Tuesday, October 27, 2009
We can't help reiterating that one of the best ways to save money is to make your own food. It's almost always fresher, healthier, and tastier this way.
Take my salsa recipe. We were able to pluck nearly all of the major ingredients from our summer garden—the tomatoes, cilantro, and habaneros. Yes, the onion, lime, garlic, salt, and black pepper were store-bought, but these come cheap. So in a sense we only paid a pittance for about a liter of deliciousness.
Try out this recipe, but also experiment. Add your own ingredients like chipotles, mangoes, etc., if you wish to create your own flavors. Let us know about your recipe in a comment below.
Homemade Pico de Gallo
6 medium red tomatoes
6 medium yellow tomatoes
1 1/2 medium white onions
1/2 medium orange habanero (substitute: 1 Tablespoon cayenne)
1/2 cup cilantro
2 cloves garlic
1 lime, or to taste
salt, pepper to taste
1. Chop all ingredients and throw in a large mixing bowl. Chop garlic and especially the habanero super-finely.
2. Add the juice of one lime, salt, and pepper to taste.
3. Refrigerate for at least an hour before eating for flavors to blend.
You'll never want to buy any of that jarred stuff again.
This recipe was included in the Carnival of Gluten-Free Recipes and the Carnival of Savings.
Homemade Pico de Gallo with Garden Tomatoes
Thursday, October 22, 2009
We promised another giveaway today, and here it is. Our awesome sponsor UPrinting is offering two lucky TAiMH readers 100 free custom postcards (with free UPS shipping to the US, of course). Make them for yourself or someone else. Use them to promote your blog, special event, or business. Get creative and use them for invitations, thank-you cards, moving announcements, or whatever your little heart desires. These are really fantastic cards: 4 x 6, full-color on both sides on a sturdy 14-point glossy cardstock.
Ready to enter?
All you have to do is leave a comment on this post telling us how you might use the free postcards if you win.
Really want the cards? For additional entries, you can do any or all of the following and leave a comment here telling us you've done it:
- Blog about this giveaway and link to this post and UPrinting.com.
- Tweet this: Win 100 free custom postcards for invitations, biz promo, etc + free shipping! Enter at TAiMH: http://bit.ly/2LqVfV #giveaway
- Follow us on Twitter, Facebook, and/or MySpace. (1 entry each)
We'll announce the winner on the blog and a coupon code will be sent to the winner’s registered email on November 6, 2009, so if your blogger profile doesn't display your email address, be sure to leave it in your comment.
Don't forget to enter our other current giveaway from UPrinting, for an awesome 24 x 36" vinyl banner with grommets ($62 value plus free UPS Ground shipping).
Thank you to UPrinting for providing us here at TAiMH with our own set of 100 free postcards. We love them.
As Promised, The Next Big Giveaway: 100 Custom Postcards from UPrinting
Thanks to everyone who entered and helped promote the UPrinting business card giveaway.
The winner by randomly generated selection is:
Congratulations! UPrinting will be contacting you soon with the coupon code for your 250 free business cards. We hope you enjoy them and that you have success promoting your new business.
If you didn't win, don't fret. We'll be offering lots of other giveaways in the future. In fact, there's a new one coming up today, so check back in a bit. You can also enter the UPrinting Vinyl Banner Giveaway; it runs until October 29th.
As a side note, MDT and I have recently moved abroad for some long-term travel, so until we get settled into the new blogging groove here, posts may be fewer and farther between than usual. But we'll do our best.
UPrinting Business Card Giveaway: And the winner is...
Saturday, October 17, 2009
Retirement Basics: Common Sources of Retirement Income
Social Security Benefits
Though the future of social security is uncertain to say the least, right now the deal is that you pay into the system for as long as you work (6.2% up to the "wage base"--$102,00 in 2008), whether you're an employee or self-employed. In the case of the employed, the employer must also pay the same 6.2% on the worker's wages. In addition, both the employee and the employer must pay another 1.45% each on the total yearly income of the worker. The self-employed do not pay Social Security tax as such, but under a separate law are required to pay 15.3% of their total income; they basically pay both the employee and the employer shares of the Social Security tax, though they can deduct half (the employer's share) when they file their federal income taxes.
The calculation process for how much Social Security benefits a person will receive is ridiculously complex, so I won't get into it here, suffice it to say that it's based on the average of the worker's covered earnings (the largest amount covered in 2008 was $102,000) for the 35 years in which the worker earned the most.
Workers can begin receiving benefits at age 62, but they will be "reduced benefits." Workers are not eligible to receive the full benefits until the normal retirement age, which is currently defined as 67 years old for anyone born after 1960. For ever year after normal retirement age that a worker delays receiving benefits, the benefit amount will increase when they do begin accepting them.
Social Security also provides for the worker's spouse (though currently same-sex spouses are not covered) and children, and with a little maneuvering, it is even possible for the spouse and children to receive benefits even if the worker decides to continue working after his or her retirement age. A worker's widow or widower is similarly provided for, as is, in some cases, even a divorced spouse or divorced widow(er).
The problem is that even if (and it's a big IF) social security benefits are still around by the time we get to retirement age, it's doubtful they'll be enough to live comfortably on. Even now, the average individual's monthly social security check is only around $950, and it's taxable. Obviously, you're going to want to secure other sources of retirement income.
For more information about Social Security benefits visit their website.
Work Pension Plans/Employer-Sponsored Benefit Plans
There are two main types of employer-sponsored retirement plans: defined benefit plans and defined contribution plans.
A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service--for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).
A Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).
A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated defined contribution plan geared towards the self-employed and owners of small businesses. A SEP allows individuals to make contributions (up to 25% of their annual earnings with a maximum of $49,000) on a tax-deferred basis to individual retirement accounts (IRAs). Fidelity has a good site with more detailed information regarding SEPs and even an SEP-IRA Contribution Calculator.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
Don't get confused, you're right--whoever thought up the acronym for this defined contribution plan cheated a bit. Nevertheless, that's what it is, even though it's easy to confuse with the Simplified Employee Pension Plan above. Whatever. There are two main options for this type of tax-deferred IRA: 1) the employer contributes 2% of the employee's pay each year and the employee is able to contribute up to $10,500 per year. 2) The employee contributes to the plan (with the same maximum contribution) by deferring a percentage of their salary, and the employer must match that contribution (up to 3% of the employee's salary).
A Profit Sharing Plan or Stock Bonus Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution.
A 401(k) plan is a defined contribution plan where employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) account. Sometimes the employer may match these contributions. The money in the account is then invested in stocks, mutual funds, and/or other securities. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.
An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan in which the investments are primarily in employer stock.
A Money Purchase Pension Plan is a defined contribution plan that requires fixed annual contributions from the employer to the employee's individual account.
For non-retirement specific investment information, see our Investments Primer.
Investing for Retirement: Retirement Accounts Overview
When you buy an annuity, the bank or insurance company invests your money and agrees to pay you back according to the annuity's contract terms. In very basic terms, you make one or more (depending on the contract) payment to the bank/insurer as your investment, and they in turn agree to make a series of income payments to you, starting immediately or at some point in the future, for as long as you live.
Fixed annuities guarantee a set payment amount and are similar to CDs in that they have a fixed interest rate. Check around; often fixed annuities have higher interest rates than CDs.
Note: Always read the contract carefully. Some so-called fixed annuities only fix the interest rate for a specified period, such as one year, and the rate is variable after that.
- Promises a steady stream of income when you retire.
- Guarantees a fixed payment amount and interest rate.
- Tax-deferred growth—interest is not taxed until you collect your money.
- Typically low investment minimums (as little as $1,000).
- Not insured by the U.S. government or by the insurance company/bank where you buy them.
- Often come with high fees and a heavy penalty, called a surrender charge, for cashing before a designated period of time has passed.
- Payment amounts do not rise to keep pace with inflation, i.e. they will be worth less as time goes by.
Some annuities help you set aside money on a tax-deferred basis. You don't pay taxes on the income (interest) earned by this money until you retire. Other annuities allow you to receive income immediately, but it won't be tax deferred.
How they work
An annuity has two phases: an accumulation phase and a payout phase. During the accumulation phase, you make purchase payments, which you can allocate to a number of investment options. For example, you could designate 40% of your purchase payments to a bond fund, 40% to a U.S. stock fund, and 20% to an international stock fund. In addition, variable annuities often allow you to allocate part of your purchase payments to a fixed account, which unlike a mutual fund, pays a fixed rate of interest. The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum. During the accumulation phase, you can typically transfer your money from one investment option to another without paying tax on your investment income and gains, although you may be charged transfer fees by the insurance company.
At the beginning of the payout phase, you may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment, or you may choose to receive them as a stream of payments at regular intervals. If you choose to receive a stream of payments, you will often be able to choose how long the payments will last, e.g. for 20 years or for your lifetime. In addition, you may be able to choose to receive fixed payments or payments that vary based on the performance of your funds. The amount of each periodic payment will depend, in part, on the time period that you select for receiving payments.
Note: Some annuity contracts are structured as immediate annuities, which means that there is no accumulation phase and you start receiving payments as soon as you purchase the annuity. Annuities with an accumulation phase are called deferred annuities.
Many annuities carry a death benefit: if you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount—typically equal to your total payments. They also sometimes offer optional features (that carry extra charges), such as a guaranteed minimum income benefit, which guarantees a minimum payment amount even if you do not have enough money in your account (perhaps because of investment losses) to support that level of payments.
Fees, Charges, and Penalties
Annuities carry a number of standard fees as well as extra charges and penalties that can be incurred. Like mutual funds, variable annuities often carry some administrative fees (in addition to the administrative fees of the mutual funds it contains!).
A fairly standard charge for variable annuities is the mortality and expense risk charge, which is expressed as a percentage of your account value, typically around 1.25% per year. This charge compensates the insurance company for insurance risks it assumes under the annuity contract and is sometimes applied toward your financial professional's commission for selling the variable annuity to you. (Yes, they get commission; financial professionals get commissions from every investment product they sell you—which is why you need to make sure you understand for yourself the terms of any prospective investment and not just let your planner delegate your money to best suit their pocketbooks.)
Many variable annuities also have penalties for certain actions, such as early withdrawal. For instance, if you withdraw money from your account during the early years of the accumulation phase, you may have to pay a surrender charge, which is usually a percentage of the amount you withdraw (sometimes up to 15%), though many contracts allow for withdrawal of a certain percentage of your account value without incurring surrender charges. Surrender charges, when they do apply, generally decrease over time; for example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the surrender period is over. In addition to surrender charges, you may have to pay a 10% federal tax penalty if you withdraw anything before the age of 59½.
Other fees, such as initial sales loads and transfer fees may also apply. Plus, any special features or options you choose for your variable annuity, such as a stepped-up death benefit, long-term care insurance, or the guaranteed minimum income benefit, normally carry additional charges. As with mutual funds, you can find a description of all charges in the prospectus.
Equity-Indexed Annuities (EIA)
The first thing you need to know about EIAs is to be careful with them. Investment advisers get big commissions when they sign people up for an EIA, so some unscrupulous advisers will push EIAs even when they're not the best option for their client. Furthermore, EIAs are not regulated by the National Association of Securities Dealers or the Securities and Exchange Commission (until 2011).
How they work
EIAs are almost always deferred annuities, and during the accumulation period, they credit your account with a return whose rate is based on the performance of a particular stock index. Most EIAs guarantee a minimum return, often 3%, during this period. After the accumulation period, the insurance company will make periodic payments (or one lump sum) to you under the terms of your contract.
It is important to note, however, that even with a guaranteed minimum return, you can lose money with an EIA if your guarantee is based on an amount that is less than the full amount of your purchase payments.
Factors affecting rate of return
Some EIAs use a simple price index, which means they calculate the rate without counting reinvested dividends. This can make quite a difference to your ROR. For example, in the past forty years, the average S&P 500 gain is 3.8 percentage points higher with reinvested dividends than without.
Method of Calculating Index Changes
EIAs also employ different methods for calculating yearly changes in an index, which can produce wide disparities in returns. Three common methods are:
- Annual Reset (or Ratchet) - This method credits index-linked interest based on any increase in index value from the beginning to the end of the year.
- Point-to-Point - This method credits index-linked interest based on any increase in index value from the beginning to the end of the contract's term.
- High Water Mark - This method credits index-linked interest based on any increase in index value from the index level at the beginning of the contract's term to the highest index value at various points during the contract's term, often the anniversaries of the annuity's purchase date.
Caps are limits on the rate of interest the EIA can earn, regardless of the performance of the index.
The participation rate determines how much of the index's gain will be used to compute the index-linked interest rate. If it is less than 100%, you won't be getting the full index gain. For example, if the participation rate is 80% and the index increases 9%, the return credited to your annuity would be 7.2% (9% × 80% = 7.2%).
Between participation rates and caps, an EIA's earnings can be significantly lower than you might expect. Participation rates and caps may be changed annually, depending on your contract.
Many EIAs provide that you'll receive at least 100% of your invested funds; others guarantee only 90%.
Your EIA earnings are tax-deferred until you withdraw them, at which time they are taxed as income; gains from an S&P 500 index fund are taxed at lower capital gains rates.
Fees, Charges, and Penalties
Spread / Margin / Asset Fee
Some EIAs annually subtract a certain percentage of the index gain and call it a "margin," "spread," or "administrative fee." In the case of an annuity with a "spread" of 3%, assuming no cap and a participation rate of 100%, if the index gained 9%, the return credited to the annuity would be 6% (9% - 3% = 6%).
Surrender charges and tax penalties
You also may have to pay a significant surrender charge and/or tax penalties if you cancel early. In addition, in some cases insurance companies may not credit you with index-linked interest if you do not hold your contract to maturity. Also, if you make any withdrawals before the age of 59 1/2, you'll be charged a 10% tax penalty in addition to the income tax on the amount withdrawn.
The final word: Be very careful with EIAs. Read the contract meticulously, and do not rely solely on the assurances of the adviser or salesperson.
A variable annuity is part insurance/part security investment; the "variable" means that its value and your income from it is variable—it can move up and down, i.e. you can lose money. Since variable annuities are long-term investments that can tie up your money for many years, the younger you are, the better.
Like 401(k)s and traditional IRAs, variable annuities are tax-deferred, which means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.
Choosing an annuity
Like with any investment, before buying an annuity you should request and read the prospectus and compare the costs and earning potential to other variable annuities and to other types of investments, such as mutual funds. You'll also want to consider the financial strength of the insurance company, which can affect their ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, or amounts you have allocated to a fixed account investment option.
For more information and helpful examples, see the SEC's page on variable annuities.
Stocks: What To Look For, How to Trade For Long-Term Gains
Bonds: The Basics
Funds: Mutual Funds, ETFs, Closed-end Funds, Hedge Funds, Oh My!
Annuities: What Are They and How Do I Find the Right One For Me?
A fund is a pooled investment vehicle--where many individuals pool their money to purchase many investment products, each owning a percentage of the whole, or a share. There are three basic types of pooled investment vehicles: open-end funds, closed-end funds, and unit investments trusts (UITs).
Open-end funds are called open-ended because the number of shares they can sell is is not fixed; they continuously issue new shares and redeem existing ones. Mutual funds are the best-known examples of open-end funds.
Closed-end funds, unlike mutual funds, sell a fixed number of shares at one time (in an initial public offering) that later trade on a secondary market.
Unit Investment Trusts (UITs) make a one-time public offering of only a specific, fixed number of redeemable securities called "units," which will terminate and dissolve on a date specified at the creation of the UIT.
Exchange-traded funds (ETFs) can be either open-end funds or UITs and aim to achieve the same return as a particular market index.
A "hedge fund" is a non-legal term meaning a private, unregistered investment pool traditionally limited to experienced, wealthy investors. Because hedge funds are not mutual funds, they are not subject to the regulations that govern mutual funds and therefore do not offer the same protection for investors.
There are even "funds of hedge funds," which often have lower minimum investment thresholds so that they can sell to more investors that traditional hedge funds, but offers more limited rights of redemption than mutual funds. Funds of hedge funds are usually not listed on any exchange.
Chances are, if you're reading this, you're not an experienced, wealthy investor, so you should probably steer clear of hedge funds for the time being. To learn more about hedge funds and funds of hedge funds, see FINRA's Investor Alert, "Funds of Hedge Funds--Higher Costs and Risks for Higher Potential Returns."
Mutual Funds (open-end funds)
How they work
Mutual funds are established so that individual investors can pool their money and create a diversified portfolio. When you buy mutual fund shares, you become a shareholder of a fund that holds a variety of investments. By diversifying, a mutual fund spreads risk across numerous investments sources (often including stocks, bonds, and money market assets) rather than relying on just one to perform well. Many investors choose to buy mutual funds that spread their investments across a range of industry sectors to further diversify their holdings, while others
Mutual funds have varying degrees of risk. They also have costs associated with owning them, such as management fees, that will vary depending on the type of investments the fund makes. The price that investors pay for a mutual fund share is called the NAV or net asset value per share, plus any shareholder fees such as sales loads. All mutual fund shares have a high degree of liquidity, meaning that investors can decide to sell their shares back to the fund at any time (at the current NAV plus any redemption fees and charges).
Mutual funds are run by investment professionals who decide which investments to buy or sell for the fund. Their decisions are guided by the fund's investment goals. For example, some mutual funds are designed for people who want to have easy access to their money and invest only for a short time. These funds invest primarily in government securities or very short-term bank CDs, where the investment risks are moderate. Other mutual funds appeal to people who are willing to take on more risk with the goal of a higher return. Such funds invest primarily in corporate or municipal bonds. Most mutual funds, however, are more diverse, offering a mix of investments. A typical fund portfolio includes between 30 and 300 different stocks, bonds, and other investments.
Since mutual funds are managed by financial professionals, they can be a good choice for a beginning investor. This is not to say, however, that mutual funds are risk-free because even financial investment planners aren't perfect (despite what they may tell you). But in general, the potential gains from investing in a mutual fund outweigh the potential losses if you're in it for the long haul.
Funds can earn money in 3 ways: dividend payments, capital gains distributions, and increased NAV.
- A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders the income (minus disclosed expenses) it has earned in the form of dividends, or the shareholder can choose to have the dividends reinvested in the fun to buy more shares.
- The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors, unless the investor has chosen to have these earnings reinvested.
- If the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. This increase is not paid to the investor, but reflects the higher value of the investment.
The share price (the price that investors pay to purchase mutual fund shares) is the approximate per share NAV, plus any fees that the fund imposes at purchase (such as sales loads or purchase fees, discussed below). The price that investors receive on redemptions is the approximate per share NAV at redemption, minus any fees that the fund deducts at that time (such as deferred sales loads or redemption fees, also discussed below).
Fees and Expenses
When choosing a mutual fund, you'll want to look at not only its holdings, stated goals, risks, and past rate-of-return, but also any fees and expenses incurred--all of which you can find in a fund's prospectus. All mutual funds charge fees (hey, those fund managers have to pay for their BMWs somehow), which are usually listed as a percentage of average net assets, called the total annual fund operating expense (aka expense ratio). Obviously, the lower the percentage, the better, as fees and taxes diminish a fund's return. Unfortunately, investors must pay the shareholder fees, sales charges, and other expenses (see below) regardless of the fund's performance. All shareholder fees and operating expenses (see below) must be displayed in a fund's prospectus in the fee table.
A sales charge (aka front-end load) is a fee expressed as a percentage of your investment. For instance, if you want to invest $1,000 in a fund with a 5% sales charge, $50 will go to the broker for the front-end load and the remaining $950 will be invested. Some mutual funds reduce the front-end load as the size of your investment increases. Similar to the sales charge is the purchase fee, which some funds charge in order to pay some of the administrative costs of trading shares. When you sell your shares, another fee, called a deferred sales charge (aka back-end load), which goes to the broker who makes the sale. Usually it depends on the length of time the investor owned the shares (decreasing with time); this type of back-end load is called a contingent deferred sales load (aka CDSC or CDSL). A redemption fee is basically the same as a purchase fee, except that it's paid when you sell your shares rather than when you buy. Some funds charge what they call an account fee that they use for account maintenance and administration; it's usually imposed on accounts with a low value.
Note that even no-load funds may charge shareholder fees, such as purchase, redemption, and account fees, as well as operating expenses.
Some mutual funds that charge front-end sales loads will charge lower sales loads for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as breakpoints. You should always ask how a fund you're interested in establishes eligibility for breakpoint discounts (if it has them), as well as what the fund's breakpoint amounts are. NASD's Mutual Fund Breakpoint Search Tool can help you determine whether you're entitled to breakpoint discounts.
Annual Fund Operating Expenses
These fees are paid out of fund assets. Management fees are administrative fees that go to the fund's adviser or manager; distribution (and/or service) fees (aka 12b-1 fees) cover the costs of marketing and selling shares and investor services. Other fees may be imposed to defer custodial, legal, and accounting expenses.
When choosing a fund, pay close attention to the fee tables as even a small difference in fees can translate into a big difference in returns over a long period of time. You can compare the fees and expenses of up to three mutual funds, or the share classes of the same mutual fund with FINRA's (Financial Industry Regulatory Authority) Mutual Fund Expense Analyzer. It also allows you to compare the fees and expenses of up to three mutual funds. Enter each fund's ticker symbol or select the fund through the drop down menu. If you can't remember the exact name of the fund, you can search for it using key words.
The SEC's (U.S. Securities and Exchange Commission) online interactive Mutual Fund Cost Calculator can also help you compare the costs of different mutual funds and understand the impact that many types of fees and expenses can have over time. Unlike NASD's Mutual Fund Expense Analyzer, you'll need to enter fee and expense information manually from a prospectus or other disclosure document when using this tool.
Many mutual funds have what they call share classes, usually denoted as Class A, Class B, etc. All the share classes of one fund will invest in the same portfolio and have the same investment goals, etc.; the difference is in the shareholder services and/or distribution arrangements (and correspondingly, different fees and expenses. In general, mutual fund class structures work like this:
Class A shares typically have a front-end sales load, a lower 12b-1 fee, and lower annual expenses than other share classes. If you're considering Class A shares, be sure to ask about breakpoints.
Class B shares typically do not have a front-end sales load, but may impose a contingent deferred sales load and a 12b-1 fee (along with other annual expenses). Class B shares also might convert automatically to a class with a lower 12b-1 fee if they're held long enough.
Class C shares may or may not have a 12b-1 fee and either a front- or back-end sales load, but the loads for Class C shares tends to be lower than other classes. This class of shares generally does not convert to another class and tends to have higher annual expenses than other classes.
Categories of Mutual Funds
There are thousands of mutual funds to choose from; most of them fall into one of three categories: money market funds, bond funds (aka fixed income funds), and stock funds (aka equity funds), each having different features, advantages, and disadvantages.
Money Market Mutual Funds (MMMFs)
MMMFs are low-risk, low-return mutual funds that invest in the short-term money market. By law, they can only invest in certain high-quality investments issued by the U.S. federal, state, and local governments, as well as U.S. corporations. Money market mutual funds pay dividends based on current short-term interest rates, and because returns for these funds are generally lower than for bond or stock funds, inflation risk can be a concern. Do not confuse a money market fund with a money market deposit account. The names are similar, but they are completely different:
Bond funds usually have higher risks and higher returns that money market funds. These risks may include credit risk, interest rate risk, and prepayment risk. Credit risk, the possibility that the companies whose bonds the fund owns default on their debts (the bonds), can be kept low by choosing a fund that invests in insured bonds or bonds issued by the U.S. Treasury. Interest rate risk is the possibility that the market value of the individual bonds will go down when interest rates rise; longer-term bonds are generally at higher risk for this. If interest rates fall, a bond issuer may decide to pay off its debt (your bonds) early and issue new bonds paying a lower interest rate that is more in line with the market. Your fund will then have to try to reinvest that money in another set of bonds; the risk here is that if prepayment happens, the fund may not be able to find another bond that pays as high a return as the original bond (since interest rates have lowered). This is called prepayment risk, and since it depends on the market, there's really no way to prevent it.
Stock Funds (aka equity funds)
Stocks have historically performed better than bonds and treasury securities over the long run. The biggest risk with investing in stocks (and stock funds) is overall market risk--the danger that stock prices will go down because of the general state of the economy (as is happening now) or because of a fall in demand for particular products or services that the companies you've invested in provides.Types of Stock Funds
There are several types of stock funds, including growth funds, which invest in stocks that have the potential for large capital gains but that may not pay regular dividends, income funds which instead focus on stocks the do pay regular dividends, index funds, which invest only in companies of a specific market index in hopes that the fund will achieve the same return as that index, and sector funds, which invest mainly in a particular industry, such as technology or energy.
There are three basic styles used by fund managers in choosing which stocks to include in their funds' portfolios: the value approach, the growth approach, and the blend approach. In the value approach, managers choose stocks that are undervalued compared to similar companies; in the growth approach, managers look for stocks that are growing faster than their competitors or than the market as a whole; these are often well-known, established companies. The blend approach is used to build a portfolio of both value and growth stocks.
The stocks in a fund's portfolio can be U.S. companies or foreign companies. Since in the past U.S. and international economies have not been in sync, i.e. their stocks experience, as a whole, growth at different times, most financial advisers recommend diversifying by choosing both domestic and international funds for your portfolio.
Depending on your investment goals, of course, it is usually wise to further diversify your asset allocation further between different types of funds (stocks, bonds, cash/stable value funds) and to include all three "caps" in your portfolio. Cap or capitalization is a measurement of the size of a company, and is relevant because size/worth is related to growth potential and risk. Generally, large-cap companies are worth over $5 billion, mid-cap companies are worth $500 million to $5 billion, and small-cap companies are worth less than $500 million. Larger cap funds tend to have slower but more stable growth and usually have relatively low risk, while smaller cap funds may have faster growth potential but also might carry a higher risk.
Trading Mutual Fund Shares
Once you've found a fund you want to buy in to, you can either contact the fund directly, your broker, financial planner, or bank.
Some funds offer exchange privileges within the fund family, a group of funds that share administrative and distribution systems but that may have different objectives, strategies, and risks. Not all funds are part of a family, but if they are, you can often transfer your holdings from one fund to another as your investment goals change, usually without any fees. Taxes consequences do apply on exchanges, though--you'll have to pay taxes on the capital gains of your old shares (or if you've lost, you'll be able to take a capital loss).
Tax Consequences of mutual funds
When you own individual stocks or bonds, you must pay income tax each year on the dividends or interest you receive, but you won't have to pay any capital gains tax until you actually sell and unless you make a profit. Mutual funds work differently. When you buy and hold mutual fund shares, you will owe income tax on any ordinary dividends in the year you receive or reinvest them, and when you sell your shares, you will owe taxes on any personal capital gains. You may even have to pay capital gains taxes each year you hold the shares (since law requires mutual funds to distribute capital gains to shareholders if they sell securities for a profit that can't be offset by a loss.)
Tax Exempt Mutual Funds
Though some or all of the dividends from tax-exempt funds such as municipal bond funds are exempt from federal (and sometimes state and local) income tax, you do have to pay taxes on capital gains.
Here's the trick: if you receive a capital gains distribution, you will probably have to pay taxes even if the fund has had a negative return since the point during the year when you purchased your shares. For this reason, you should contact the fund to find out when it makes distributions so you won't pay more than your fair share of taxes. Sometime that information can be found on the fund's website.
Comparing mutual funds
When comparing mutual funds, be sure to take each of the following into account:
- category/type of fund
- tax consequences
- fund objectives/goals and strategies
- level of risk vs. return
- share classes available
- fees and expenses
- level of diversification
- types of holdings (industry, company size and health, etc.)
- past performance (though this is not necessarily a reliable indicator of future performance)
- price/affordability of shares
- minimum initial investment
- how shares are purchased and redeemed
Here's some of what you'll find in mutual fund prospectuses:
- Date of Issue — The date of the prospectus should appear on the front cover. Mutual funds must update their prospectuses at least once a year, so always check to make sure you're looking at the most recent version.
- Risk/Return Bar Chart and Table — Right after the fund's narrative description of its investment objectives or goals, strategies, and risks, you'll find a bar chart showing the fund's annual total returns for each of the last 10 years (or for the life of the fund if it is less than 10 years old). Except in limited circumstances, funds also must include a table that sets forth returns, both before and after taxes, for the past 1-, 5-, and 10-year periods. The table will also include the returns of an appropriate broad-based index for comparison purposes. Bear in mind that the bar chart and table for a multiple-class fund will typically show performance data and returns for only one class.
- Fee Table — The fee table includes an example that will help you compare costs among different funds by showing you the costs associated with investing a hypothetical $10,000 over a 1-, 3-, 5-, and 10-year period.
- Financial Highlights — This section contains audited data concerning the fund's financial performance for each of the past 5 years. Here you'll find net asset values (for both the beginning and end of each period), total returns, and various ratios, including the ratio of expenses to average net assets, the ratio of net income to average net assets, and the portfolio turnover rate.
Generally, closed-end funds sell a fixed number of shares at one time (in an initial public offering) after which the shares typically trade on a secondary market, such as the NYSE or the Nasdaq. Closed-end fund shares are also generally not redeemable, i.e. the investment company is not required to buy its shares back from investors upon request. Some closed-end funds, commonly referred to as interval funds (see below), offer to repurchase their shares at specified intervals.
The investment portfolios of closed-end funds are usually not managed by the company itself, but by independent investment advisers that are registered with the SEC. Be aware that closed-end funds are permitted to invest in a greater amount of illiquid securities than are mutual funds. Because of this feature, funds that seek to invest in markets where the securities tend to be more illiquid are typically organized as closed-end funds.
Unlike mutual funds, the prices of closed-end fund shares that trade on a secondary market after the initial public offering is determined by the market and may be greater or less than the fund's per share NAV.
An interval fund is a type of investment company that periodically offers to repurchase a certain number of shares from its shareholders. Shareholders, however, are not required to accept these offers.
Even though interval funds are classified as closed-end funds, they differ from traditional closed-end funds in the following ways:
- Interval fund shares typically do not trade on the secondary market.
- Interval fund companies are permitted to continuously offer their shares at a priced based on the fund’s NAV.
- An interval fund will make periodic repurchase offers to its shareholders, generally every three, six, or twelve months, as disclosed in the fund’s prospectus and annual report. The interval fund also will periodically notify its shareholders of the upcoming repurchase dates. When the fund makes a repurchase offer to its shareholders, it will specify the last day shareholders are allowed to accept the repurchase offer. The actual repurchase will occur at a later, specified date.
The price that shareholders will receive on a repurchase will be based on the per share NAV determined as of a specified (and disclosed) date. This date will occur sometime after the close of business on the date that shareholders must submit their acceptances of the repurchase offer (but generally not more than 14 days after the acceptance date).
Fees and expenses
Note that interval funds are permitted to deduct a redemption fee from the repurchase proceeds, not to exceed 2% of the proceeds. The fee is paid to the fund, and generally is intended to compensate the fund for expenses directly related to the repurchase. Interval funds may charge other fees as well.
Exchange-Traded Funds (ETFs)
Like index funds, ETFs seek to achieve the same return as a particular market index and primarily invest in either all of the securities or a representative sample of the securities of companies that are included in a that index. For example, one type of ETF, called a Spider or SPDR, invests in all of the stocks contained in the S&P 500 Composite Stock Price Index. ETFs, as their name suggests, are traded on exchanges, so you can purchase shares via a broker account (like individual stocks).
How they work
Exchange-traded funds, or ETFs, are investment companies that are legally classified as either open-end funds or UITs, but that differ from traditional open-end companies and UITs in the following respects:
- ETFs do not sell individual shares directly to investors and only issue their shares in large blocks that are known as creation units. Investors generally do not purchase creation units with cash. Instead, they buy creation units with a basket of securities that generally mirrors the ETF’s portfolio. Those who purchase creation units are frequently institutions.
- After purchasing a creation unit, an investor or institution often splits it up and sells the individual shares on a secondary market. This permits other investors to purchase individual shares (instead of creation units).
- Investors who want to sell their ETF shares have two options: (1) they can sell individual shares to other investors on the secondary market, or (2) they can sell the creation units back to the ETF.
- In addition, ETFs generally redeem creation units by giving investors the securities that comprise the portfolio instead of cash. So, for example, an ETF invested in the stocks contained in the Dow Jones Industrial Average (DJIA) would give a redeeming shareholder the actual securities that constitute the DJIA. Because of the limited redeemability of ETF shares, ETFs are not considered to be—and may not call themselves—mutual funds.
Fees and Expenses
An ETF will have annual operating expenses and may also impose certain shareholder's fees that are disclosed in the prospectus. However, ETFs are generally more cost efficient than mutual funds because they are based on an index, and do not need to be actively managed, thereby saving you management costs. Like stocks, investors can purchase ETF shares on margin, short sell shares, or hold onto them for the long haul.
Stocks: What To Look For, How to Trade For Long-Term Gains
Bonds: The Basics
Annuities: What Are They? How Do They Work? And How Do I Find the Right One For Me?
Image via WikipediaHow they work
When you buy bonds, you are lending money to a federal or state agency, municipality, or other issuer, such as a corporation. A bond is like an IOU. The issuer promises to pay a stated rate of annual interest, called the coupon rate during the life of the bond and repay the entire face value when the bond comes due or reaches maturity. The interest a bond pays is based primarily on the credit quality of the issuer and current interest rates. When bonds are purchased, they may be held to maturity or traded. In general, bonds are lower risk investments that have lower returns than stocks.
A bond may be sold at face value, which is the amount returned to the investor at maturity, (also called par) or at a premium (higher price) or discount (lower price). For example, when prevailing interest rates are lower than the bond's stated rate, the selling price of the bond rises above its face value and can be sold at a premium. Conversely, when prevailing interest rates are higher than the bond's stated rate, the selling price of the bond is discounted below face value.
Yield-to-maturity is the effective yield of the bond from the current date until the bond reaches maturity and depends on the total interest payments remaining, and the difference between today’s market value (current price) and par value. Yield-to-call is the same calculation based on the total coupon interest payments remaining between now and the first call date (rather than the maturity date) as well as the difference between today’s market value (price) and the call price.
Bonds are fixed income products, meaning that the amount you will receive is set when you buy it. In this way, bonds are low-risk investments. The bond market as a whole has historically been less volatile than the stock market, as well. Corporate bonds are usually riskier than government, Treasury, or municipal bonds because there is the potential for the corporation to go under and not be able to afford to pay its bonds when they reach maturity. All bonds carry some risk, however, including inflation risk and interest rate risk (because bond prices generally decline when interest rates rise and vice versa.) These two types of risk are related in that inflation leads to higher interest rates. Bonds with the lowest coupons are at the highest risk when interest rates rise.
Short-term bonds (those with maturities of three years or less) usually have lower yields than longer-term bonds, especially those with maturities of ten or more years. This is because the longer a bond is held, the more subject the holder is to inflation and interest rate risk.
Inflation-indexed securities like Treasury Inflation Protection Securities (TIPS) are designed to get rid of inflation risk.
Firms like Moodys Investor Service and Standard & Poor's rate bonds. With corporate bonds, the company's bond rating is based on its financial picture. The rating for municipal bonds is based on the creditworthiness of the governmental or other public entity that issues it. Issuers with the greatest likelihood of paying back the money have the highest ratings, and their bonds will pay an investor a lower interest rate. Remember, in general, the lower the risk, the lower the expected return.
Callable vs. Noncallable
The idea here is the same as with callable and non-callable CDs.
Types of Bonds
Government Savings bonds (EE/E or I bonds) are U.S. government-issued and backed. There are different types of government savings bonds, each with slightly different features and advantages. Series I bonds are indexed for inflation, meaning that they protect against the deterioration of your investment from inflation—the earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflation. Savings bonds can be purchased in denominations ranging from $50 to $10,000, and typically earn higher interest than savings accounts and CDs, but often lower than other types of bonds.
Ginnie MaeTreasury bonds, bills and notes are sold by the U.S. Treasury to pay for an array of government activities and are backed by the federal government (like Ginnie Maes). Treasury bonds are securities with terms of more than 10 years and that pay interest semiannually. Treasury bills are short-term securities with maturities of three months, six months or one year and are sold at a discount from their face value. The difference between the cost and what you receive at their maturity is the interest you earn. Treasury notes are securities with maturities ranging from two to ten years that pay interest every six months. Treasury Inflation Protected Securities (TIPS) are securities that, like Series I government bonds, protect against inflation. With TIPS, interest is paid on the inflation-adjusted principal.
The Government National Mortgage Association (GNMA aka Ginnie Mae) is a government agency that buys mortgages from lenders, pools them together, and sells shares of the pool to investors (or to brokers who then sell them to investors). The pools are called Mortgage Backed Securities (MBS) aka "pass-through" securities because the mortgage payments (from the home-owners who hold the mortgages) pass through banks (which take out a processing fee) to the investors who've bought the MBSs.
What makes Ginnie Mae MBSs unique is that since the GNMA is a government agency, they get special treatment such as low interest rates on any money they borrow from the government and tax-exempt status from (most) states and municipalities, and are therefore often able to offer higher yields than other MBSs. Plus, Ginnie Mae MBSs (unlike Freddie Mac's, Fannie Mae's, and other MBSs) are fully backed by the U.S. government, i.e. your money is as safe as houses (pun intended) no matter what happens with the housing market, various financial agencies, etc. This means that Ginnie Maes are just as safe as Treasuries but often pay higher interest.
Investors receive a monthly payment either of interest and a portion of principal or of interest only. In the latter case, the principal is paid in a lump sum when the mortgage matures. The minimum investment for Ginnie Maes is $25,000, making them out of reach (or just plain undesirable) for most of us, but that's where mutual funds and the secondary market come in. Like other bonds, Ginnie Maes can be sold by their current owners who are willing to unload them at a lower price because, for instance, their interests are low compared to newer issues or they're close to maturity and there isn't much principal left to be paid.
The risks for Ginnie Maes are minimal but existent. A bunch of the mortgage holders in the pool could decide sell their homes, pay their loans off early, or refinance, causing the investors to be paid back early. This isn't so much a risk as it is slightly unfortunate. You don't lose anything; you just don't get paid as much interest as you would if the mortgages were held to maturity.
Treasury securities are sold in increments of $1,000, and along with government savings bonds, can be purchased online directly from the U.S. Treasury. There is no state or local income tax on the interest earned from Treasury and savings bonds
Municipal bonds are issued by a state, state agency or authority, or a county, city, town or village. The money invested in the bonds is used by these entities primarily for public projects such as building or repairing schools, roads, highways, bridges, hospitals, and low income housing. This type of bonds is among the safest of investment types and is special because of its tax-exempt status. This feature makes munis especially attractive to investors in the highest tax brackets.
The interest munis pay is often lower than that of other bonds, but since other bond interest is taxed, you will not actually receive that much. For a more accurate comparison of actual interest you would receive, use the muni's tax equivalent yield (TEY) for your tax bracket. The TEY will be higher than the stated yield; it's basically the pre-tax yield that a taxed bond would have to pay in order to equal that muni's stated yield. Discount muni bonds may be subject to capital gains tax when sold.
Corporate bonds are basically loans an investor makes to a company in exchange for interest. Buying bonds for a single company is much like owning stocks in a single company; if something happens to that corporation, you can lose some, if not all, of your investment. Bond mutual funds are an alternative that spread the risk among multiple companies. While bond funds can lose money as interest rates increase, they tend to offer greater protection from losses than single bonds or stock funds.
Stocks: What To Look For, How to Trade For Long-Term Gains
Funds: Mutual Funds, ETFs, Closed-end Funds, Hedge Funds, Oh My!
Annuities: What Are They? How Do They Work? And How Do I Find the Right One For Me?
Buying stock makes you a partial owner of that company. You're basically betting that the company will be successful. This can be exciting, especially if you're really interested in what the company does. But the most common, and best, advice about buying stocks is that you can't put all your eggs in one basket. In other words, do not, no matter how great the company is, put all your money into that one stock. The risk is just too much. It's generally advisable to diversity your portfolio, which means investing in many different companies and industries. To diversify a portfolio, an investor should own at least ten different stocks in different industries.
Unless you have loads of cash and are able to buy millions of dollars of diversified stocks, by nature owning stock directly carries a higher risk than investing in a mutual fund. The advantages are in the lack of management fees (because you do it yourself) and direct control over your investments.
How they work
When you buy stock, you become a part owner of the company and are known as a stockholder, or shareholder. Stockholders can make money in two ways--receiving dividend payments and selling stock that has appreciated. A dividend is an income distribution by a corporation to its shareholders, usually made quarterly. Stock appreciation is an increase in the value of stock in the company, generally based on its ability to make money and pay a dividend. However, if the company doesn't perform as expected, the stock's value may go down. There is no guarantee you will make money as a stockholder. In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up.
Day-trading and other short-term stock holding techniques make for some very risky investments. The best way to minimize risk and maximize potential is to become a long-term investor. Plan on holding your stocks for years--at least five and preferably many more. The idea is that if you choose the right companies, over the years they will grow and continue to be successful and their stock will appreciate. The longer the investment term, the more the risk decreases since you're allowing time for any spikes in performance to even out to a slow growth.
Why Some Investments Make Money and Others Don't
You can potentially make money in an investment if:
- The company performs better than its competitors.
- Other investors recognize it's a good company, so that when it comes time to sell your investment, others want to buy it.
- The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your stock.
- The company's competitors are better than it is.
- Consumers don't want to buy the company’s products or services.
- The company's officers fail at managing the business well, they spend too much money, and their expenses are larger than their profits.
- Other investors that you would need to sell to think the company's stock is too expensive given its performance and future outlook.
- The people running the company are dishonest. They use your money to buy homes, clothes, and vacations, instead of using your money on the business.
- They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesn't, or make up fake numbers on their finances to dupe investors.
- The brokers who sell the company's stock manipulate the price so that it doesn't reflect the true value of the company. After they pump up the price, these brokers dump the stock, the price falls, and investors lose their money.
- For whatever reason, you have to sell your investment when the market is down.
Buying Stock: How to Pick 'Em
Before investing in a company, learn about its past financial performance, management, products, and how the stock has been valued in the past. Learn what the experts say about the company and the relationship of its financial performance and stock price. Successful investors are well informed.
Where do you find all that information? You could go to the company's website and try to find its financial statements and annual reports, then visit a bunch of financial news sites or get a free subscription to Investor's Business Daily. But if you're short on time, websites like Morningstar, TDAmeritrade, Scottrade, and Yahoo! Finance make the basic information you'll need easier to find. Each of these sites let you search stocks by ticker symbol and access profiles of that company and its stock. Most include of these sites include in each company's profile organized financial stats, analyst commentary, relevant news, and helpful charts. If you don't have a certain company in mind, all of the above sites have free customizable stock screeners which let you search stocks by various criteria.
No set of criteria will guarantee you a winning stock, but here are some tips:
- Look for companies with high cash to debt ratios. Then look for mid-level payout ratios; too high could be dangerous because it could mean that the company is overreaching. You don’t want a company that pays out more than it can afford. A good average is around 40%.
- Also avoid stocks with high dividend yields (for the market at the time). By nature of its definition, a stock's dividend yield falls when its price goes up, and vice versa. A yield above 6% could mean that share price is plummeting. Furthermore, high yields tend to indicate mature companies with little opportunity for growth.
- This one might seem obvious, but it's important so it's getting listed anyway: profits. Look for companies with high profits, and more specifically high profits relative to revenues. If Company A and Company B both have 1-year profits of, say, $2 million, but Company A's revenue is lower, all else being equal, Company A's stock would be more desirable. Why? Because a higher percentage of the money it brings in directly benefits its shareholders by increasing the company's net worth.
- Look for a high P/E (above 30). This tends to indicate a better growth rate and expectation of future profits. Particularly avoid stocks with low price-to-earnings ratios (below 15) because they tend towards slower growth and lower profit expectations.
If you're serious about learning the details about a company, it's time to check out their financial statements and reports. Most of these you can access from the company's website and/or from the monitor/broker sites listed above.
Your first stop: the income statement. The income statement contains the following information:
- Revenue: how much money the company has earned
- Expenses: how much money the company has spent
- Gross profit: how much money the company has left after sales to pay its operating expenses (revenue − cost of sales)
- Net income: how much money is left after all expenses are paid, i.e. actual profit. Also called earnings, profit, "bottom line."
- Earnings per share (EPS): net income ÷ number of shares outstanding
- Equity aka stockholder's equity aka net assets aka net worth: how much more the company owns than it owes
- Market capitalization: a company's market value (stock price × shares outstanding)
- Gross margin: gross profits ÷ revenues
- Operating margin: operating profits ÷ revenues
- Net margin: net profits ÷ revenues
- Price to earnings ratio (P/E): very roughly, how expensive or cheap a stock is at the moment (stock price ÷ earnings per share). One way to gauge how a stock is valued relative to the market is to compare its P/E with the average S&P 500 P/E.
- Return on equity (ROE): net income ÷ equity
- Dividend Yield: annual dividends per share ÷ stock price
(from the Morningstar.com website)
- Go to Morningstar.com and click on the tab labeled "Portfolio."
- In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio."
- You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue."
- Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done."
- In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again.
- Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com.
Bonds: The Basics
Funds: Mutual Funds, ETFs, Closed-end Funds, Hedge Funds, Oh My!
Annuities: What Are They? How Do They Work? And How Do I Find the Right One For Me?
Stocks: Owning Part of a Company
Your credit score is based on how you manage the credit you already have. Credit cards, car loans, mortgage loans, student loans, and utility bills all play a part in your credit score. If you miss payments, make late payments, or default on any of these, your score will fall. Conversely, if you always pay at least the minimum payment and always pay on time, your score will increase.
Maintaining a good credit score is incredibly important. If you have poor credit, it will be very difficult to get a good interest rate on a loan for, say, a house or a car when the time comes. It can even affect how much you pay for insurance.
Federal Trade Commission's article with more info on credit scores
You are entitled to one free copy of your credit report from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion) once a year. Anything above that, you will have to pay for (they charge up to $9.50). In order to receive your credit report, you must contact the agencies and request that they mail it to you. Do not contact each company separately; they've set up a website and toll-free number (1-877-322-8228) together, so that you can do all your requesting in one place.
Federal Trade Commission's article with more info on free credit reports
The consumer reporting companies are allowed to report most information about your credit for up to seven years, except for bankrupcy which can be reported for up to ten years.
Federal Trade Commission's article about how to recognize credit repair scams
If you find an error on your credit report, you can dispute it with the reporting company by contacting the credit reporting company (online, by fax, or by certified mail) and identifying the creditor you have a dispute with and the nature of the error. Include verifiable information, such as canceled checks or receipts, that support your complaint. The credit reporting company must investigate your complaint
within 30 days and get back to you with its results.
If for some reason, the error does not get resolved, contact the creditor with whom you have the dispute directly and try to correct the error that way. Once it's corrected, ask them to send notice of the correction to the credit reporting company.
If the error still remains unresolved, you have the right to explain in a statement that will go on your credit report. You also have the right to issue this sort of explanation even if the issue is not a reporting error, i.e. if you were actually at fault. For example, if you did not pay a car repair bill because the mechanic didn’t fix the problem, the unpaid bill may show up on your credit report, but so will your explanation.
See also: Credit Cards main, Choosing a Card: What to Look For, Establishing Credit
Credit Scores: How They're Calculated and How They Affect Your Interest Rate
Finding the Best Deal on a Credit Card
There are tons of credit cards out there, and they all have different fees, interest rates, qualifications, restrictions, and benefits. You'll want to compare these to find the card that's right for you. Here are some factors to consider:
Annual percentage rate (APR): The APR is a measure of the cost of credit, expressed as a yearly interest rate. Check out the "periodic rate," too. That's the rate the issuer applies to your outstanding balance to figure the finance charge for each billing period. For example, if you have an outstanding balance of $2,000, with 18.5 percent interest and a low minimum monthly payment, it would take over 11 years to pay off the debt and cost you an additional $1,934 just for interest, which almost doubles the total cost of your original purchase. Watch out for low "introductory rates" that will later skyrocket, often after six months. Look instead for a low "fixed rate." But if you're using a credit card like you should, and paying it off completely every month, then you really don't have to worry about this.
Grace period: This is the time between the date of a purchase and the date interest starts being charged on that purchase. If your card has a standard grace period you have an opportunity to avoid finance charges by paying your current balance in full. Some issuers allow a grace period for new purchases even if you do not pay your balance in full every month. If there is no grace period, the issuer imposes a finance charge from the date you use your card or from the date each transaction is posted to your account.
Annual fees: Many credit card issuers charge an annual fee for granting you credit, typically $15 to $55. But there are plenty of cards with not annual fees. The only reason to get a card with a fee is if you absolutely cannot qualify for a fee-free one. And if that's the case, you probably shouldn't have one anyway. See Establishing Credit. If you do choose a card with a annual fee, it may be possible to get it waived if you pay all your bills on time. Call the customer service line and ask.
Transaction fees and other charges: Some issuers charge a fee if you use the card to get a cash advance, if you fail to make a payment on time, or if you exceed your credit limit. Some may charge a flat fee every month whether you use the card or not. Hint: avoid these like the plague. You shouldn't have to pay simply to have a credit card. See above.
Make note of all finance charges that could be applied--there will usually be a chart of them on the application or the terms of agreement. These include various transaction fees, service fees, late fees, and interest rates. Above all, stay away from costly cash advances--most of the time, they're a total ripoff.
Credit Limit: This is the total amount you're allowed to have charged on your account, (including purchases, cash advances, finance charges, and other fees) at any one time. The credit card company will set this limit depending on your credit history. If you're just starting out it will probably be fairly low, maybe even only $500 to $2,000. It will probably increase automatically as your credit score improves; if not, you can always call customer service and ask them to raise it. Try to stay well under your credit limit, so you'll have credit available if you need it in an emergency.
Customer service: This is actually really important, as crappy customer service from a credit card company can make your life miserable if say, you lose your card or get mischarged. Some companies are notoriously bad at giving a brother a break; others have great reviews in that department. Make sure, at the very least, that your company has a 24-hour, toll-free telephone number.
Other benefits: Lots of cards offer cool benefits like insurance (especially travel insurance), credit card protection, discounts, cash rebates, frequent flyer miles, and special merchandise offers. Make sure you look around and see what's out there.
Here are a couple of good places to start when looking for a card. They'll let you compare different types of cards from different credit companies and banks, and even search by different factors such as credit score required, rewards, annual fee, and APR.
E-Wisdom's credit card page
If you're a student, you can also try
Federal Trade Commission's article with more info about prescreened offers of credit and insurance.
See also: Credit Cards main, Establishing Credit, Credit Scores
Choosing a Card: What to Look For
Image via WikipediaWhat Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information, which they obtain from your credit report, a computerized profile of your borrowing, charging, and repayment activities.
1. Income & Expenses
Lenders will look at what you earn and your regular expenses, such as rent, utilities, food, and other ongoing items. The amount left tells them whether you can afford to take on additional debt.2. Assets
Do you have assets that can serve as collateral? Lenders will look for things like bank accounts, insurance, and valuable items such as a house, if you own one.3. Credit History
How do you manage debt? If you have credit cards or have borrowed money before, you have a history that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.It's easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.
How to Establish a Credit History
Begin by opening an individual savings and checking account in your name. Over time, your deposits, withdrawals, and transfers will demonstrate that you can handle money responsibly.
Another easy way to establish credit is with utility bills. Having one or more utility bills in your name and paying them in full and on time will add to your credit score. Even cell phone bills work.
You could also apply for department store and gasoline credit cards, which generally are easier to obtain than major credit cards. Keep in mind that if you are repeatedly apply for cards and get denied, it will lower your credit score, so if you're denied more than twice, get a copy of your credit report and find out why before you apply for any other cards.
Once you get a credit card, an easy way to establish good credit is to just put a few purchases on it, and pay it in full at the end of the month. Do this for several months, et voila! You've established good credit.
See also: Credit Cards main, Choosing a Card: What to Look For, Credit Scores
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