During my days investigating fraud and financial crimes as a detective, I saw so much criminal, financial abuse toward the elderly, that I had to share this important article. The unfortunate thing was that more often than not, there was little that could be done after the fact to recover the lost assets. And what is often unspoken, is that much of the fraud is from within the family. If you have a love one, read this guest post, watch for the signs, and do not hesitate to intervene if you suspect something isn’t right.

Enter Judy A. Stewart, CFP® and Marcie Grube Carlsbad, CA

Senior financial abuse is a chord that strikes close to home. My 88-year-old mother lives alone, and I worry that she could be vulnerable.

The financial exploitation of seniors is very prevalent. According to the North American Securities Administrators Association (NASAA), Investor Protection Trust (IPT), and the National Adult Protective Services Association (NAPSA):

• Half of older Americans exhibit at least one sign of current financial victimization.
• Almost half of those aged 65 or over (44%) got at least two of four questions wrong about basic investment knowledge.
• About one of three older Americans (31%) say they are vulnerable in one or more ways to potential financial victimization.
• Only 2% of Americans 65 or older say their health-care provider has ever asked, “How you are handling money issues or problems?”
• Four of 10 children of parents age 65 or older are “very” or “somewhat” worried that their parents “have already become or will become less able to handle their personal finances over time.”

Sounds scary, doesn’t it? Fortunately, some people are taking action. The NASAA, IPT, and the NAPSA, along with medical professionals and social workers, are banding together to create the Elder Investment Fraud and Financial Exploitation project, whose job is to stop a “rising tide of economic exploitation of the elderly” (Kristof, Los Angeles Times, June 20, 2010).

Sheryl Rowling, of Total Rebalance Expert, highlights the three most common ways a senior might be exploited:

• Telemarketing scams: More than a third of telemarketing fraud victims are over 60 years old. The most common scams are free vacation packages, time-shares, sweepstakes, phony charity fundraisers, and expensive 900 numbers.
• “Free lunch” investment seminars: Shady financial advisers often lure seniors to a free lunch or dinner, promising advice on “senior” issues such as living trusts or estate planning. Once there, seniors are pressured into purchasing dubious investments such as annuities or promissory notes. Although technically legal, these products are monumentally bad choices for retirees—illiquid, complicated, and booby-trapped with high fees.
• Religious or social group fraud: Among con artists’ favorite targets are members of close-knit religious or social groups. The con joins the group and then tries to sell fraudulent investment schemes to members. (Sheryl Rowling, “Beware Senior Financial Abuse,” June 10, 2010)

What can you do to prevent senior financial abuse in your family? Rowling suggests family members simply sit down and discuss their financial concerns with their senior relatives. Of course, this can be a sensitive subject for seniors who want to remain independent. Calmly reviewing best practices can be a good reminder for seniors.

• Documenting financial arrangements can prevent misunderstandings. Review estate plans and wills every few years with senior family members.
• Encourage senior family members to stay active in their community. If they know where to turn for help, they’ll be less likely to be exploited.
• Check references of those who help seniors in and around their homes. This can protect against con artists looking for an easy target.
• Don’t give out personal information such as ATM or credit card numbers, PINs, or Social Security numbers.

Most importantly, be engaged in the lives of senior family members. Ask about their acquaintances and friends. Con artists look for victims who are lonely and isolated. Seniors who are active and who have family and friends looking out for them are less likely to be targeted for financial abuse.

If you suspect a parent or other aging family member or friend might be a victim of financial exploitation, a counselor or financial advisor can provide expertise in a sensitive and potentially serious situation.

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When should you sell an investment if the value drops?

Investors agonize over this and often let themselves be guided by the old adage: “Buy low, sell high.” Based on this logic, they decide they will hold any investment they buy until they can at least break even. Once a client adopts this mantra, it is difficult to convince them to sell their holding at a loss, even when it keeps dropping in price.

There is a strategy of ‘averaging down’ when an investment drops in price. For example, suppose that you buy a mutual fund or stock when it is $20 a share and then it drops to $15 a share. If you had decided it was a good buy at $20 then, logically, you should buy more because it is even a better buy at $15. And if it drops to $10, then buy even more.

This is an aggressive strategy, and requires undaunting confidence in the investment. It can work out, but it often doesn’t. When it doesn’t, the results can be catastrophic. Employees who buy their company stock are particularly prone to make this mistake.

I have seen situations where clients have stubbornly held on to Pan Am, GM, Chrysler, Enron, etc. and continued adding to their holdings only to end up losing it all. On the other hand, Ford shareholders have done well using this strategy over the past few years.

A more sound investment approach is to decide that, when you buy an investment, you will reevaluate it if it drops. You evaluate the losing investment with other investments, and then make a “keep or sell” decision. For example, let’s go back to your $20 per share stock. Rather than wait until it drops to $15 you could have decided that, if it drops 10% or 15% (i.e. to $18 or $17), you will reconsider the investment.

If there are other investment options with better upside potential, sell your loser and reinvest in something with better prospects. This prevents you from blindly holding on to the shares hoping they will go back to $20.

For many people, selling a loser means they made a mistake, and they are adamant about not losing money on their investments. The blatant truth is that holding on to the stock means you still have a loss, you just haven’t ‘realized’ it yet.

One technique I have used with some success is to explain to clients that by selling the stock, they are ‘harvesting’ their losses for tax purposes. The tax loss will save them tax dollars by offsetting other gains, thereby reducing the capital gains tax. It often gives them an additional $3,000 deduction against other ordinary income, which can save them about $1,000 in taxes at the 33% tax bracket.

The beauty of this is that the client can buy the stock back after 31 days. If bought back sooner, the ‘wash sale rule’ precludes them from taking the tax loss. It’s interesting to note that, no matter how resistant the client was to selling the stock at a loss initially, once they sell it they never buy it back!

Of course we do not recommend ‘market timing.’ When managing clients’ portfolios we take into consideration other factors such as the overall balance of the portfolio, the amount of the single investment relative to the total portfolio, as well as tax issues and clients’ long term goals.

For example, we don’t sell stripped Treasuries in a client’s ladder just because the market value drops. The function of this investment is to assure that the maturity value provides the cash flow necessary for spending goals (usually in retirement), without fail. We know and expect that the market value will fluctuate in the meantime, but the ending value is government guaranteed.

On the other hand we don’t hesitate to sell a mutual fund that has underperformed its peers significantly for two or more quarters in a row. We also take losses in the Cambridge Index Portfolio when we can capture them as short-term, which are the most tax advantaged.

Cutting losses isn’t limited to securities like stocks, bonds, and mutual funds. A huge concern of many clients today is whether they should ‘dump’ their real estate in this depressed market or wait until they can ‘get their money back out.’ This issue is more complex, but here are some guidelines I consider.

If the home is your personal residence, and you like it and can afford the payments, keep the house unless you have to move (e.g. new job, changing neighborhood). If it is a vacant house or vacant property, it is generally better to sell (even at a loss) because the carrying costs of keeping vacant property and running the risk that the value will continue to drop generally makes this type of real estate a bad investment at this time. You may want to review my previous blog of April 29, 2010 titled “What To Do When Your House Is Underwater.”

The issue of when to “cut your losses” is also perplexing when applied to employment and other relationships, but my expertise in these areas is limited (though I have done a lot of research…). The best approach usually is to get a therapist!

In any situation, cutting your losses sooner rather than later is usually the better course of action. Not only does it minimize financial losses, but it also reduces stress. Continually dealing with these kinds of decisions is emotionally toxic.

So make a New Year’s resolution to cut your losses in three areas that have been plaguing you. Get the monkeys off your back, and get on with a rich fulfilling new year!

Guest post by BY: Bert Whitehead, M.B.A., J.D.

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This morning I opened my email inbox and found the same email of the City Council Agenda forwarded to me by six people. I never receive such emails, but I was asked my view of the proposed police officer retirement benefit changes.

This is an important issue for the cops, but the lesson affects all of us non-police officers. Their retirement benefits are going to be cut and this is only the beginning of a much larger trend. I predicted this over five years ago after closely following the economics and politics at the State level here in California, but the trend will be nationwide.

Briefly I will explain what is happing in Santa Maria as an example of what will become a larger trend. It is important we understand this example because it will explain where we will ultimately end up, how it affects the rest of us, and what you need to do to protect yourself.

Santa Maria, CA

In the City of Santa Maria, and many other California cities, police officers participate in the CalPERS 3% at 50 defined benefit retirement plan which provides an officer who has 30 years of service with a retirement benefit of 90% of his salary in retirement for the remainder of his life.

To employees and business owners in the private sector, these benefits often seem generous, but it’s important to understand how these benefits are paid for. CalPERS retirement benefits are funded through contributions paid by employers, employee contributions, and earnings from CalPERS investments.

In the Santa Maria Police Officers’ example, the City is responsible for contributing about 23% of the employee’s salary to the CalPERS pension plan and each employee is responsible for contributing 9%. But though salary negations, the City agreed to pay the employee’s 9% contribution if the officers agreed to forgo cost of living raises that keep their salaries in line with inflation.

It costs the officers a total of 32% of their salary to fund their pension. The important point that officers and the public often miss is that the generous pension plan the officers receive is NOT free.  Whether the officers pay it directly, or the City pays, their pension ultimately costs them a 32% reduction in their pay. How many people in the private sector save 32% of their salary—not very many.

Police Officer Wage

Many in the private sector argue police officer pay is inordinately high. Police officers, particularly in California, do earn a decent living for a job only requiring a high school education. But that ignores the incredible physical dangers, the legal liability, and the mental and emotional toll the officers endure during their careers.

It’s also important to consider that only a very small percentage of officers that begin the careers, actually complete 30 years. The majority leaves early due to stress, injuries, or less than perfect behavior that in any other career wouldn’t be a factor.

In every profession, the laws of economics determine wages. There is a reason the U.S. law enforcement wage market is higher than in most third world countries. Our society values a strong rule of law and pays a premium for it, and as a result, there is generally less crime and corruption.

Times are changing

Governments at all levels have overspent and pension plans such as CalPERS have used overly optimistic stock and real-estate market forecasts. Now that we are in a deep recession, the investments used to pay the retirement benefits are not earning what they used to, so CalPERS is raising the percentage that employers must pay to maintain the same level of retirement benefits.

As a result, Cities are looking for ways to fund the increased cost of retirement benefits and make up for lost tax revenue. In the City of Santa Maria example, they are taking several steps which led to the emails I received today. First they are proposing that new employees pay the 9% contribution instead of the City footing the bill. This will result in a two-tiered retirement plan where new employees have different benefits than older ones.

But this is only the beginning and eventually police officer’s will lose all of their defined benefit pension plans. This is shocking to many, but as I said previously, I’ve predicted this for over 5 years. It’s so predictable because the majority of the U.S. work force no longer has defined benefit plans. They do not have retirement plans with guaranteed retirement benefits that are predetermined 30 years in advance.

Instead most employees have what are called self-directed retirement plans where the employee contributes and manages their own investments. Many are familiar with 401(k) or IRA plans. And since most people do not have pension plans, they’re not pleased when others have guaranteed benefits, especially when they’re funded with tax payer dollars.

History is repeating itself over and over which make this very easy to predict. This first happened to the American auto industry which was almost wiped out because of expensive retirement plans. I followed that closely in the news, but then went through it personally in my early 20’s in the grocery business. In grocery, they started out exactly as the City of Santa Maria is until ultimately pension plans were eliminated.

The private sector was hit hardest and first as a result of global competition. It has just taken government longer to feel the impacts because government is in essence a monopoly—they have no competition.

But even though government has no competition, they haven’t been able to maintain their runaway spending through this deep recession.  The recession is not something I even tried to predict, but it’s just accelerating what was already politically going to happen.

What To Do

The first step is to accept that police, or any other pension plans, are eventually going away. Period! There is nothing you can do to change that. That doesn’t mean that your unions shouldn’t fight to slow the process.  It never hurts to continue negotiating for more benefits.

But ultimately, that will be a losing battle and it’s important to take control of your own finances. You cannot allow yourself to become the victim of circumstances, but instead take charge by planning your retirement.

You need to do two things. The first is to find a second source of income. Follow your passions and turn hobbies into second jobs or passive incomes. And if you don’t currently have the skills you need to follow your passion, it’s time to start educating yourself through school or self study so you have a second source of income, or at the very least, another option if you need it.

The second step is to educate yourself on retirement plans and get started investing on your own. Empower yourself to create your own retirement benefits, that you control, so you are no longer at the mercy of your employer, especially when I’m telling you where this is heading.

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Most people have no idea how much their mutual funds in or outside of their retirement accounts cost. If you’re like most people, you probably don’t know you’re being charged hundred’s or thousands of dollars each year, but you are.

Learn what you’re charged for load and no-load mutual funds. Lower expenses can make a difference of thousands of dollars in your investment accounts.

This video makes load, no-load and expense ratios simple to understand. By the end of the video, you will know the basics of expenses you’re mutual funds charge you.

No Load mutual funds fee-only financial advisor

Daily we are bombarded with horror stories in the financial media about how severe the current recession is.  It has unofficially been named “The Great Recession” making a very uncomfortable connection to the Depression of the 1930′s.

So just how bad off are we?  Should you prepare yourself as if we are entering or are already in the next depression?

In this guest post, Kennith Robinson shares real information, not the hype the media uses to sell their products, to put the current economic climate in perspective.  Enter Ken:

In February 1954, Time magazine and the St. Petersburg (FL) Times quoted labor leader Dave Beck: “I define a recession as when your neighbor loses his job, but a depression is when you lose your own.” His comment, which became a popular saying, captures how challenging it can be to distinguish between a recession and a depression.

Are we actually in a depression now? As bad as things have been, and despite the comparisons you’ve probably heard, this recession is not another Great Depression.

There is no single definition of a “depression.” When real gross domestic product (GDP), a measure of the size of an economy, drops by 10% or more, economists commonly describe the situation as a depression. But this recession has so far been marked by only a single-digit decline in real GDP (less than 4% through the end of March 2010). By contrast, real GDP declined by more than 26% during the depression of the 1930s.

What about unemployment? Rates have been high, especially in some areas of the country. According to the Federal Reserve, nationwide unemployment has so far topped out at slightly above 10%. That’s hardly good news. But it’s not nearly as high as the estimated 25% unemployment rate of the 1930s.

Also, far fewer households 80 years ago had two earners. It’s always upsetting when someone loses a job. But the loss of one job in a two-income household has less impact than the loss of the only job in the household. A substantial number of families experiencing unemployment today still have some income and thus are still putting money into the economy.

A similar point can be made about unemployment compensation, which didn’t exist until the 1930s. We may think its main purpose is to help support a family experiencing a job loss. But the benefit to the larger economy is that the family has some money to spend, which stimulates economic activity and helps blunt the recession.

What about the recent spike in bank failures? After only 3 failures in 2007, the Federal Deposit Insurance Corporation (FDIC) reported 25 bank failures in 2008 and 140 in 2009. So far in 2010 there have been more than 140. But this number doesn’t come close to the roughly 7,000 banks that failed in the wake of the 1929 stock market crash (about 4,000 of those in a single year). It’s also not as severe as the fallout from the savings and loan crisis of the 1980s when about 1,600 banks failed (534 of those in 1989 alone).

In addition, the nature of a bank failure has changed. When a bank failed in the 1930s, depositors lost their entire savings. Today, when the FDIC decides a bank has failed, regulators swoop in—like a SWAT team with briefcases and laptops—often around closing time on a Friday. In most cases, by Monday morning the bank is open for business as a branch of a stronger bank. The most noticeable difference is usually that the signs for Failed National Bank have been replaced by those of Stronger National Bank.

If the situation isn’t nearly as devastating this time around, why does it seem so awful? First, the news cycle has changed. Instead of catching up on the latest events in a morning or an evening paper, news is now a 24/7 business, with intense competition for our attention.

The media makes its money by selling advertising, so the news story has to be juicy enough to keep you watching when the ad comes on. It doesn’t mean the news is necessarily giving you any information that’s helpful in figuring out what action you should take next.

Also, for most of us, the current economic conditions are far more challenging than anything we’ve faced so far in our lives. The Great Depression may have been much worse, but this situation is happening to us, not to our grandparents or great-grand-parents. Naturally we experience it as a traumatically defining event.

As we’ve seen so many times before, this kind of instinctive emotional response is often the enemy of sound financial behavior. If you have concerns about how you should respond to current economic conditions, call your ACA advisor for a clearer understanding of what you should do and, just as importantly, what not to do.

Will we have a “double-dip recession”? No one will know for sure until it happens (or doesn’t). But we have many reasons to be confident this recession won’t lead to a repeat of the 1930s.

Kenneth F. Robinson, JD, CFP® is a Financial advisor in Cleveland, OH.  Be sure to check out his new book Don’t Make a Budget

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The housing market has continued to struggle and it will be a long time before we see a significant recovery.  This has caused many families to be underwater enough on their mortgage that many are considering or have already gone into foreclosure or short sale.  There is a lot of bad information our there and like  always, there is never a shortage of people ready to take advantage of people in times of distress.

If you owe more money for your home than it is worth, read this excellent article from one of my mentors, and founder of ACA – The Alliance of Cambridge Advisors, Bert Whitehead.  I’ve yet to find a more honest and thorough analysis of your options than Bert’s.

Enter Bert Whitehead, M.B.A. J.D. © 2010:

What To Do When Your House Is ‘Underwater

Almost one of every four homeowners are faced with the sad reality that they owe more money on their home than they could sell it for. In the real estate world, that’s called ‘being underwater.’  This blog is a realistic review of your options, and discusses the biggest mistake people make when they are in this tight spot.

1.  If you can still afford to live in your home and enjoy living where you do, stay there. If you are still working (or retired with the same income as when you bought the house and qualified for the mortgage) and living within your means – don’t worry about how much your home is worth because you don’t have to sell it.  Your home is an inflation hedge, especially if you have a long-term fixed rate mortgage.  In most areas of the country home values will eventually rise again.  Keep in mind that one of the primary purposes of owning a home is the joy of living there.

2.  If, however, you need to move, then you have to review your options. It may be that you have become unemployed, or your job requires relocation, or you want to downsize to cut expenses.  Many people have adjustable rate mortgages that have been reset to a higher interest rate, so they cannot afford to live in their home.  The obvious answer is that you can sell the house for what you can get, then sell other assets (perhaps some investments) and bring a check to the closing to cover the amount of the mortgage not covered by your sales proceeds.  As we will discuss later, this is often the best option.

Regardless of what you may have heard, the following options (#3-#8) are successful only for homeowners who stop making payments.  Banks are not likely to negotiate with you if they are still getting paid…and why would they?

3.  There are 12 states* in the U.S. which provide that homeowners have no personal recourse for a mortgage taken out to purchase a principal residence. That means you can just walk away from the loan.  The bank will foreclose and sell the home at auction, but they will not be able to sue you for any deficiency should the net sales proceeds not equal what you owe.  Your credit score will drop by about 200 points, but this is a viable option.  From a moral perspective, keep in mind that you paid a premium (built into your closing costs) when you bought the home to have this option. So it is not unlike collecting on an insurance policy.

In the past forgiven debt was taxable as income but currently this does not apply to cancellation of the unpaid portion of a mortgage used to buy the house.  If there is a second mortgage, any unpaid amount may be taxable income.

4. In the 38 other states, if you walk away from your home the bank will foreclose and sell the home at auction. If the house doesn’t sell for enough to pay off the mortgage, they can sue you for the deficiency.  With a judgment they can then put liens on other assets (like bank accounts or other real estate) and garnish your wages.   So not only are you on the hook for the deficiency (plus the bank’s collection costs and attorney fees), but your credit score will likely crash about 300-400 points and you could have to pay income taxes on the unpaid portion of the mortgage.

5. A better option than foreclosure is to deal with the bank and work out an arrangement called a “deed in lieu of foreclosure.” When banks stop receiving payments, they will be open to talking about this approach.  In these situations the bank agrees to have you just sign over the deed so they don’t have the expenses of foreclosure.   With the bank’s agreement, you can qualify for non-taxable debt forgiveness.  It will cut your credit score by 300-400 points initially, but you end up free of the debt.  Again, the bank is not likely to agree to this if you are working or have other assets they can levy

6. In recent years there has been an effort by the government to pressure banks to provide “Loan Modifications” to homeowners who are unable to make their payments and who meet strict criteria. For most people, this is not a viable option.  Loan modifications may include lowering the interest rate or extending the term to reduce monthly payments.  However banks are not willing to reduce the principle owed.  This is a time consuming process, and thousands of applicants have overwhelmed banks.  It takes an inordinate amount of time to check applicants and banks don’t make any money beyond the $1,500 offered from the federal government (more red tape) if a loan is modified. Of the 4 million homes in foreclosure last year only 2% were approved for modification and 2 of every 3 modifications were in default again within 6 months.

7. Most homes selling now are ‘short sales.’ This requires the owner to find a buyer at a reduced price.  If a bank accepts the low offer, the owner signs the house over to the bank and the buyer/investor buys the home from the bank and the bank releases the owner.  Thus, there is no deficiency and the forgiveness of debt does not trigger a taxable event.  It will knock about 250 points off your credit score.  There are now some real estate agents who specialize in these transactions, although most avoid getting involved because of the paperwork, the time commitment, and very small commissions.

8. The final solution for most people who need to move from their home is to continue cutting the price until it sells, even though it means taking a check to the closing to pay off the mortgage.  There are very few buyers in the market now, mortgages are difficult to get, and appraisals are very conservative.  So even if you get a willing buyer at a reasonable price, often the appraisal will not be high enough to get a mortgage.  As prices drop, this process reinforces itself.

You can sell your house if it is priced right but the ‘right price’ has nothing to  do with what you paid for it, what you invested in it, what it was worth 3 years ago, or how much you owe on it. The ‘right price” is what someone in this market will pay for it.

To arrive at the ‘right price,’ recognize that pricing is a process, not an event.  Start by listing your house somewhat below other comparable houses in your neighborhood.  Keep in mind that current listings are overpriced – otherwise someone would have already bought them.  Then ruthlessly cut the price on your house every 6-8 weeks by 5-10%, and keep cutting until you get an offer.  Cutting the price will put you on the top of the pile and keeps your house from becoming a ‘stale listing.’

This makes good financial sense when you realize the tremendous carrying costs of a vacant house.  Ignoring carrying costs is the biggest mistake people make when they face this scenario. Carrying costs generally run about 10% per year of the home’s value and include the house payment, taxes, insurance, repairs and upkeep, as well as opportunity costs for the equity (if you still have equity.)

So if your home is worth $400,000, the carrying costs are about $40,000/yr.  If you are determined to get your price, you might easily wait 2 years until the market bottoms out.  Then you will have paid out $80,000 in carrying costs.

Now it will have to appreciate 30%-40%  per year for the next two years for you to pay 2 more years of carrying costs plus ‘catch-up’ appreciation for you to break even.  To expect this spectacular market turnaround is naïve.  You’re better off selling the home for $350,000 now, and in two years you will have avoided $80,000 in carrying costs.

Living in a home you can’t afford, or trying to rent it out, doesn’t change the math much either because the carrying costs don’t take into account the continuing drop in home values in most areas. In many areas there are huge inventories of unsold homes in foreclosure, and we are facing another tsunami of homes likely to go into default in the next year or two as all the of 5-year adjustable mortgages from 3-4 years ago are reset.

Keep in mind if you use any of the techniques in this article, under a new federal law you will not be able to obtain a new mortgage for 4-7 years.  If you lost your job, or had a catastrophic illness, this disqualification period is shortened to 2 years.

Of course, each situation is different.  It is advisable to get professional advice from someone whose compensation is not dependent on the outcome of your decision.  The upside is that, if you are buying a home, you will very likely find a great bargain once this housing bust ends!

*AK, AZ, CA, CT, FL, ID, MN, NC, ND, TX, UT, WA – laws vary by state.

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY., as well as the fact-checking of Terry Fraser (Mackinac Bank), and Trevor Smith (Incline Village Real Estate), and blog editing by Susan Stanley

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I’ve always believed the foundation to a happy and healthy life revolves around three things.  Picture a triangle with three equal sides.  Each of the sides represent Money, Relationships and Health.

When any of those three is out of whack, the triangle is no longer equal and it loses its symmetrical, ballanced shape.  This is the same with your life.

In this article Carol Friedhoff describes how getting your finances right can lead to a happier and healthier life.

Guest Author:

How Fiscal Fitness Can Improve Your Physical Fitness

What’s the biggest worry in our lives? The number-one answer is money. And right after money, we worry about relationships and health.

Guess what? Money impacts both relationships and health. When you are under financial stress it’s easy to begin to feel negative—defeated, detached, fearful, and in conflict.

In contrast, being in control of your finances can reduce embarrassment, shame, and guilt, and boost energy as well as your emotional and physical fitness.

Here are some steps that can help you both maximize your money and also improve your well-being by becoming financially prepared and fiscally fit.

Step 1: Enjoy life by being true to yourself

Doing what you like is freedom. Liking what you do is happiness. What if you could do both? You can.

• Start by identifying what you enjoy. What is your passion?
• Next, list ten things you are really good at—your own strong points—that you also enjoy.
• Finally, envision your life 20 to 40 years in the future. What do you picture yourself doing? What will your life be like?

Given your passions and your strengths, how are you going to achieve your vision? Use the answer to this question to drive your career and ultimately your income.

It’s easier to have a satisfying life if you like what you do to earn your money. With a fulfilling daily life, it may no longer seem important to spend money on things you sought out because you “deserved it” for putting up with a job you didn’t enjoy. Everyday happiness can be a crucial key to physical well-being.

Step 2: Pay yourself first

How much money do you need to achieve your dreams? Where and how can you find it?

Start putting more money into your savings. Pay yourself first by saving at least 10% of your earnings. If you need some extra encouragement to spend less, list the three most important items you included in your vision and how much you think they will cost.

What adjustments in your life are you willing to make to build up the savings you need to have those three things? If you are not sure where your money is going, try keeping a journal. Manage credit and debt to improve your credit rating and reduce your interest expenses.

Limit the number of credit cards you own, and only charge the amount you can afford to pay each month. You will reduce or eliminate interest expenses, improve your credit score, and lower the interest rate you will be charged when you want to borrow money.

As a result, you’ll feel less overwhelmed. Get your family involved. Family communications will be more harmonious if everyone is involved in the plan (singing from the same hymn book, so to speak).

Step 3: Create a safety net

There are two ways to be prepared for the unexpected. One is to have enough money saved to pay for the unforeseen. It’s critical to establish an emergency fund, equal to about three to six months of expenses. Review your budget and determine how much you can contribute to your fund each month.

The second way is to have the right amount and kind of insurance. Common types of insurance to consider are life, health, disability, property, liability, and long-term care.

For instance, if there are people who depend on you and your income, life insurance can be used to provide for them in the event of your premature death. For most people, term insurance is the most cost effective. Comparison shopping for insurance can help reduce costs (and increase your satisfaction with the results).

Having enough of the right kinds of insurance and an adequate emergency fund can help you feel you aren’t just one accident away from financial disaster. How reassuring!

Step 4: Grow your savings

As you accumulate your savings, you will want them to grow or at least outpace inflation. This means investing. Varying risks are associated with different investments. Just like sowing seeds, you can diversify your crop (and reduce your risk of failure) by selecting a mix of assets (cash, real estate, bonds, or stock) based on when they will be needed.

In other words, invest with goals in mind and with a plan to reach those goals. When you invest purposefully, rather than trying to guess what’s about to be hot, you can be more confident about the outcome and start to relax.

Making this kind of conscious, purposeful progress on both your vision and your financial goals can help reduce your stress and leave you with more energy. This in turn will automatically enhance your physical well-being and make it easier to be healthy and fit.

Carol Friedhoff, MS, CFP is a financial planner in Columbus Oh

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2010 is an interesting year for Roth IRA’s because there are changes in the law that may really benefit you.

Being that it’s fall, this is a good time of year to evaluate if a Roth IRA conversion is good option. You may be able to take advantage of the new laws or perhaps even a negative tax bracket with the economic challenges.

If you’re not aware of those new rules, you should ask your adviser or do some research because you may be able to save a lot of money.

Guest Author:

Jo Anne Paynter wrote a timely article explaining some of the most interesting benefits of Roth conversions by looking at three numbers: investment years, marginal tax rate, and tax drag.

Investment Years

What are your plans for the account you’re going to convert to a Roth? Will you to tap it as an income source during your and your spouse’s lifetimes? Or do you want to pass it on to your children or grandchildren?

Depending on your longevity, you could have quite a few investment years ahead of you. The number of investment years describes how long the account will be able to accumulate value.

A 45-year-old investor (who happens to be converting an IRA to a Roth this year) could very well live to age 85. In those 40 years, a $10,000 Roth conversion, left untapped and earning 7.5% per year, would grow to about $180,000. If left to grow to age 95, the value would reach about $370,000.

The accumulation doesn’t have to stop there. Because Roth accounts aren’t subject to Required Minimum Distributions (RMDs) until after the original owner dies, you could let it continue to grow, taking nothing for yourself and leaving it to your children or grandchildren. The number of investment years would then extend for the remainder of your life, plus the number of years your beneficiaries live on. You might be creating an account that will grow for more than a century!

Of course, once the beneficiaries receive the account, they are required to take out RMDs over their lifetimes. But these distributions start out as fairly small compared with the growth of the account. For instance, a 25-year-old beneficiary needs to take an RMD of only about 1.72% of the account balance, leaving the remainder to grow until the next year. A 35- or 45-year-old would need to take only about 2.06% or 2.58%, respectively. This leaves the great majority of the account untapped, accumulating value for your beneficiaries.

Marginal Tax Rate

You may know that for your traditional IRA, you must take your own RMD when you reach age 70½. (Beneficiaries must take RMDs no matter what their age.) These distributions are taxed at the recipient’s marginal tax rate, the income tax rate applied to additional income they receive.

But distributions from a Roth account aren’t taxable (assuming you’ve met all the requirements, like the five-year holding rule and being at least age 59½). Roth assets don’t require RMDs from the original account owner, and it’s nice to have a Roth account to dip into for an unexpected expense. Whether you have a chance to take a trip or you need to deal with an emergency repair, you don’t have to worry about the tax consequences of taking a Roth distribution the same way you do for a traditional IRA.

If it’s your heirs who will be taking the distributions—and they will be required to take RMDs—the non-taxability of these distributions can be especially beneficial. If the kids or grandkids have been successful in their own right, they could be in the top income tax brackets.

For 2010, this means a Roth distribution saves the beneficiary up to 35% in federal tax, compared with having to take money from a traditional IRA. These savings would only increase in 2011 when the tax reductions put in place in the early 2000s expire and the top tax bracket jumps up to 39.6%.

And that’s just for federal income tax. Traditional IRA distributions can be subject to state tax as well. Although future income tax brackets are impossible to predict accurately, we can be quite sure we’ll be glad to have assets to draw on that won’t increase our tax liability or that of our beneficiaries.

Tax Drag

Closely related to marginal tax rate is tax drag, the tax cost associated with assets that could be put into a Roth account.

For instance, suppose you are in a fairly high tax bracket (perhaps 28% in 2010, which will be going up to 31% at the start of 2011). You may have assets that generate interest, or unqualified dividends, or capital gains. Those streams of income create tax liability each year at your marginal tax rate or capital gains tax rate, as the case may be. That part of your tax bill from the IRS (and the state, if applicable) is the tax drag on your net investable assets.

The new federal health-care legislation will only magnify tax drag for some investors. Beginning in 2013, the law imposes an additional 3.8% tax on all unearned income for high-income earners (those earning more than $200,000 per year for single taxpayers or $250,000 for married couples).

That means additional tax on rents, royalties, dividends, capital gains, interest, and annuities. So your tax drag will grow as your taxable assets grow. Using a Roth could shelter future retirement distributions from taxation, reducing tax drag and thereby enhancing overall investment performance.

These three numbers—investment years, marginal tax rate, and tax drag—have something in common: we don’t have direct control over any of them. Like many aspects of personal finance, we often need to make decisions without being able to completely predict the outcome.

Roth conversion decisions bring with them lots of possible issues that can affect families in different ways. Your advisor can help you evaluate how these three numbers affect your Roth conversion plans.

Jo Anne Paynter, CFP®   is a financial planner in  Grove City OH and a member of ACA.

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Previously we calculated how much we are really worth per hour and how it is far less than we thought.  Now I hope to pull it all together into a usable concept.  Believe it or not, figuring your true hourly wage is all about debt.  Doing this exercise will help you get, and stay out of, dept forever.

The reason we all go into debt is to overcome some unhappiness in our life. We use debt to live a life we really can’t afford. Very rarely do we use debt to pay for some catastrophic expense like medical bills.  And even when credit was used for these things, it’s usually because we spent too much money trying to be happy and didn’t plan for emergencies with insurance and savings.

Think about the things you’ve used credit for; vacations, cars, eating out, etc.  All of these are luxuries including the car.  Do you really NEED the car you drive or is it possible you could have gotten by with something less expensive?

So how does the above exercise help with debt?  If you’ve done the exercise as I’ve suggested, every time you make a purchase, you’ll ask yourself if it’s really worth it.  You’ll remind yourself that you make $X per hour and will have to work Y amount of hours to buy that thing.  That thinking will dramatically change what you spend money on.  You’ll only buy things you’re willing to exchange your life, for your money, to get.

You’ll remember that in order to buy that thing, you’ll have to spend X amount of hours away from your kids, your spouse, or whatever you enjoy doing, to afford it.  You’ll make better buying decisions and get far more pleasure out of life.  I do this and it works!

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Related Articles

Part 1

Part 2

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You will be the victim of identity theft. The question is no longer if, but when, and how much damage will be done.

One estimate suggests that as many as 10 million Americans are the victim of identity theft each year.  In our increasingly electronic society, more of your personal information is floating around waiting to be taken by criminals intent on making their lives easier by turning yours upside-down.

You’ve likely heard many recommendations from your bank, credit card, law enforcement, or the media about steps you should take to protect your identity.  All of the many recommendations such as shredding documents, getting a locking mail box and changing passwords are all sound.

The problem is not a lack of available recommendations, but rather too many. We’re all busy and pulled in different directions by things competing for our limited attention.  So when something is too complicated or takes too long, it’s natural to take no action.  For instance, when was the last time you got a copy of your credit report?  Even though it’s free annually, it’s unlikely you taken this most basic precaution.

Trying to follow every identity theft precaution is as impossible as following all the weight loss techniques or the various personal finance strategies.  It’s impossible to do it all so these things end up neglected until it’s too late.

Enter Pareto’s principle

Otherwise known as the 80/20 rule, the principle suggests that for most things in life, 80% of results come from only 20% of effort.  This concept is commonly applied to business by suggesting that 80% of your income comes from only 20% of your customers.

There are many ways you may be the victim of identity theft and thus many ways to prevent it, but nothing will ever eliminate the risk.  Since it’s impossible to guarantee 100% security, you’ll be most successful if you apply your effort into protecting against 80% of the risks.

During my law enforcement career, I investigated thousand’s of cases of identity theft.  They ranged from very complicated organized criminal groups originating in the former Soviet Union to corporate espionage cases dealing with multi-million dollar companies.

I enjoyed these more “sophisticated” cases, but the day to day “routine” case were the bland cases of stolen credit cards.  Identity theft statistics are not accurately tracked, but from my personal experience, 80% of identity theft cases begin when someone steals your credit card from your home or car and uses it for the days or weeks until it’s reported stolen.  These cases are so common they may even account for as much as 90% of cases.

The solution

It’s obvious you shouldn’t store your wallet or purse in your parked car, but that’s not enough.  Even if your card is never physically stolen, how do you prevent your restaurant waitress or doctor’s receptionist from stealing the account data with a magnetic card reader or simply writing the info down?  Both of these happen daily.  There are hundreds of ways your account information can be stolen so you’re safer assuming it will be, than trying to protect against every possible threat.

The first step is to eliminate your debit card and only use a credit card for purchases. Debit cards are the bank ATM cards you carry with the Visa or MasterCard logo allowing you to make purchases without a pin number.  Find a bank that still issues an ATM only card that requires a pin number to make cash withdrawals.

There are two reasons to use a credit card instead of a debit card.  First is that credit card fraud victims are usually not legally liable for more than $50 of fraudulent purchases and it’s rare banks even charge you that.

Secondly, and most important, if your credit card is stolen and maxed out, your personal bank account does not get drained.  A criminal who steals your debit card can drain your bank account overnight. This is a nightmare to clean up. Not only will you be temporarily out of money, but any checks you’ve written will bounce resulting in more fees.  Most banks will eventually take care of this, but it’s a nightmare that you won’t have with a credit card.

Second option

Not everyone wants to use a credit card.  Some people don’t want credit cards because of the temptation to overspend and this is a real concern.  Unless you have the discipline to pay off your entire balance each month, it’s not wise financial planning to you use a credit card for purchases and instead follow this idea.

Get two checking accounts, preferably at the same institution to make transferring money between accounts easier.  The first account should be the one you use to secure the majority of your money and should only have an ATM card connected with it, not a debit card.  The second account may have a debit card associated with it so you can make your purchases at the gas stations, online, or anywhere you want.  The trick is to only keep a small amount of cash in the second account and as needed transfer money online from the large account into the smaller one to cover purchases.

If you follow one of these two ideas, when you are the victim of identity theft, the damage and clean-up time will be minimal. There is still a chance you’ll be attacked by other methods, but you have to decide how much time and effort is worth investing to reduce a relatively smaller risk.  This is the Pareto principle applied to identity theft, now where else can apply it to get more of the things you enjoy and fewer of the things you dislike.

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