. Put your money in a Certificate of Deposit. A CD typically gives you a higher interest rate than you can get with a savings account, but you are required to keep the money in the CD for a certain period of time, or pay hefty penalties to get the money out early. Higher Interest + Save Money Longer = Win.

If you have trouble saving money there are many ways you can "force" yourself into doing it. Here are my five brilliant ideas.

3. Don’t Add More Crap to you Possessions
Let me tell you a secret; you have enough crap. Sure, you’ll probably want or need new crap somewhere down the line. That’s cool. But when you get new crap, get rid of the old crap. This works particularly well with clothing. Get a new pair of jeans? Donate an old pair to charity. New suit? Sell the old one to a second hand store. Not only will this keep your closet from overflowing, it will make you put a little more thought into whether you are willing to give up an old favorite tshirt to get a new one. Plus you can sell old clothes or write off charitable donations to save even more.

4. Save 50% of any bonus or raise
I actually stole this idea from The Hoff; pretend you are earning $30k a year and you’re making it just fine. Then you get a raise to $35k a year. Guess what? You’re cost of living didn’t increase, but your income did. Theoretically you could save 100% of your raise and maintain the same lifestyle, but that’s no fun. What’s the point of a raise if it doesn’t include a new PS3? As long as you save half or more, you have my permission to spend some or all of the rest of it on a new toy or vacation.

5. Race Your Friend
When you are racing a friend to something like $1 Million in net worth or $1,000 in the bank, you’re going to be more motivated to do it. Saving money is a lot like going to the gym; you’ll stick to it better if you and a friend hold each other accountable. And you’ll get huge deltoids. Wait, maybe that’s just the gym. The point is, it’ll be fun and you’ll find yourself being a lot more conscious of your money decisions.

Mar 15 2015

Who Needs Life Insurance?

By |March 15th, 2015|General Personal Finance|Comments Off on Who Needs Life Insurance?|

One of the most common questions asked about life insurance is “who needs life insurance?” The answer is actually more complicated than you may think. There are many factors that will go into determining whether it would be a good financial move to obtain a life insurance policy. Most insurance companies have a wide variety of different life insurance policies available and using an insurance comparison website like InsureChance will allow you to view many of them at a glance. Here are some of the groups that would benefit from having a life insurance policy covering them.

Married Couples

Every married couple should have some type of life insurance policy covering them. If both parties work outside the home, the life insurance policy should be used to replace employment income so that the surviving spouse can maintain the same standard of living without financial hardship. If only one spouse works outside the home, they should definitely be covered by life insurance because the loss of their income would be devastating to their family. The spouse that stays at home should also be covered so that the costs of childcare and other expenses for things that the stay at home spouse took care of can be paid without placing the entire burden on the shoulders of the surviving spouse.

Homeowners

It is important for homeowners to have life insurance so that their home will not revert to bank ownership if they were to die before the mortgage on the home is paid off. The beneficiary of the life insurance policy can use the proceeds of the policy to pay off the rest of the mortgage and retain possession of the home. Having this type of life insurance can help keep your home in the family. Mortgage life insurance can be an option for homeowners who are denied regular life insurance for medical reasons.

Business Owners

It is also important for small business owners to purchase life insurance. A life insurance policy can ensure your company remains in business after your death and provide for your employees in the event that the unthinkable happens. The last thing that you want to do is leave several families in dire financial circumstances due to your unexpected death. Check out several different types of life insurance policies to see which ones fits the needs of your small business the best.

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