Sushi Money

That depends upon what you’re looking for of course.  Lets assume an individual’s overall debt situation is well under control, and their credit card debt, if not paid off monthly, is mild.  If an individual is trying to stay away from all market risk, and wants to keep cash readily available for a near-term use, then “safety” is defined by your need for the money, for a purpose close at hand.  

Having an “emergency fund” is important for unforeseen situations… the time you really need money for something.  Most advocates say 3-6 months savings in the amount of your monthly income needs should fit that bill.  I think 6 months is more appropriate, and should be a first priority, especially in a family. So bank savings, money market accounts and CDs will fit the bill (CDs for savings, not an emergency fund due to possible penalties upon early withdrawal… e.g. you need the money).   Next is the credit card situation… pay down the credit cards!   

But what about longer term?  Is a safe bank/money market account or CD really helping over time?  Aside from peace of mind for knowing the money is there if needed, it may not be a safe place to keep funds.  Why?  Walter Updegrave from CNN Money writes a nice overview on why stockpiling cash may be a bad idea in a recent article “A lot of cash- too much risk.”  In essence he shows how the bite of inflation can slow the interest rate growth of bank savings (or CD or money market accounts) to a crawl.  That just doesn’t provide the necessary growth for someone trying to save for retirement or some other longer-term goal.  Mr. Updegrave shows the better alternative of really using a 401(k), if you have one, to grow retirement funds.  

I can think of few reasons why someone should not take advantage of 401(k) opportunities.  Most of those reasons involve hassles with paperwork, or how long one expects to be with a certain company, etc, etc.  But most 401(k) plans offer amazing benefits, and can be portable to take to a new employer.  Best of all, most 401(k) plans offer some kind of attractive matching or other benefit to how much you countribute… why pass up free money?    If you don’t have one, or just don’t want to use it… start an IRA.  We all need some kind of tax-deferred savings vechicle.  There is no better way to build retirement funds over time than a long-term tax-deferred approach to savings.  What if that just doesn’t meet your goals and need?  Maybe it can for a part of your savings program, and you can still use bank savings, money market and CDs for another portion.  You don’t like stocks or mutual funds?  Historically they provide the best long-term growth opportunities.  What about U.S. Savings Bonds?  They can provide a safe investment with a decent return, and can be used to fund education needs for children at a later time. 

The point is that there are many opportunities to grow your money over time… the earlier we start, the better off we are in later years.  I had a water-softener installed a couple weeks ago.  I didn’t plan on making a large appliance purchase this month, but the old water-softener finally gave in.  We live on well-water, and a good water-softener is essential.  Good reason for having an emergency fund… but more interesting was the conversation with the installer.  Here’s a guy in his middle forties that has a construction business on the side.  He was an energetic guy with lots of ideas and a strong work ethic.  He built his own house, had no debt, purchased only used cars, and was helping his children pay for school.  What about his retirement needs?  He had over $100,000 in savings.  Where was it?  In the bank, in a passbook savings account.

 This hard-working family man had never invested, never started an IRA, never looked at stocks or mutual funds, and was not comfortable with anything but cash at hand.  He was proud of his financial accomplishments, and should be… but he was also taking on a lot of “risk” in terms of the long-term safety of the growth of his money over time.  He also didn’t have any life or disability insurance beyond what social security might provide, and a family member to run the business in case of his disability.  Lots more there to be concerned about.  He knew he needed to start some savings and investment programs that would give him a leg up on inflation, but he was very risk averse.   We talked about some options and I referred him to a Certified Financial Planner to help get started.  He didn’t seem inclined to really want to do more however.  I wished him well… and hope he looks at other options.  It’s never too late to start!

Not yet! We were really due for this correction.   But I’m looking at sectors and how much exposure I have. How far will it go?  Great question, and one we’ll be reading about in the days ahead.  I won’t prognosticate that far… Stay tuned for all the “I told you so” comments, and some doom and gloom from the bear side.   If history is a guide, the commentary will become increasingly negative.  In the past few days there were several new articles with leads calling the market topped and way overvalued.  Just now I was watching the DOW drop slowly past 200 to over 400 points, then a super quick slide to over 500 points down.  Wow…  now just 10 minutes later it’s back “up” a little at “only” 393″ points down.  It’ll go more… watch the volatility.  That being said, I’m not a buyer here.  I’m pretty much 45% equities, 45% fixed-income, with some cash on the side.  I really like balanced and equity-income funds within an IRA… let them do their stuff.  Where else can you put your money right now?  A good money market fund at 4-5% is nothing to sneeze at.  Several internet banks have great rates in the 4-5% range as well.  I also like IEF… I-Shares Lehman 7-10 year Intermediate Treasuries.  It’s an ETF that trades on the AMEX, pays monthly and is a nice foundation for my portfolio.  I don’t plan to trade it near-term, but watch interest rates over time and see how it does. 

OBTW… eating poorly prepared Fugu is a really bad idea.  I love sushi, but I’ll keep my risk in the market!

Binary Dollar is hosting the 89th Carnival of Personal Finance this week.   Super idea for the theme using celebrity pictures for each topic and article… how appropriate for Academy Awards week!   The Carnival of Personal Finance originated at the site by the same name… with weekly carnivals around the blogosphere on a myriad of personal finance topics- terrific and useful information out there.  Our submission is the post “Supercharge your IRA for 2007” and I’m please to be part.  Great job Henry and Matt!

Oh… “What the heck is a blog carnival” you ask?!   Well, a blog carnival is simply that- a festive blogging and reading experience!  But it offers much more- truly a collaborative writing effort where bloggers and sites with a similar focus host a “carnival” of content periodically.  The blog carnivals are a nice way to gather theme-oriented content in a single reading experience, with creative layout and links to other blogs and information.  Enjoy!  

Many people are unaware that simply giving money to someone can result in a potentially taxable gift.  Sure people give money to others every day but for a sizable gift, cash or otherwise, the IRS has formal guidelines for the transfer of wealth in society.  Doesn’t sound fair sometimes, but if no one had to pay taxes when moving money around, that’s probably all there would be! Elaborate schemes to hide and shelter money, resulting in a system of taxation that was crazy.  Wait a minute… that sounds like what we have today!  Yes, but for gifts it’s a little different and we do need to abide by the law.  In many cases there are choices to be made… if not considered carefully we may owe far more taxes on gifts than realized. 

Let’s say you win a $1,000,000 lotto, and you decide you want each of your other 4 siblings to have $200,000.  You’ve been waiting for this day… so what do you do?  Walk to the lotto office, smile for the cameras and hold up that big check?  Then give each of your siblings the money?  That’s very nice of you… and for 2007 the IRS will thank you as well when you pay up to $50,960 gift tax on each of those $200,000 gifts!  That would effectively mean you paid $203,840 in taxes out of the original $1,000,000, leaving you to divide up $796,160.  Subtracting your own $200,000, you would only have $596,160 to divide up among your four siblings, each receiving $149,040 .  Not bad you say… which is true, but I would rather have the original $200,000!  What’s the better strategy?  Well, perhaps there’s not a formal guideline- but I talked about this with a few other people, and if it were me I would contact my siblings personally, and have them pay for the portion of the lotto tickets I purchased.  Then we could all walk down to that lotto office together and have the State or Lotto Agency write seperate checks for each of us!  No gift taxes would be due and we would each have the original $200,000.  Just an example to consider, and maybe not legal or even ethical depending on the circumstances. 

Giving money to others is a generous and charitable thing to do… but doing so may have unforeseen tax ramifications. More appropriate to most of us, for 2007 the current annual gift exclusion is $12,000.  If you want to give your four kids each $12,000- so be it.  You want to give your neighbor $12,000… that’s fine.  There is a lifetime gift limit of $1,000,000 to consider, after which gift taxes may be due.  Even if no gift taxes are due, when giving cash in excess of the annual gift tax exclusion amount you may be required to file a gift tax return.  Maybe not a factor for most of us, but definitely a consideration for estate planning and the wealthy.  If I did get $1,000,000 from the lotto individually, I would be sure not to give more than $12,000, or the annual exclusion amount, to each person each year!  But there is certainly a ”tax bite” that can occur without prior thought.  Any time someone “comes into money” it would be wise to sit down with an objective professional such as a Certified Financial Planner or CPA to discuss options.  

 Regardless of how we give, there are also beneficial tax considerations when making donations.  There may be valid, legal deductions available that can lower the taxes you must pay on your income each year.  And for larger donations of cash or valuable property, there are limitations on the deductibility of such gifts based on your income.  It is also important to note that unless you are making donations to qualified charitable organizations or non-profit entities, you may be making a gift that will incur taxes- money you must pay to the IRS based on the size of your gift.  It’s a good idea to speak with your tax planner or CPA to make an informed decision benefiting both the charity and your potential tax liability.  For general information, check out these useful links on taxes and charitable giving:

• A short overview on tax considerations is discussed in The Tax Perks of Charitable Giving from SmartMoney.com. 
• Fairmark™s Tax Guide has an excellent multi-page overview of the Tax Rules for Gifts.
• For those who may make larger cash donations and have trust or estate planning concerns, T. Rowe Price has an overview of The Tax Value of Charitable Giving.

So what isn’t taxable regarding gifts?  What does the IRS say it’s okay to give to others without concern for taxation?  Quite simply, medical and education costs, and gifts to your married spouse (there is currently an unlimited lifetime gift exclusion within a marriage), or to a qualified charity (there is also an unlimited lifetime gift tax exclusion on gifts to qualified charities).  You can pay for anyone’s medical care, without fear of taxation, as long as you pay directly to the medical institution for those health care costs.  Likewise, you can pay tuition costs for anyone as long as you pay the money directly to the educational institution.  If you give the money to the individual to pay for it themselves?  Then it’s a “gift” with potential tax consequences.  So there are many considerations and tax ramifications to “giving” money, or property, away.  Do you want to give your house to a family member?  That may be a gift… Do you want to give your car away?  Again, a gift…  When in doubt, always see a professional for discussing specifics about your situation!

• For detailed tax regulation information, see the most current IRS guidelines found in IRS Publication 526 (pdf file).

Most consumers hate paying ATM fees, especially if you are withdrawing money from an ATM machine that is not part of your own bank.   I usually see fees in the range of $1.50 to $2.00, but today I stopped by a local, small-town bank where it says, “Our main goal is to provide superior service that meets- and exceeds- your expectations.”  Well, they exceeded my expectations alright, especially when they wanted to charge me $3.00 to use their ATM!  Okay, I wasn’t one of their customers… but the reason I was withdrawing money was so I could walk inside and open an account.  Needless to say, their other fees were also excessive and I walked back out the door.  This wasn’t a branch of a national bank- just a small town bank in Missouri that for years has had the reputation of taking care of customers.  Perhaps they still do, yet now charge high fees as well. To their credit, they offer very competitive CD rates, which is apparently their focus point.  But I was disappointed to say the least.  Charging $3.00 for a non-customer to use their ATM more resembles the independent “let’s stick an ATM anywhere” businesses.   You can almost understand the reason for higher ATM fees with that business model, but I haven’t even seen a $3.00 fee at one of those machines yet!

I tried to find some national statistics on ATM fees, but found nothing specific after a short search.  Generally it seems $2.00-$2.50 is the highest most people see across the U.S.  Perhaps $3.00 may even be common in several major cities… but rural, small-town Missouri?  Some banks will tell you they charge the fees because of “network access charges” or that your other bank is charging them…. Not so fast.  In my case, I called my primary bank and they verified they do not charge other banks or institutions fees for a customer to use an ATM card or access their account.  I’m all for paying for quality service, at a fair price.  In this case, they are not offering either. 

Piggybacking on my earlier post, Yahoo’s Personal Finance has a syndicated article titled Steer Clear of Tax Cons written by Dayana Yochim that shows the pitfalls of “instant refund” tax programs, among others.  The article provides a great summary of why it’s not a good idea to use these services for most people.  Sure, there are legitimate business that provide a service- and for many people it’s fast, simple and effective.  But you are paying far too much for this service!  Why not do it yourself instead?  I’ve been doing taxes myself for many years with helpful programs like TurboTax from Intuit.  Instead of paying commissions and fees to someone else- spend the money on some basic tax software for your home computer! (Or you can do it online as well). It will probably cost less overall, and will provide an excellent tool to gain knowledge and a true picture of your tax situation.  Most taxpayers do not have complicated financial lives, or tax situations.  Do-it-yourself tax software is easy to use, and provides a year-to-year historical record as you use the software over time.  I’ve been doing this for over 15 years.  In some ways, I find the tax software applications almost “too easy” because it takes so much of the work out of it.  There are many valid reasons to use a professional tax-preparer such as a CPA of course.  Time, complicated financials or business issues may be more than you want to tackle personally- and that is understandable.  But most of the “instant refund” tax services are not professional tax services, and most taxpayers do not need expensive professional consultation.  There are several excellent tax software applications- do a Google search and you’ll find one to meet your needs.  Filing is simple and quick- and you can get your refund in days. It’s an invaluable tool and time saver… it really is not difficult.  Anything that makes my life simpler and more productive is a good thing!

There are so many websites and information devoted to personal finance that it becomes confusing at times.  We end up using what works best for us.  Planning for our future is becoming ever more important, especially with the aging of the Boomer population over the next 15-20 years.  It seems we can never know enough, and laws change every year requiring a pragmatic approach to keeping abreast of the changes.  One of my favorite sites is Yahoo Finance.  It offers so much information and flexibility.  The Yahoo Personal Finance pages are very useful for issues the average consumer can really use.  The content integrated to the site is excellent- and leads to many other resources. Empower yourself with the free tools out there- it’s never too late to begin planning ahead!

Like different types of Makizushi, or simply “Maki”, an IRA can be an amazing combination of many assets all rolled into one. We’re going to talk about mutual fund investing and increasing the power of your IRA! This discussion is not about what an IRA is, or if you are qualified to open one- we will assume you have some idea of the basics (if not, look here!). Personally I favor the Roth IRA if you’re eligible. Most taxpayers are, and the beauty is that qualified future withdrawals will be tax free under current law.

My analogy with Maki is simple: Your IRA does not have to be comprised of one or two stodgy funds that you remain committed to, or change every few years after gut-wrenching analysis. And why should it be? Your IRA can hold nearly any combination or flavors of investment vehicles. Asset allocation and diversification are not only relevant to your entire portfolio, but should also be used as a tool within your IRA. Common sense to some, but many people are under the assumption that IRA’s are not very flexible for the type or combination of assets they hold within the IRA. Perhaps because of confusing jargon and legal descriptions, many people are also hesitant to make changes to their IRA due to potential tax consequences. But you don’t have to be hesitant, as long as you are not withdrawing funds from the IRA itself. (If you are making a qualified, intentional withdrawal then this obviously doesn’t apply). Even if you do take money from the IRA by mistake- if you “rollover” the funds back into the IRA within 60 days you should not incur tax penalties.

The strategy I prefer for managing an IRA is simple. Find a good low cost mutual fund or brokerage company like Vanguard, and over time diversify your IRA contributions to different funds you believe will achieve your objectives. In either case, let’s say you are adding to your Roth IRA with a $4000 contribution for 2006 or 2007 (you still have until April 17th to make a contribution for 2006!!!). Do you need to put that money directly into the same fund you already have? No! Consider other funds that will meet your current or long-term objectives and put the money into a new fund. Many funds have minimum requirements of anywhere from $500 to $3000 or more to be opened, so choose carefully. You can even open a different IRA at a different institution if you desire- there is essentially no limit to how many IRA’s you have. The real limits are established by law in terms of an annual contribution maximum for how much you can contribute in total to any or all IRAs in a given year. I like to keep my IRA with one institution to minimize administrative issues.

But here’s the key to the strategy: Use one of your IRA contribution years to fund and open a good money market fund within your IRA such as the Vanguard Prime Money Market Fund (VMMXX). Now that you have this money in the money market fund, within your IRA, you can choose to sweep that money into any other fund, at any time that you desire, based on the institution’s minimum investment requirements! And vice versa… let’s say you are uncomfortable with the market’s direction at some point- you can sell all or a portion of a fund held within your IRA and “sweep” the cash back to your money market fund, also held within your IRA. Or you can move or re-balance other funds within your IRA at a later date… what a great tool for re-balancing a portfolio over time! There are no tax consequences because all funds and transactions remain within your IRA. (There may however be fund company or brokerage firm consequences- if you sell all of a given fund, or reduce a fund below a certain balance, the fund or brokerage company may close you out of that fund and not allow transactions to the same fund within a period of time. Look at the company guidelines for your fund before doing this.) But in general, you now have increased your flexibility within the IRA for how you manage your assets.

I’m not advocating market timing in any sense, and I strongly believe in long-term investing for an IRA. However there are times when we may need the flexibility of having choices… and using a money market fund as a placeholder within your IRA can be a very helpful tool. So that’s it- supercharge your own IRA with flexibility! You can then a) know that you are not stuck in a fund or asset allocation that makes you uncomfortable, b) do your IRA investment research in a thoughtful manner over time, and c) choose the funds or assets that are most appropriate for your objectives. Talk with your financial planner or investment advisor if you want more information. Moving mutual fund investments around frequently is not a good strategy to achieve long-term returns. But you can do more with your IRA than at first glance!

For more news about the Roth IRA.

For more about Makizushi!

My favorite sushi is nigiri-style maguro.  A nice fresh cut of tuna on rice with wasabi… it is delicious.  I remember stories of the Japanese fish markets with enormous Bluefin Tuna lined up in rows for early morning bidding.  Some of these fish would fetch prices in excess of $30,000 to $40,000.  Amazing, but not surprising given the equally enormous appetite for this particular fish. 

Recently, we see in the headlines that the Bluefin Tuna is at risk of extinction if the present fishing pressures continue expanding.  In an article titled Nations Join Forces to Save the Tuna, the UK Times Online is reporting that Japan and the European Union have agreed to dramatically reduce their annual catch by almost a quarter percent in an effort to halt species decline and ensure a positive future for the fish (and markets! – Picture of Tsukiji Fish Market, Japan, courtesy of JoshSpear.com).

But this brings to mind some personal financial considerations.  We accept many types of risk… with our investments for example.  Often we make investment decisions based on factors that justify, for us, the merit of that decision.  Maybe we leave it up to someone else.  Be it fundamental, technical, practical, emotional or some combination of those factors that justifies the investment decision, we are accepting a level of risk that becomes part of an overall risk profile for our portfolio.  And yet it is more than that.  When was the last time you looked at your entire spectrum of risk?  Not simply your investment risk, but to your total retirement portfolio?  Do you know how your 401(k) is allocated?  The choices you have for how your funds are invested? Asset allocation? What about your insurance needs?  Do you have the right coverage for your current family situation?  Are you accepting undue risk for your family and future because you have procrastinated or simply have not got around to it?  Many of us are amazed to examine our auto and property coverage after having older policies for many years, and finding that coverage levels do not fit current needs.  Do you need and have an umbrella liability policy?  And at the later end of the lifecycle spectrum, what about estate planning and taxation?  We could go on of course, but the point is simply that sometimes we are so involved in our lives and jobs that we may forget the larger risks inherent to our personal or family financial situation.  I’m thinking about the larger context of our lives in which we function from day-to-day and year-to-year.  And if nations can agree to manage the risk of species decline of Bluefin Tuna in terms of catch and consumption, we can certainly agree to the need for managing the financial and retirement risks we face.  The oceans are vast places, seemingly endless.  So too the financial choices we face are seemingly endless.  But our choices can be managed and approched systematically, positively and with the knowledge that we are taking care of our future!  Is it time to find professional assistance?  To find a Certified Financial Planner in your area that meets your needs, see the Financial Planning Association’s search tool.