May 1 2015

401(k) loans can make a bad situation worse

By |May 1st, 2015|Blog|Comments Off on 401(k) loans can make a bad situation worse|

For many investors who are still in their working years, the largest single account balance in their portfolios is a 401(k) plan, especially for those who have worked at one company for a long period of time. When times get tough, borrowing a portion of that balance to ease the strain can be a tempting proposition.

The good news first

There are upsides to borrowing from a 401(k). It’s an easy loan to get, relatively speaking. Since you’re borrowing your own money, there is no credit check required. Add to that the fact that interest rates are generally lower on 401(k) loans, which may lead to lower payments. And that interest ultimately goes right back into the borrower’s account, rather than to a credit card or banking institution.

The obvious argument against taking money from any sort of retirement account is that the money won’t be there when you need it. But there are counter arguments, specific to 401(k)s, since the money lost on investment earnings may be less than the additional costs of a loan acquired elsewhere. However, if you are in financial straits, it is important to consider all of the ways a 401(k) loan may cost you before you make the decision to move forward.

Default could spell disaster

If you fail to make your payments on a 401(k) loan, the amount you “borrowed” now becomes an early distribution. And that carries significant costs. Since the money was taken out of your paycheck pre-tax, you will now owe ordinary income tax on the outstanding amount and accrued interest, plus an additional 10% penalty. For an investor in the 28% tax bracket with $20,000 outstanding, this would mean a $7,600 tax liability. And it would be due next April 15th. Consider that failing to pay a credit card debt damages your credit; failing to pay the IRS is another matter altogether.

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You may be stuck at your job until the loan is repaid

Even if you keep up with your payments, the entire balance will become due 60 days after you leave your current job. You don’t want the prospect of a big bill to derail a career opportunity. And if the separation is involuntary, you may find yourself with no income at all. If you fail to pay the balance within the allotted 60 days, you’re in the same situation as you are if you fail to make payments – the outstanding balance will be considered an early distribution, with taxes and penalties attached.

Paying taxes once is enough

Although paying taxes on an early distribution is painful, it at least represents a cost you would have incurred at some point, albeit at a much later date. Payments on a 401(k) loan are another matter, since they will be taxed twice in the long run. That’s because although the payments are made with after-tax dollars, distributions from your 401(k) remain fully taxable. In figuring the total cost of at 401(k) loan, it is important to include the double tax hit.

Making the right decision

There is nothing inherently evil about 401(k) loans. In fact, there are situations where they may even be advisable. But easing financial difficulties is not one of them. The consequences attached to 401(k) loans can make a bad financial situation much, much worse. You would be well advised to look elsewhere for a solution.

 

Apr 29 2015

Beyond Six-Months’ Cash: Alternatives for your emergency fund

By |April 29th, 2015|Blog, Personal Finance Tips|4 Comments|

The concept of an emergency fund is simple. Ideally, we should all have 6 months of expenses put aside in a savings account, just for emergencies. There are generally two objections to this school of thought.

Objection 1: Inflation risk and opportunity cost

From an investment perspective, emergency funds held in cash represent significant opportunity cost. In fact, some experts will tell you that six months’ of expenses is way too much to subject to the inflation risk and opportunity cost of a traditional savings account. In certain circumstances, I would agree with that. As with most things financial, the answer comes down to an individual’s personal situation.

Cash is king when it comes to emergency funds for two reasons: first, it is liquid, and liquidity needs should always be an investor’s first consideration. Second, it is virtually free of investment risk. However, depending on how much emergency cash you have and your own level of risk tolerance, you might want to consider an alternative to a traditional savings account.

Solution 1: Increase yield with a short-term bond mutual fund

Short-term bond funds invest in investment grade bonds with short maturities, typically 3 years or less. As such, they are generally lower-yielding investments than longer bonds. Short-term bond funds are less sensitive to interest rates than longer bonds, making them a more conservative investment. As a trade off for slightly higher yield, however, these funds do carry a bit more risk. Look for a fund with low expenses and shorter duration to preserve your principal.

Checking and savings accounts are not the only options for your emergency savings. Here are alternatives for your emergency fund.

Objection 2: Six months’ expenses is a lot of money

It’s true – half a year’s expenses represents a daunting figure for many of us. A family whose expenses are $3,000 per month would be looking at $18,000, just for emergencies. And that doesn’t include funding other goals, such as college or retirement.

One way to meet this need is to reduce the amount needed by drafting an emergency plan. The idea is that in a true emergency, expenses would be ranked in order of need, and only the most necessary would remain. A second, even complementary strategy is to combine emergency savings with another goal.

Solution 2: Combine emergency and retirement saving in a Roth IRA

If you can’t afford to max out your Roth IRA and put money aside for emergencies, consider having your Roth pull double duty. Roth IRA contributions are made with after-tax dollars, and can always be taken out without penalty. Consider bulking up your Roth contribution by combining it with your emergency savings. That way, you don’t have to feel like you’re missing out on retirement savings to save for emergencies. Any money you don’t use will be available to you as retirement income. Also, once you reach your goal for your emergency fund, you can direct your entire contribution toward your more risky retirement investments.

I’d like to point out two considerations here. It is rare that I advocate earmarking retirement money for another purpose. This solution only applies if you are unable to max out your retirement contribution and save for emergencies at the same time. Second, money that is designated for emergencies should be in a separate, low-risk investment. (like a short-term bond fund, for instance) within your Roth IRA account.

Beyond the numbers

My personal viewpoint is that emergency saving is best thought of as insurance, rather than investing. In putting aside a pool of money for emergencies, we are self-insuring against job loss, medical expenses, or unforeseen catastrophe. While there is nothing wrong with maximizing your level of protection, doing so at the risk of not being covered is counterproductive. And prioritizing other goals at the expense of emergency funding puts everything at risk.

Apr 29 2015

Combating the Costs of North Facing Rooms With Your Windows

By |April 29th, 2015|General Personal Finance|Comments Off on Combating the Costs of North Facing Rooms With Your Windows|

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Anyone who has embarked on the house-buying process will know all about orientation, and how it’s one of the primary things to think about when purchasing a new property. Particularly now, when heating costs are soaring through the roof, choosing a home which is suitably orientated can be absolute crucial from a money-saving perspective.

As the title of this post has highlighted, we’re today going to focus on north-facing rooms. Of course, the majority of properties in the country are going to have at least one north-facing room, but it’s all about how much time you are going to be spending in there. For example, a north-facing bathroom isn’t going to be the end of the world, but when it comes to a living room and you are cozied up every evening, trying to keep warm, it’s a different matter entirely.

Fortunately, there are solutions. North-facing rooms might get much colder in the winter months than any other region of the home, but through strategic window treatments it’s possible to control the heating costs tremendously. Admittedly, you could also turn to other means, such as an A+ boiler, or added insulation, but window treatments are where most homes flop and where some truly huge savings can be made.

Let’s start with the first suggestion; the suggestion that was actually designed for that room which just can’t get warm. We’re talking about insulated shades. Some companies might refer to them as cellular shades, others might call them honeycomb shades – but the fact remains that their design means that they prevent heat from escaping from a room. It’s possible to purchase some of these blinds which are actually two or three levels thick, which allow virtually no heat to escape. Nevertheless, whichever option you choose, it will make a big difference to your final energy bill.

It goes without saying that the above products are a little more expensive than traditional blinds, even if their benefits are considerably better. If you don’t want to part with such cash, it’s time to improvise. Any type of blinds will suffice in this regard, whether it’s roller blinds, blackout blinds or Roman blinds and your aim is to just leave them down all through the day. Again, you’re locking the heat into the room, albeit at the cost of natural light.

If you do want to use one of the three blind types we’ve just mentioned but with some natural light, it might be time to get creative again. Motorized blinds used to be for show, but now they can act as a money-saver as well. Using the programmable timer, you can set them to open and close in tandem with the movement of the sun. It means that they can be open to let sunlight filter through into your room, whilst closed the rest of the time. Of course, if you combined such a system with an insulated blind, the effects would just be multiplied.

As you can see, north-facing rooms certainly aren’t no-go areas anymore. If you can think strategically about the windows, there’s every chance you can make them at least habitable during the winter months – and not the deterrent they once were to prospective home buyers.

Apr 27 2015

How to Choose a Good Lender for a Car Title Loan

By |April 27th, 2015|General Personal Finance|Comments Off on How to Choose a Good Lender for a Car Title Loan|

If you have a low income or bad credit, there are still borrowing options available to you should you be in a financial emergency. One such option is the title loan, which you can access if you have a clear title on a vehicle, essentially turning your car into an asset for collateral. The problem is that if you have poor credit, you are vulnerable to loan sharks who see you as easy prey. This is why you need to know what to look for if you do want to apply for auto title loans online in particular.

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What Is Predatory Lending?

Predatory lending is when there is actually no benefit to you as a borrower and you end up trapped in a permanent cycle of ever-growing debt. Predatory lenders use a number of illegal practices, ranging from aggressive sales tactics to threatening with physical violence if you do not pay your loan back.

How Do You Find a Good Lender?

If you are on the lookout for a lender who provides good title loans, you need to start by looking at the interest rates that they offer. Car title loans always have higher interest rates than bank loans or other loans, but this also due to the fact that they are short term loans.

You must be careful about balloon payments, which hide just how big the burden of your finance actually is. This means that you end up having to roll the loan over for longer periods of time, meaning you constantly pay interest and end up in more and more debt. This is a situation you must avoid.

Another thing you are likely not aware of is that you are within your rights to negotiate a reduction on your loan charges and interest rates. Predatory lenders will try to lock you into bad terms with exorbitant rates. In many cases, people end up being forced to hand over the title of their vehicle, because they simply cannot meet the repayments.

There is a chance of getting caught up in a cycle of inescapable debt. This is why you need to take your time in finding a reputable lender who actually has your best interests at heart. Naturally, the overall goal of any lender is to make money themselves, but this should not be achieved by forcing you into bankruptcy. They should be completely transparent about their charges and penalties and completely explain what your personal rights are as well.

The above may sound frightening and leave you turning towards any option besides title loans. In reality, however, you can avoid dangerous situations by exerting due diligence and common sense. Spend some time doing your research, look into your various options and know your rights. Always check the name of a lender you are considering with the Better Business Bureau and your local financial ombudsman, as this will tell you whether or not they are reputable and engage in fully legal lending practices.

 

Apr 27 2015

3 Decisions that may Hurt your Diversification Efforts

By |April 27th, 2015|Blog, Personal Finance Tips|Comments Off on 3 Decisions that may Hurt your Diversification Efforts|

Asset allocation and diversification are important concepts in investing. Although many investors think of them interchangeably, they are, in fact separate concepts. Asset allocation refers to how you choose to spread your money among investments. Every investor practices asset allocation by virtue of having invested. Whether or not that asset allocation represents diversification is another matter altogether.

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Diversification is a portfolio attribute that can be achieved through asset allocation. The purpose of diversification is to manage risk by investing in many different types of assets. Stocks and bonds from companies of different sizes and from different countries all have places in a diversified portfolio.

There are many considerations in building a diversified portfolio, but here are three decisions that may hinder your quest for ideal diversification.

  1. Choosing to invest in individual stocks and bonds instead of mutual funds or ETFs. It is difficult to find consensus among experts on the number of stocks or bonds required to build a diversified portfolio, but the numbers generally fall in the 20-50 range for the US stock market alone. Effective diversification requires exposure to international stocks and bonds, as well. For most individual investors, diversifying this way just isn’t practical.
  2. Using a global fund to fill an international allocation. Global funds may invest in securities from every country in the world, including the one you live in. Some global funds from US companies can invest up to 50% (or more) of their assets in US securities. This may lead to overlap with your domestic investments and make your portfolio less diversified than you intended. If you’re looking for exposure to countries other than the one you live in, go with an international fund. If you’re looking to diversify further, choose a fund with allocations to emerging markets, which don’t correlate as closely to the US as larger countries do. (Keep in mind that emerging markets also add risk, so size your allocation accordingly.)
  3. Choosing a fund by name alone. Sometimes investors spend a great deal of time determining exactly how they want their portfolios to be allocated, then lose it in the implementation stage. Some, as described above, may end up with far less international exposure than they wanted. Others match their asset allocation goals with fund names that describe asset classes without looking any further. A mid cap fund that behaves like a large cap fund, for example, defeats the purpose of the mid cap allocation altogether. A careful reading of the prospectus will tell you how much latitude is given the portfolio manager for an actively managed fund, and which index is being used to define an asset class for an index fund. Also, a look at a fund’s Morningstar style box will tell you if its name is representative of its current holdings.

Eggs and baskets

Diversification is the embodiment of the old adage about eggs and baskets. Just as important as choosing asset classes, however, is how you choose to invest in those asset classes. A diligent investor looks beyond the theoretical world of indexes to actual investments, making sure they reflect the desired asset allocation

Apr 27 2015

Essential Features of a Qualified Binary Options Broker

By |April 27th, 2015|General Personal Finance|Comments Off on Essential Features of a Qualified Binary Options Broker|

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Success in binary options will depend on a number of things. However, it shouldn’t come as any surprise that a trader will never get very far in their career without a solid binary options broker and platform to handle their business. While you’ll have a number to choose from, thanks in large part to how popular binary options have become in a short amount of time, this also means you have quite the challenge ahead of you in trying to choose one.

The following features should be signs, though, that a binary options broker is worth your time and money.

Sound Security

Any site you spend money on should involve high quality security. Otherwise, it suggests they don’t take your business very seriously. Maybe they do, but they’re clearly not taking any steps to safeguard your money, which is just as bad.

Make sure a binary options broker is using 128 bit SSL encryption from a reliable provider. Most traders keep a lot of money with their online brokers. If this type of encryption isn’t being used to protect your investment, expect a hacker to eventually take advantage.

Demo Software

In the past, most traders had a long and treacherous road separating them and success. Not only did they have to make a number of mistakes, but each of these had to cost them a good deal of money too.

Fortunately, binary options help cut down on a lot of these risks. However, you can do even more by only considering a broker who provides demo software. This will allow you to play the market without ever losing any money. Although you won’t win any either, the learning opportunity is more than worth it.

Even veterans of trading should look for demo software. Whether you want to test out a new strategy or explore new markets, doing so without risking any money is ideal.

Returns on Losses

More and more, brokers are offering returns on options that don’t end up in the money. It won’t be a ton of money, but when you consider that many brokers give back as much as 15%, you can see how that would add up quickly over time. That’s all money that can all be used to make better investments that pan out too.

Plenty of Assets

A binary options broker can have all the expertise in the world and a great platform to complement it. However, if they lack a wide array of assets for you to invest in, your profits are going to be limited. Beginners will also suffer from a lack of exposure and may never fully appreciate the markets that are available to them.

The next time you’re looking for a binary options broker to handle your business, consider the above features that are essential. This way, you’ll know that hard work is the only thing standing between you and success.

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