Posted on July 12th, 2008 by vLogged
We all know that a college education is important, but did you know that, according to U.S. Census Bureau statistics, people with a bachelor’s degree earn nearly twice as much on average than those with only a high school diploma?
The challenge is that the cost of a college education continues to rise considerably faster than inflation. Four-year private college prices increased 5.9 percent from last year and four-year public colleges increased 6.3 percent from last year. If these increases continue, in 18 years, a college education is expected to cost over $145,000 for Public colleges and over $325,000 for Private colleges.
How to Save?
There are a number of possible ways you could start saving for a college education but the two most popular tax advantaged options are the 529 and Coverdell plans.
529 - A 529 plan is a state sponsored, tax advantaged savings plan. While the specifics of the plans vary by state, they generally allow for the education savings to grow federal and state tax free. 529 plans generally have high contribution limits and can be used for a variety of educational expenses in addition to tuition such as housing or books. While the plans are state sponsored they are almost always run by large financial institutions and the investment choices are sometimes limited to a specific set of investment choices offered by the state. For example, the California “ScholarShare” College Savings Plan, is managed by Fidelity Investments and offers a maximum of 24 different investment options. The “ScholarShare” College Savings Plan allows contributions up to $60,000 ($120,000 per married couple) per beneficiary in a single year.
Shop around for the best state plan - you are not limited investing in your state of residence. Be sure to investigate the amount of “load” or management fees that are charged by the financial institutions for each state plan. High fees can significantly reduce your college nest egg.
Coverdell Savings Account - A Coverdell Education Savings Account (formerly an Educational IRA) offers many of the same tax advantages of a 529 plan with some important differences. A few of the differences include: a significantly lower contribution limit ($2,000 per year per child) and significantly greater flexibility of type of investment vehicles (e.g. stocks, bonds, mutual funds, etc..)
When should I start saving?
Staring down that big future tuition number can be daunting but the most powerful effect you can take advantage of is the power of compounding. The two factors that affect compounding are time and rate of return. Start saving as soon as possible and find an investment vehicle that maximizes your return for a reasonable amount of risk. A $10,000 investment in U.S. Government Bonds today will be worth $24,700 in 20 years. Not a bad return and certainly a low risk choice but the return pales in comparison to higher return alternatives.
If the same money was instead invested in a broad market index mutual fund and if that fund returns something close to the long term historical average for equity indexes then that $10,000 would be worth over $46,000. Of course, investing in mutual funds is more risky than government bonds, and there are no guarantees, but a long term investment horizon can help mitigate any short term market fluctuations.
In summary, there are many good tax-deferred ways to save for your child’s education and you should start saving as soon as you can – even a little can go a long way with compounding. There are also a number of resources on the web to check out such as:
- collegesavings.org - Good information on 529 plans including what types of plans are available by state
- savingforcollege.com- Good general overviews of college saving information
- collegeboard.com – The SAT guys and a great source of statistical information
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Filed under: Finance
Posted on May 28th, 2008 by vLogged
Whenever I meet clients, I can safely assume that they are confused between Traditional and Roth IRA. Actually, most of the times it’s safe to assume that they wouldn’t know the difference between the two. Generally speaking, a Traditional IRA is where before-tax dollars are contributed (which, at time of withdrawal, are subjected to tax) whereas a Roth IRA is funded with after tax dollars (and hence aren’t subjected to tax at the time of withdrawal).
Since Traditional IRA is an approach taken with an employer sponsored plan, it allows the employee/investor to invest more money over the life of the IRA. This is what makes the plan more lucrative in actual practice even though Roth IRA may have sounded more impressive initially. Here is an interesting example I found.
If an investor/employee invests for 30 years for an 8% return in Traditional IRA, he will accumulate approximately $300,000 if he has been investing $200/month. On the other hand, if we assume a 20% tax, the Roth investment will be $160/month (after tax) which will accumulate to approximately $240,000.
Obviously, one will still need to pay taxes on the Traditional IRA. Normally, for retired people, the tax bracket reduces from 20% to 10 % (since they have already paid their mortgages, have less income, and other such factors). Hence, after withdrawal, the money from Traditional IRA will be approximately $270,000. This is almost $30,000 more than Roth IRA.
It is for this reason that most experts advise to contribute to a Traditional IRA. Even though it is based on many assumptions, it usually turns out to be the better financial choice. Since these assumptions may not be true for everyone, it really depends on every individual’s situation.
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Filed under: Finance, Financial Planning, Investing, Personal Finance, Taxes, Understanding Finances
Posted on May 24th, 2008 by vLogged
Here’s an interesting list I came across the other day. 15 interesting facts about IRS – Talk about oxymorons (IRS & Interesting)
1. IRS was known as the Bureau of Internal Revenue when it first came into existence. In the 1950’s the name was changed to the Internal Revenue Service.
2. The initial income tax was only 3% tax on individuals making over $800. Today the top tax bracket consists of a 35% tax.
3. The IRS was created by President Abraham Lincoln during the Civil War to help pay for the military expenses.
4. In order for the IRS to print the necessary forms and documents over 300,000 trees are cut down every year.
5. The IRS collected $2.2 trillion in 2006, with $1.2 trillion coming from just federal income taxes.
6. Prior to the introduction of the Taxpayer Bill of Rights in 1998, the burden of proof was put entirely on taxpayers, meaning taxpayers had to prove themselves innocent.
7. The IRS sends out an average 8 billion page of paper every tax season. If all the pieces of paper were laid out end-to-end, it would wrap around the earth 28 times.
8. Over 229 million income tax returns were filed with the IRS in 2006.
9. The federal government spends $200 billion per year on federal tax compliance, which is more money than it takes to produce all of the cars in the United States.
10. The IRS employs over 114,000 people. That’s over double as many as the CIA and five times more than the FBI.
11. The United States tax systems is widely known for being confusing and difficult to understand. Therefore, over 60% of taxpayers seek professional help preparing their tax returns.
12. The average family pays over 38% of their total income to the IRS, which is more than the average family spends on food, clothing, and shelter combined.
13. The IRS has a whistleblowers program designed to help catch tax evaders. In 2005 they paid over $27 million to informants that resulted in nearly $350 million in revenue.
14. The federal government spends about $10 billion per year to pay the IRS’s 114,000 employees.
15. Tax Day, the date when tax returns must be filed with the IRS usually lands on April 15th. However, if the 15th is a weekend or holiday, Tax Day is moved to the next business day.
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Filed under: Business & Economics, Daily Ramblings, FUNancials, Taxes
Posted on May 22nd, 2008 by vLogged
These days all lenders are more than willing to provide joint mortgages. Besides getting better loans, here are four more reasons why someone should opt for them.
1. Deposit – This is a simple numbers game. Two people sharing the burden is much easier than one person bearing all the burden. Also, the bigger deposit you put on a mortgage, the more money you can borrow.
2. Borrow more money – This is in conjunction with the above reason. With two or more incomes, the lenders are willing to offer more money which can be used to buy a bigger house.
3. Joint Ownership – One feels much more comfortable sharing the financial responsibility towards a big mortgaged sum.
4. Investing In Property – When you buy a house, not only are you buying a place to live, but also you are investing for your future. Buying a property can be an investments with great benefits over a period of time.
On the flip side however, since a joint mortgage is drawn in the names of two people or more, each person will have equal responsibility and liability. Hence, it’s always advisable to draw out a legal agreement to cover for any kind of possible eventuality.
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Filed under: Credit, Financial Planning, Funds, Mortgage, Personal Finance
Posted on May 20th, 2008 by vLogged
Protecting your assets is the top concern of everyone. Everyone has their own definition of this wretched word – ‘Risk’. Bottom line is that everyone is afraid of losing their money when it comes down to investment assets. The truth is that this definition takes a whole new meaning depending upon your current stage in life. For those in retirement, even a small risk is too much risk. On the other hand those in their initial states of career are more willing to experiment. Whatever be the case, understanding the different types of risks is the key factor over here. Its only then that one can personalize their definition of risk.
1. Market Risk – defined as “The risk that the value of your investment will decrease due to movements in the stock market”. The index movement is difficult to understand as its increase/decrease can depend upon anything from a company scandal to natural disasters to even terrorism. The key is to take advantage of the returns the market can offer without the inherent risk.
2. Interest Rate Risk – is the risk of fluctuating Interest Rates. Even though a Fixed Interest Rate is safer, it also means lower rates. One has to carefully balance between the two depending upon their circumstances.
3. Inflation – Even though this doesn’t directly affect your absolute savings, but it affects the cost of living index. Thus the effective money index goes down.
4. Excessive Taxation – Some simple steps like avoiding tax on re-invested income can help prevent one from this risk. However, more often than not, a poorly designed investment portfolio suffers from this risk. This is where one should get professional help.
5. Other Miscellaneous Risks – These are the risks which most financial planners fail to address. These involve huge medical expenses, lawsuits etc. This also includes the risk that one takes by not seeking professional help to combat potential risks that one’s portfolio may face.
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Filed under: Credit, Financial Planning, Funds, Investing, Personal Finance
Posted on May 18th, 2008 by vLogged
Felix Salmon is a blogger/writer with the Conde Nast Portfolio magazine. He wrote a blog entry yesterday about cap weighted funds which I think is a must read for anyone confused between cap weighted funds and fundamentally weighted funds. He quotes Joe Nocera “fundamentally weighted funds ain’t index funds, and they shouldn’t be viewed as a replacement for index funds”.
Where the cap-weighted crew have done magnificently well is that they’ve alighted on the S&P 500 as their chosen benchmark, and then decided that all investment decisions should be made with respect to it: they’re setting the terms of the debate.
For many investors a fundamentally-weighted fund might well suit their risk profile better than an S&P 500 index fund - or it might free up a bit more risk appetite to go exploring in places like emerging markets and commodities.
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Filed under: Finance, Funds, Products & Websites
Posted on May 14th, 2008 by vLogged
If you have bad credit, it’s a good idea to start working to get it fixed now. Regardless if your credit problems are because of mistakes on your credit report, a poor credit history from not paying your bills, or stolen identity, there are several steps you can take to fix your credit. The first and the foremost being, choosing the right credit repair company.
RepairYourBadCredit.com is one of such services which offers credit repair solutions online. They have been in this business for almost 7 years now. In fact they are so confident that you’ll like the solutions they provide that they back it up with a money back guarantee. Their money-back guarantee is not like the ‘warranties’ which many other companies provide which entitles you to a part of the money if you aren’t completely satisfied.
One of the other advantages of joining their program includes a high level of transparency. There are no hidden costs or clauses. In fact, unlike many other credit repair services, they completely take care of obtaining your credit reports for you at no additional fees.
With great personal attention, constant updates (weekly emails) and a claim that you’ll see the results in the first 60 days, RepairYourBadCredit.com is definitely worth checking out. In fact there are quite a few testimonials over there to vouch for their superb services.
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Filed under: Credit, Financial Planning, Personal Finance
Posted on May 10th, 2008 by vLogged
In order to reduce the tax burden that small businesses may suffer from, it is vital for the owners to be aware of the latest reforms which can help them avail tax reliefs. Several aspects of the tax legislation help provide relief to small businesses. The categories which include reduction and aid include returns on income tax, tax incentives on small business growth and reduction on capital gains and dividends. Together, all these small reliefs add up to provide considerable relief for tax payers.
1. The latest laws have broadened the span of entities covered in smaller tax categories. This helps in reduction of income tax as the business income can be taxed under such categories with lower tax (10 & 15 percent). This is quite less compared to the 35 percent of other higher categories. Thus small businesses can reduce the money falling under the span of income tax returns.
2. Earlier, when the business was inherited by the beneficiaries of the business owner upon his/her death, the beneficiaries were expected to pay a percentage of the value of assets as tax. This form of tax has been eliminated.
3. The recent change in regulations through taxes on dividends and capital gains provides a relief from the problems of double taxation where the business and the individuals were expected to pay taxes for the same capital gains.
4. By increasing the depreciation rates by 20 percent for new assets in their first year, the new regulations have taken a step forward in promoting small business growth. These incentives promote acquiring of assets by small businesses.
Hence, it’s advisable for any small business to hire a professional financial consultant to benefit from these new regulation changes and reduce the amount of money they pay as taxes. This money can be easily diversified to further boost their business growth.
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Filed under: Business & Economics, Finance, Funds, Investing, Taxes
Posted on May 8th, 2008 by vLogged
We all know how lawsuits or claims can run into months and years. Not only are they terribly time consuming, they also eat up on your savings and investments. That is where companies like LawMax come in which can help you avoid financial crisis during such trials. They loan you immediate cash against the proceeds from your lawsuit (whenever it is resolved). And this isn’t even the best part. You need to make a repayment only if you settle your lawsuit (either by winning the case or reaching an out of court settlement). What this means is that you pay them nothing should you fail to reach a settlement.
Once you provide LawMax with complete documentation from your attorneys, you can expect to hear from them within two days. Obviously, the rates of such a loan are more than the bank considering the fact that they share the risk with you (i.e. you don’t need to repay if your case doesn’t reach a settlement).
Applying to LawMax is fairly simple and easy with filling up an online form. With easy access to their staff via phone, fast decision time and no credit checks, employment requirements or monthly payments, Lawmax is definitely worth considering for getting a lawsuit loan.
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Filed under: Funds, Personal Finance, Products & Websites, loans
Posted on May 6th, 2008 by vLogged
Postponing Social Security until age 70 makes a great deal of sense for most healthy, married Americans that can do without the income. Of course, there are numerous exceptions and before postponing your benefits you should seek professional guidance. Obviously most haven’t because about two-thirds of current Social Security recipients started taking benefits before their normal retirement age? For the vast majority, this was a mistake and will cost them dearly in retirement as the result will be lower lifetime benefits. Is there a way to reverse this mistake and start again?
Yes! The Social Security Administration allows you to pay back the money you’ve received in Social Security benefits - without interest and without adjustment for inflation - and reapply for higher benefits. All you need to do is complete form 521, “Request for Withdrawal of Application”. You’ll be asked the reason for your action but don’t worry because any answer is acceptable. Let say you started at age 62 and have been drawing $1,000 a month for eights months but now want to reapply. Along with form 521 you’d write a check for $8,000 and then you can reapply when ready. If you filed a tax return during the period, you’ll probably want to file an amended return because chances are you overpaid your taxes and are due to refund. If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus the cost-of-living-adjustments, which means your benefits will more than double from those at age 62. As you’ll learn from reading my Guide to Social Security there are several other good reasons to postpone Social Security if you can possibly afford to do so. In fact, the typical family may be able to add as much as $200,000 to their lifetime retirement income if the primary breadwinner postpones Social Security until age 70.
The foregoing shows two easy ways to maximize your Social Security benefits by taking advantage of little known glitches in the rules. More and more married couples are realizing that postponing Social Security is the wise move because there is an increasing probability that at least one of them will live well beyond age 90. Since Social Security is a lifetime annuity promised by the U.S. Government with benefits annually adjusted upward for inflation and tax-favored when taken, making them a relative larger part of your retirement income is smart. This is done by postponing until age 70 if possible and taking advantage of the two “loopholes” we’ve discussed. Of course, by using these loopholes you’re adding to the financial woes of the Social Security System. If you find these glitches attractive, act soon before Congress wakes up and closes the gate.
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Filed under: Finance, Financial Planning, Investing
