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Archive for January, 2008

Step 5 - Protect Your Financial Resources

January 31st, 2008 at 10:53 pm

Fear of the unknown can produce a sense of scarcity. Since no one can predict the future, insurance products help protect us from financially catastrophic events. Properly using insurance can protect your financial resources, keeping this fear in check.

For most people, the need for automobile and home owner’s insurance is fairly well understood. However, by increasing your deductibles, you can often cut insurance premiums significantly. As an example, if you have a $500 deductible on your auto insurance policy, you might consider raising it to $1,000.

If you have a loss that is slightly more than $500, it may be better to pay for the loss yourself and not report it. Sometimes, reporting a small loss can significantly increase your future insurance premiums. If you will likely not report a smaller loss, why pay the additional premiums required for the lower deductible?

Life insurance is a requirement for any family member that contributes financially to the family. Typically, term insurance is the most cost effective type of life insurance. Consider a term period which will last until you no longer require life insurance. If you are in your thirties, this may mean a thirty-year term. To determine how much life insurance you require, go to

Text is http://www.finabguide.com/ and Link is
http://www.finabguide.com/ for the free life insurance estimator under the “Advice” tab.

Many people fail to understand the critical need for a long term disability insurance policy. Under age 65, you are more likely to become disabled than you are to die. As Peter Ubel, well known professor of psychology states, “If people are smart, they will invest wisely in disability insurance.” A serious, long-term disability can destroy even the best financial plan.

Another protection to consider is an umbrella liability policy. In our litigious society, the liability limits of your home owner’s and auto policies may not be enough to protect your hard earned assets. For a relatively small additional premium, you can increase your liability coverage by $1 million or more.

Protecting yourself from catastrophic financial risks will help reduce the fear of the unknown, a necessary step to obtaining financial abundance.

Step 4 - Manage Your Investments

January 24th, 2008 at 12:45 am

Properly managing investments is an important step toward financial abundance. If you manage your own investments, implement an asset allocation that allows you to sleep well at night. While the stock market has consistently out-performed fixed income investments over every 20-year period since the great depression, a conservative allocation of equities to fixed income can often perform better than a more aggressive allocation.

In Financial Abundance Guide, Mary, Nancy and Joan find out that the returns from a portfolio with a 50% equity and 50% fixed income allocation performed better than a portfolio of 80% equities and 20% fixed income over the six year period between January 2, 2001 and December 31, 2006.

Unless you have the time and energy to do a significant amount of research on stocks, low cost, indexed mutual funds or ETFs will usually provide superior long- term results. Be sure that your equity allocation includes small, medium and large cap stocks. Over the past 25 years, mid cap stocks, an asset class that is often overlooked, have out performed both small caps and large cap stocks.

It is also wise to have international equities in your portfolio. While emerging markets have received a lot of press, developed countries equities will provide a safer long-term return. It is wise to also consider small amounts of “alternative investments” such as Real Estate Investment Trusts and gold. These investments can be purchased as Exchange Traded Funds or mutual funds with low fees.

If you have an investment adviser, be sure that their long term returns consistently out-perform the comparable indexes after all management fees are included. Be especially careful in dealing with advisers that are compensated by commissions on products that they sell. Compensation through commissions can sometimes produce conflicts between how an adviser is compensated and your best interests.

If your adviser suggests variable deferred annuities, be especially careful. If you decide that a deferred annuity is the correct product for you, consider buying the annuity through a non-commissioned company such as Schwab, Fidelity or Vanguard. You’ll usually find a better product with much lower costs.

Managing investments requires your active participation, even when the investments are managed by an investment adviser. By participating in all of your investment decisions, you are on the path to financial abundance.

Step 3 - Minimize Your Taxes

January 21st, 2008 at 10:46 pm

Use every legal method to reduce taxes. If you are married and your spouse has no earned income, you may be able to fund a "spousal IRA." With a spousal IRA, you may deduct an additional $5,000 (or $6,000 if your spouse is over age 50) from your income taxes in the 2008 tax year.

If you have children in college, take advantage of the federal government's HOPE Scholarship or Lifetime Learning credit programs. Both of these programs provide tax credits which can reduce the income taxes that you owe on a dollar-for-dollar basis.

The Hope Scholarships can reduce your tax bill by up to $1,800 in 2008, while the Lifetime Learning tax credits can reduce your tax bill by up to $2,000. If you are eligible for both, you must choose the one that provides the greater tax savings.

Using appreciated long term stock for charitable giving can also reduce your taxes. You pay no taxes on the stock's appreciation and receive a charitable deduction of the stock's full market value. The easiest way to give appreciated stock is through a donor-advised charitable giving fund. This type of fund is free and easy to set up, yet it provides you a giving vehicle similar to a charitable foundation.

Fully funding your Health Savings Account gives you the same tax savings benefit as funding an IRA. Your taxes are reduced even if you don’t itemize your deductions. You can even deduct your HSA contributions when you have no earned income.

In low income years, consider converting some of your IRA assets to a Roth IRA. If you can do so by paying no more than 15% in taxes on the conversion, you will likely save taxes upon your withdrawal of the funds.

If you are in the 25% tax bracket or higher, you will likely receive greater after tax income from tax exempt municipal bonds issued in your home state, than from high quality taxable bonds. Do your calculations before you buy to determine which bonds provide the higher after tax return.

Every dollar saved by reducing your taxes helps build your financial abundance.

Step 2 - Maximize Your Financial Resources

January 19th, 2008 at 12:49 am

The second step on the path to financial abundance is to maximize your financial resources. Venture capitalists know that the best way to maximize their finances is to use OPM (Other People’s Money). We can learn from these successful investors and use OPM for ourselves.

If you have a company-sponsored retirement plan, at a minimum, contribute enough to your account to receive the maximum amount that your company will match. If your company will match 50% of the first $6,000 that you contribute, when you contribute $6,000, your retirement account will receive $6,000 from you and $3,000 from your employer.

The $3,000 becomes “free money” from your employer and provides an immediate 50% return on your investment. On top of this great return, you are also getting a boost from your favorite uncle (Sam). If you are in the 28% tax bracket and pay 5% state taxes, your $6,000 contribution will save you approximately $2,000 in taxes.

Combining the $3,000 you receive from your employer with the $2,000 you receive from Uncle Sam, the $9,000 in your retirement account only cost you $4,000, with $5,000 in OPM. You get an incredible 125% immediate return!

By using Coverdell education savings accounts or Section 529 college savings plans to save for your children’s educations, your educational savings will grow and no taxes will be owed on the earnings from these plans, so long as the money is used for eligible education expenses. This tax savings is another way to use OPM to reduce educational expenses.

A Health Savings Account (HSA) is the only saving vehicle that combines the benefits of an IRA with the benefits of a Roth IRA. When you contribute to your HSA, all contributions are tax deductible as are contributions to your IRA. If you do not use the HSA funds and let them grow until retirement, all withdrawals are tax free, similar to a Roth IRA, as long as the funds are used for medical expenses. Once again, your tax savings provide OPM when you fund the HSA as well as when you withdraw the HSA funds in the future.

In “Financial Abundance Guide,” I cover many other methods of maximizing your financial resources by using OPM. When we get an immediate increase in the amount of our saving through company matching funds or tax savings, we have increased our investment return before even deciding upon our investment approach. That is what is “maximizing your financial resources” is all about.

Step 1 to Financial Abundance

January 15th, 2008 at 08:53 pm

The first step on the path to financial abundance is to spend less than you earn. While this may seem simplistic, a large portion of our consumer based society does not follow this step. While some people, living in true poverty, cannot follow this step, many Americans have simply chosen not to follow it. Because of this choice, the average American family now has over $10,000 in credit card debt.

Financial abundance is a product of our choices. If we choose to take the path to financial abundance, the first step must be to create “excess earnings” by spending less than we earn. “Excess earnings” are simply the amount of earnings that remain when yearly expenses are subtracted from yearly income. For most people, “excess earning” amounting to 15% of after tax income is sufficient. If 15% is not possible, start with 5% and add at least 1% more every three months. In 2 ½ years, you will reach the 15% goal.

To assure that you meet your “excess earnings” goal, I recommend that you “pay yourself first.” If less than 15% of after tax income is withheld for your company retirement plan, on each payday “pay yourself first.” Into your “excess earnings” account, put the difference between the15% total and the amount withheld for your company retirement plan. The “excess earnings” account helps begin your journey to financial abundance.

If you have any credit card debt, the first use for your “excess earnings” is to pay this debt. This will require a consistent application of these funds to your debt, combined with a significant reduction or elimination of further credit card purchases. Remember, if you have $1,000 in credit card debt, you likely pay $200 or more per year and receive nothing in return.

Once you have paid off your credit card debt, the next use for “excess earnings” is to build an “emergency fund.” This is an account, with highly liquid assets, that can provide 6 to12 months of income when a short term emergency occurs. With an emergency fund, if you are laid off from your job or are temporarily sick or disabled, you will have adequate savings to withstand this “emergency.” Without an emergency fund, you might be required to prematurely withdraw funds from your retirement accounts. This approach has short term tax penalties as well as the long term consequence of diminishing the funds available to fund your retirement.

Once you have paid off your credit card debt and built an emergency fund, the excess earning fund can be used for a down payment on your first house, for your children’s education or to help fund retirement. The next steps on your journey to financial abundance can only begin after you take control of your spending.

The Path to Financial Abundance

January 4th, 2008 at 10:51 pm

As we start a new year, it may be helpful to analyze strategies for taking more control over our financial health. By taking a more active role in our financial life, we begin to escape the fear of financial scarcity and start living with a feeling of financial abundance.

For some people, fear of financial scarcity controls their lives. When the fear of scarcity is controlling us, we will often either 1) Do nothing, out of fear that anything we do will be wrong or 2) Try “get rich quick” schemes which may leave us in a worse financial position.

To help my clients escape the fear of financial scarcity, I developed:

The Seven Steps of Financial Abundance

1. Spend Less Than You Earn
2. Maximize All Financial Resources
3. Minimize Taxes
4. Actively Manage Investments
5. Protect All of Your Assets
6. Keep Control Over Your Finances
7. Have Faith in Continued Abundance

These steps are basic tools to help control our financial lives. These tools are designed to help you “get rich slowly,” by using strategies to minimize your tax burden as well implementing techniques to manage and protect your financial assets.

In future posts, I will provide more detailed information on each step, including specific implementation strategies. Hopefully, this will help anyone who is interested in finding their path to financial abundance.