Money Doesn’t Come Without Guidance

When should I hire a lawyer?

For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need to hire a lawyer. And, if a court case is involved (other than a simple, routine matter), you`ll almost always need a lawyer.

When deciding whether to hire an attorney, consider the following:

  • Does the matter involve a complex legal issue or is it likely to go to court? Is a large amount of money, property, or time involved? These factors indicate that you need to hire a lawyer.

  • Is there a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with only minimal assistance.

  • Are there any non-lawyer legal resources available to assist you?

Unlike more complex transactions, some transactions can be handled without a lawyer. For instance, a living will can often be prepared with the help of organizations such as the American Association of Retired Persons (AARP). Non-profits that deal with retired and elderly persons may also be able to provide you with the necessary paperwork to create a living will in your state, as well as additional information and/or assistance in completing the form properly.

How would I handle a dispute on my own?

Many disputes can be resolved by writing letters or negotiating with the other party on your own, or by using arbitration or mediation. Legal self-help manuals and seminars can provide you with the tools to handle a portion of, or the entire, dispute.

Tip: Consider hiring an attorney to review papers or provide advice, rather than fully representing you.

Negotiating on your own. Negotiating on your own behalf is often the best way to solve minor disputes. Visit your local library or search online for resources that explain the best way to negotiate a dispute.

Tip: Before starting the negotiation process, it`s usually a good idea to familiarize yourself with legal issues that might come up by calling a legal hot-line or consulting other sources of information.

Mediation or arbitration. Dispute resolution centers have been established in every state. Most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

During the mediation process, a neutral person assists the two sides in discussing their differences and helps them possibly reach an agreement. In an arbitration setting, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties agree to it, using a dispute resolution center or a private mediation center is a lower-cost alternative to bringing a lawsuit to court or hiring an attorney to represent you during a negotiation process.

Small claims court. Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. If you file in small claims court, be prepared to act as your own attorney, gathering necessary evidence, researching the law, and presenting your story in court.

How do I find a good lawyer?

The first step is to compile a list of names. Ask relatives, friends, clergy, social workers, or your doctor for recommendations. State bar associations usually have lawyer referral lists organized by specialty. Martindale-Hubbell also has a comprehensive lawyer referral service. For specific groups such as persons with disabilities, older persons, or victims of domestic violence consult a community lawyer referral services. The court and your banker may also be good referral sources. Finally, don`t forget the yellow pages of the telephone book, which often lists lawyers according to their specialties.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Tip: Be aware that many bar associations have committees that conduct training or public service work in various areas of specialty. An attorney serving on one of these committees could have the expertise you are looking for.

After developing a list of potential lawyers, interview them initially by telephone to narrow down the list and then arrange face-to-face interviews.

What questions should you ask?

Before committing yourself to a consultation, ask potential candidates the following questions:

  • Do you provide a free consultation for the initial interview?

  • How long have you been in practice?

  • What percentage of your cases is similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient).

  • Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?

  • Do you represent any clients or special-interest groups that might cause a conflict of interest?

  • What type of fee arrangement do you require? Are the fees negotiable?

  • What information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don`t feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete your initial phone calls.

Next, interview the candidates. Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney. The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

What legal fee arrangements are best for me?

The market rate for any given legal service varies by locality. A "fair" fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

  • How much you can afford

  • Whether the case is routine or requires special expertise

  • The range of attorney rates for this type of case in your area

  • How much work can you can do on the case yourself

The most common types of fee arrangements used by lawyers are listed below.

Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.

Note: While lawyers will not set a flat fee for litigation, they can usually give you a good estimate of the costs at each stage.

Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee.

Hourly rate. Attorneys charge by the hour (or portion of an hour). For instance, if your attorney`s fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation. And, as a rule, large law firms usually charge more than small law firms and attorneys in urban areas often charge more per hour than attorneys practicing in rural areas.

Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you? Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney`s fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. A one-third fee is common.

Tip: Ask whether the lawyer will calculate the fee before or after the expenses. This can make a substantial difference, since calculating the percentage of the attorney`s fee after the expenses have been deducted increases the amount of money you receive.

How can I save money on legal fees?

It is important to remember that a lawyer`s fees are often negotiable, but your lawyer is unlikely to invite you to bargain over fees! Here are some tips for saving ensuring the cost-effectiveness of legal fees.

Comparison shop for flat fees on simple cases.

Ask about the billing method for hourly rates. A written agreement specifying the fee arrangement and the work involved is the best way to be clear about the total cost of the case.

Choose a lawyer with the appropriate qualifications. Most legal work is relatively routine in nature and often has more to do with knowing which form to fill out and which county clerk will process it most quickly.

Offer to perform some of the work.

Hire the attorney to act as a go-between. Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle.

Hire the attorney to act as your pro se coach. If you want to represent yourself in court (called "appearing pro se"), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign.

Choose a lawyer who specializes in what you need.

Prepare for meetings with your attorney. The more work you do to prepare, the less time your attorney needs to spend (and charge you) for finding the information.

Answer your attorney`s questions fully. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigations or misdirected case development.

If the situation changes, tell your attorney as soon as possible. You don`t want your attorney heading in the wrong direction on a case.

Maximize contact with your attorney. Consolidate your questions or information-giving into a single call. Unless you have a specific reason for doing so, pass on information in writing or to other office staff rather than speaking directly with the attorney.

Examine your bill. Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

What kind of records do I need to keep in my business?

Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that helps you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income, and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.

Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit.

The Basic Recordkeeping System

A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.

An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.

What do I need to know about automating part or all of my business?

You must have a clear understanding of your firm`s long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer. Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems.

Business Applications Performed by Computers

A computer`s multiple capabilities can solve many business problems from keeping transaction records and preparing statements and reports to maintaining customer and lead lists, creating brochures, and paying your staff. A complete computer system can organize and store many similarly structured pieces of information, perform complicated mathematical computations quickly and accurately, print information quickly and accurately, facilitate communications among individuals, departments, and branches, and link the office to many sources of data available through larger networks. Computers can also streamline such manual business operations as accounts receivable, advertising, inventory, payroll, and planning. With all of these operations, the computer increases efficiency, reduces errors, and cuts costs.

Computer Business Applications

Computers also can perform more complicated operations, such as financial modeling programs that prepare and analyze financial statements and spreadsheet and accounting programs that compile statistics, plot trends and markets and do market analysis, modeling, graphs, and forms. Various word processing programs produce typewritten documents and provide text-editing functions while desktop publishing programs enable you to create good quality print materials on your computer. Critical path analysis programs divide large projects into smaller, more easily managed segments or steps.

How can I ensure that I`m choosing the right computer system?

To computerize your business you need to choose the best programs for your business, select the right equipment, and then implement the various applications associated with the software. In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware. QuickBooks is a good example of this type of software.

To determine your requirements, prepare a list of all functions in your business. in which speed and accuracy are needed for handling volumes of information. These are called applications.

For each of these applications make a list of all reports that are currently produced. You should also include any pre-printed forms such as checks, billing statements or vouchers. If such forms don`t exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information that you want to display on the computer video screen (CRT).

For all files you are keeping manually or expect to computerize list, identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business.

How can I successfully implement a new computer system?

When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes. Be sure the location for your new computer meets the system`s requirements for temperature, humidity, and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and then train, or have the vendors train, everyone who will be using the system.

After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works.

System Security

If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software.

Data Safety

The best and cheapest insurance against lost data is to back up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs, and documents needed for essential tasks during recovery from a disaster.

Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.

How do I research whether my small business` product or service will sell?

Market research is the most critical element of successful business planning because it provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge. It is a process that involves scrutinizing your competition and your customer base, and interviewing potential suppliers.

There are a number of benefits to conducting market research such as helping you create primary and alternative sales approaches to a given market, making profit projections from a more accurate base, organizing marketing activities, developing critical short/mid-term sales goals, and establishing the market`s profit boundaries, but first, you must define your goals and organize the collection/analysis process.

What market research questions should I ask?

Your research questions should revolve around the demographic data of your customers such as age, location, and income (what they can afford). Your research should also address larger questions such as what type of demand there is for your product, how you might generate demand. In addition, you will want to find out how many competitors provide the same service or product and whether you can you effectively compete with regard to price, quality, and delivery.

You also might want to ask yourself whether you can price the product or service so as to assure a profit. Finally, it is helpful to understand the general economy of your service or product area and the areas within your market that are declining or growing.

What costs should I consider when determining how much to charge for my products or services?

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity`s total cost, therefore failing to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.

Material Costs. These are the costs of all materials found in the final product.

Labor Costs. Labor costs are the costs of the work that goes into the manufacturing of a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of person-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers` compensation, unemployment compensation, insurance, retirement benefits, etc.

Overhead Costs. Overhead costs are any costs that are not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat, and light, depreciation, taxes, rent, advertising, transportation, and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components.

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It`s best to project the costs semiannually, including increased executive salaries and other projected costs.

What is a corporation?

A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.

What is the difference between an "S" corporation and a "C" corporation?

All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C-corporation becomes an S-corporation by completing and filing federal form 2553 with the IRS. An S-corporation`s net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C-corporations. Subchapter S-corporations, as they are also called, are restricted to having no more than 100 shareholders.

Do I need an attorney to incorporate?

An attorney is not a legal requirement for incorporating a business in any state except South Carolina, where a signature by a South Carolina attorney licensed to practice in the state is required on articles of incorporation. In every other state, you can prepare and file the articles of incorporation yourself. However, if you are unsure of what steps your business should take and you don`t have the time to research the matter yourself, a consultation with a good corporate attorney is often well worth the money you spend.

How do I know if my name is available?

We will request your two top name choices. We will check these as part of your order. If neither of these is available, we will contact you for other name choices.

How do I name my corporation?

First, we recommend that you spend some time coming up with a name for your corporation. Although each state has different rules concerning the naming of your corporation, the most common rule is that it must not be deceptively similar to another already formed company. The corporate name must include a suffix. Some examples are "Incorporated", "Inc.", "Company", and "Corp." However, your state may have different suffix requirements.

What are the benefits of incorporating?

The primary advantage of incorporating is to limit your liability to the assets of the corporation only. Usually, shareholders are not liable for the debts or obligations of the corporation. So if your corporation defaults on a loan, unless you haven`t personally signed for it, your personal assets won`t be in jeopardy. This is not the case with a sole proprietorship or partnership. Corporations also offer many tax advantages that are not available to sole proprietors.

Some other advantages include:

What is a Registered Agent?

Most every state requires that a corporation has a registered agent. That agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (lawsuit).

How many Directors/Shareholders do I need?

Most states allow for one person to act as shareholder, director, and all officer roles.

How many shares of stock should I choose, and at what par value?

We provide a default of 200 shares, although you can choose any amount you want on all orders. Your par value is not requested on all orders, and is usually expressed as "No Par Value" or some dollar amount per share such as "$1.00" or "$0.10." Some states require that you do not issue your stock for less than the par value. Some states also base their fees on the number of shares authorized, multiplied by the par value.

What is a Federal Tax Identification Number or EIN?

Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.

We provide two EIN services:

What do I need to do AFTER I incorporate?

You must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven`t been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers, adopt your company`s bylaws, and issue your stock (among other actions).

How do I get started?

Once you have decided on a name, order your corporation online. Once we receive your paid order, we verify the availability of your name choices, draft your articles, file them with the state and send you all appropriate documents after they have been filed.

How can I minimize problems when getting a mortgage?

Much of the information required by your lender can be brought with you when you apply for a loan. To avoid delays, try to find out in advance exactly what documentation the lender will require from you. In general, however, most lenders will ask for the following documents:

Ask the lender what is the average time for processing loans and what time frame you can reasonably expect your loan to be approved in.

People who are rejected for a mortgage loan often find that it is due to problems with their credit score. To circumvent potential problems, several months before applying for a mortgage try to pay down your credit cards, but do not close them. Although it may seem counterintuitive, closing them can negatively affect your credit score. Obtain a copy of your credit report so you can dispute any errors you find. Do not apply for credit unless you really need it and start paying bills on time if you do not already do so. Your recent history is counted heavily. If your credit history is sparse, take out a small loan or obtain a bank credit card or store charge card and make timely payments. Try not to change jobs.

How can I lock in a mortgage rate most effectively?

A lock-in, also called a rate-lock or rate commitment, is a lender`s promise to hold a specific interest rate and number of points for you while your loan application is processed. A lock-in is typically held for a specific amount of time as well. A lock-in that is quoted when you apply for a loan may be useful because during that time the mortgage rates may change and it`s likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application.

But if your interest rate and points are locked in and rates increase you will be protected while your application is processed. Remember, however, that a locked-in rate could also prevent you from taking advantage of decreases in the interest rate unless your lender is willing to lock in a lower rate that becomes available during this period.

When considering a lock-in, ask the following questions:

How are escrow payments calculated?

An escrow account is a fund that your lender establishes in order to pay property taxes and hazard insurance as they become due on your home during the year. The lender uses the escrow account to safeguard its investment, which is your home. Similarly, if you neglected to pay the hazard insurance premium, a fire or flood that destroyed your home also would destroy the lender`s security for the loan.

The goal of the escrow account is to have enough money to pay taxes and insurance when they become due. To achieve this, the lender adds one-twelfth of the tax and insurance amount to your mortgage payment each month. For example, if your taxes and insurance are $1,200 per year, the lender would collect $1,200 in twelve installments of $100 per month.

To cover possible tax or insurance increases, the federal Real Estate Settlement Procedures Act (RESPA) permits the lender to add to the yearly amount two months of extra payments prorated monthly. So, the lender would collect an additional $200 divided by 12, or $16.67 per month, for a total escrow payment of $116.67 per month

Mortgage services are required by federal law to make payments for taxes, insurance, and any other escrowed items on time. Within 45 days of establishing the account, the servicer must give you a statement that clearly itemizes the estimated taxes, insurance premiums and other anticipated amounts to be paid over the next 12 months, and the expected dates and totals of those payments.

You should also receive a free annual statement from the mortgage services that outlines activity in your escrow account such as account balances and when payments were made for property taxes, homeowners insurance and other escrowed items.

To determine if you are being charged correctly, compare your escrow payments with what you owe annually on your hazard insurance and property taxes. You can get this information from your local tax authority and your insurance company. If the lender charges you substantially less than the required amount, you will need to pay an additional lump sum at the end of the year. If the lender charges you substantially more, it may tie up your money unfairly, as well as violate the RESPA regulations.

What should I do if my bank or other mortgage lender sells my mortgage?

To protect borrowers, the National Affordable Housing Act requires lenders or mortgage servicers (the company that borrowers pay their mortgage loan payments to) to do the following.

They must notify you at least 15 days before they sell your loan unless you received a written transfer notice at settlement. If your loan servicing is going to be sold, you should receive two notices, one from the current mortgage servicer and one from the new mortgage servicer. The new servicer must notify you not more than 15 days after the transfer has occurred.

The notices must include the following information:

For example, if your old lender did not require an escrow account, but allowed you to pay property taxes and insurance premiums on your own, the new servicer cannot demand that you establish such an account. They must grant a 60-day grace period, in which you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage servicer instead of the new one.

If you believe you have been improperly charged a penalty or late fee, or there are other problems with the servicing of your loan, contact your servicer in writing. Include your account number and explain why you believe your account is incorrect.

Within 20 business days of receiving your inquiry, the servicer must send you a written response acknowledging your inquiry. Within 60 business days, the servicer must either correct your account or determine that it is accurate. The servicer must send you a written notice of what action it took and why.

If you believe the servicer has not responded appropriately to your written inquiry, contact your local or state consumer protection office. You can also file a complaint with the FTC. Or, you may want to contact an attorney to advise you of your legal rights. Under the National Affordable Housing Act, consumers can initiate class action suits and obtain actual damages, plus additional damages, for a pattern or practice of noncompliance.

When can I stop paying Private Mortgage Insurance (PMI)?

Generally, if you make a down payment of less than 20 percent when buying a home, the lender will require you to buy private mortgage insurance (PMI). You can usually drop the PMI when your home equity is more than 20 percent. Making extra payments, home improvements, and appreciation can all help increase equity and reduce the length of time that you have to pay PMI. Thanks to new regulations, it`s now easier for people to cancel PMI when their home equity reaches 20 percent; however, some government insured loans such as FHA and VA loans require that homeowners pay PMI for the life of the loan.

To find out whether you can cancel PMI, call your lender or mortgage servicing company (the company to which you send your mortgage payments) and ask what steps you need to take to cancel it. You will be required to request it in writing, but by calling first you can make sure you have included all of the necessary information when you submit your request.

In most cases, you will be required to pay for a formal appraisal. When you call the lender ask whether you can set up the appraisal or if it`s something the lender needs to do. Lenders also take a close look at your payment history, so it`s important to have made your payments on time. One other thing to keep in mind is that if you rent your home out, most lenders will require a higher equity percentage before dropping PMI.

If your request is approved, you will receive any pre-paid premiums that are in your escrow account.

How can I avoid paying Private Mortgage Insurance (PMI)?

Lenders usually require private mortgage insurance if the loan is more than 80 percent of the home`s purchase price, but even if you don`t have the standard 20 percent down-payment, you can avoid paying private mortgage insurance in other ways. Some buyers go for 80-10-10 financing, which means that they put 10 percent down and take out a first mortgage for 80 percent of the purchase price. Sellers sometimes will carry a 10 percent second mortgage. Otherwise, you can finance the remainder through institutional lenders, which often charge a point above the first mortgage`s rate.

If you only have 5 percent to put down, you may still be able to do the deal. You will pay a much higher interest rate on a 15 percent second mortgage, however.

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for pre-payment), it makes good financial sense to prepay as much as you can every month, but there are some exceptions. For example:

  1. You do not have an emergency fund stashed away. Once you`ve put away three to six months` worth of living expenses, then you can begin paying down your mortgage.

  2. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

  3. There are a few individuals who might be better off not paying down their mortgages since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to several lenders to find out what the current refinancing rates and what costs are associated with refinancing. Costs can include items such as appraisals, attorney`s fees, and points.

Once you have an estimate of what the costs might be, figure out what your new payment would be if you were to refinance. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). Be aware, however, that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Refinancing can be a good idea for homeowners who want to get out of a high interest rate loan to take advantage of lower rates or those who have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan. It is also a good idea for those who want to convert to an ARM with a lower interest rate or more protective features than the ARM they currently have. Finally, refinancing is recommended for those who want to build up equity more quickly by converting to a loan with a shorter term or want to draw on the equity built up in their house to get cash for a major purchase or for their children`s education.

Should I pay off my mortgage?

The rule of thumb is to pay off your mortgage if there aren`t any better uses for your money. As far as loans go, mortgages have moderate interest rates, and interest payments are tax deductible. However, any investment that yields substantially more than the interest rate on your mortgage (such as tax-deferred retirement plans) is probably a good alternative. Paying off credit card balances is also a better use of your money than paying off a mortgage, but if you know you will just spend the money otherwise, paying off your mortgage is a good idea.

Before you make any extra payments, make sure that your loan has no prepayment penalty. If so, then you can make an extra payment once a year, pay every two weeks instead of every month, or just send in whatever you can afford above your normal monthly mortgage payment. The larger the extra payment and the sooner you make it, the faster your mortgage will be paid off--and the more you will save in interest. Contact your lender to make sure your payments will be credited toward principal rather than future payments. There is no need to pay a third party to arrange extra mortgage payments.

What are the different options for mortgages?

There are two basic kinds of mortgages: fixed-rate and adjustable. Fixed-rate mortgages carry the lowest risk and are an especially good deal when interest rates are low. Adjustable-rate mortgages typically cost less, but they can become expensive if interest rates rise substantially. Some of them also amortize negatively, which means that your payment does not cover all of the loan`s interest for the month. Your balance will increase, and you will owe interest on the interest. You can get either loan for different terms, typically 15 or 30 years.

There are now many different kinds of mortgages that combine aspects of both fixed-rate and adjustable loans. A mortgage may start as a fixed-rate loan, for example, and then convert to an adjustable after several years. One loan that has been around a long time is a balloon mortgage. It has low, fixed payments for a period of years, and then the entire loan comes due. Considered very risky, it is sometimes used by a seller to help a buyer with the down payment. Banks now offer balloon mortgages that can convert to fixed-rate or adjustable mortgages.

How do I choose between low rates and low points on a mortgage?

Get a lower interest rate and pay more points if you intend to live in your house for a long time. Points are an up-front interest fee that generally increases as the mortgage interest rate decreases. Trading this fee for a higher interest rate will cost more over the life of the loan.

If you plan to be in your house for less than five years, however, it is less expensive in the long run to avoid paying points by taking a higher interest rate. You also might want to take the higher interest rate if it means you can then put enough cash down to avoid private mortgage insurance.

Which mortgage is best for me?

It may depend on how much risk you can tolerate. A traditional 30-year, fixed-rate mortgage is still the safest way to go. Your monthly payment stays the same for the life of the loan. You are protected from increases in interest rates, and if rates go lower, you can always refinance.

An adjustable-rate mortgage, or ARM, is riskier but often less costly. ARMs typically offer below-market teaser rates and then adjust according to current interest rates as often as every few months. These loans set caps on the interest rate and the amount it can ratchet up each period. Be careful of loans that have payment caps because they can leave you owing more money on your mortgage each time you make a payment if interest rates rise quickly. ARMs are best for people who need initially lower monthly payments, who expect their income to rise, or who expect to live in their home for five years or less.

Mortgages with 30-year terms are still the most popular although 15-year mortgages are gaining favor among people who want to build equity faster at a lower cost. Many homeowners with 30-year mortgages, however, can also lower their costs and shorten the term of their loans by paying extra each month.

How do I find a good real estate agent when I sell my home?

First, ask friends, family, and colleagues for recommendations of real estate agents. You can also look for names listed on posted "for sale" signs, especially for houses that have been sold. Once you have at least three names, schedule a telephone or in-person interview with the agent.

Ask the real estate agent what problems she or he sees in marketing your home. The broker should be honest about potential problems and be able to think creatively about solutions. Ask for a plan for marketing the home and what you as a homeowner can do to help implement the plan. Listen to the answers. Does the agent exhibit a willingness to think creatively in approaching whatever problems might exist with the selling process? Does she seem co-operative or receptive to your input? Other things to consider are whether the broker knows the good and bad points about your neighborhood or town. And last but not least, don`t forget to ask the broker for a list of comparable homes, which is essential in helping you arrive at an asking price for your home.

Which type of listing agreement should I enter into with the real estate agent?

A listing agreement is a contract between the homeowner and the agent. It states how much the agent will be paid and what services are provided.

You will generally have to enter into an exclusive listing, which gives the agent the exclusive right to sell your house for a limited period of time. The listing agent gets 100 percent of the commission if he or she sells the house and a percentage of the commission if another broker sells the house.

Tip: Establish a time limit of three months for an exclusive right to sell agreement. This will give the broker an incentive to sell the home quickly and still gives you an out if you feel the broker isn`t doing enough for you. If you have a lot of confidence in the broker, and you have seen and approved of his or her plans for marketing the home, you may wish to sign for six months.

Tip: If at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker you have doubts about.

How can I speed up the sale of my home?

Here are some tips for making your home more attractive to buyers.

Make cosmetic improvements to get the house looking as good as possible.
For instance, patch damaged plaster and drywall, repaint, and re-wallpaper. Spruce up the exterior by replacing broken shingles or shutters or doing some minor landscaping to give your home more "curb appeal."

Increase your home`s appeal to a wider range of potential buyers.
Repair or replace any part of your home that`s been modified that might not appeal to the general population.

Make your home cozy and inviting when potentials buyers come by.
Make sure the interior and exterior are clean, neat, and well maintained. Have a fire burning in the fireplace, bake some cookies or an apple pie, or have a pot of coffee brewing. Put away toys and tools. Keep pets out of sight. Not everyone is as enamored of Fido as your family is. Try not to cook foods like fish with lingering odors.

Here are some ideas for working with your broker to speed up the sale of your home.

Offer a warranty.
Sometimes offering a warranty on the roof, electrical system, or appliances can speed up a sale or smooth the negotiating process, particularly if it`s causing buyers to balk at the asking price.

Create a home sale kit with your broker.
A home sale kit consists of flyers that are distributed to potential home buyers and contain photos of your home`s exterior, interior, and surroundings. The flyer should also list major selling points and include information about utility costs, taxes, and a floor plan.

Do not help the broker show the home.
Allow the broker to do his or her job. Make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.

Offer a bonus to your broker.
A bonus shouldn`t be obvious to the buyer because the buyer will wonder if the house price has been bumped up to accommodate the real estate broker`s bonus. Instead, offer the bonus in the form of an increased commission, say 3 1/2 percent instead of 3 percent.

Take it off the market and re-list it later.
If your house has been on the market for a long time, it may be perceived as undesirable. Taking it off the market and re-listing it at a later time sometimes helps.

How do I get the best price for my home?

Here are some tips for negotiating with buyers, once they`ve made their first offer:

One final piece of advice is to avoid being confrontational, which can kill a potential deal during the negotiation process. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any "low-balling" techniques engaged in by buyers. Be willing to make some concessions. Make counter-offers to try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, you can always reject it outright and wait for another buyer.

What are the steps in the investment process?

The investment process is comprised of several steps that enable you to select a portfolio appropriate to your risk tolerance and desired return. The primary steps in this process are:

Q: How are risk and return related?

A: Risk and return are positively correlated. The higher the risk of an investment, the higher a return it must offer in order to compensate for the risk. Risks come in many forms such as the volatility of the market, inflation risk, interest rate risk, and business risk. You must determine the degree of risk that you are willing to tolerate. Your investment professional can assist you in this process.

Select the level of risk that permits you to sleep at night. If you have a long investment horizon, then focus on your desired return. Year to year fluctuations should not be a concern. Over the long term, stocks have generated annual returns of about 10 to 11 percent and have had the highest level of risk while long-term government bonds have had long-term returns of 5 to 6 percent and have had the lowest level of risk. The more risk you can tolerate or the higher your desired rate of return, the higher the portion of your portfolio invested in stocks should be.

Q: What is an asset allocation plan?

A: Asset allocation is the distribution of investments among asset classes. Asset classes include different types of stocks, bonds, and mutual funds. It is a significant factor in determining your investment return relative to risk. Proper asset allocation maximizes returns and minimizes risk. This is because different classes of assets react differently to economic upswings or downswings. Allocation differs from diversification in that it balances a portfolio among different classes of assets, for example, growth stocks, long bonds, and large-company stocks, while diversification focuses on variety within an asset class. Generally, allocation among six or seven asset classes is recommended.

Q: What is diversification?

A: Diversification is the selection of multiple investments within a portfolio. For example, investing in a portfolio of 30 stocks rather than in just a few. By maintaining a diversified, varied portfolio, you are minimizing risk. You`re less likely to make that "big killing," but when individual investments take a nose-dive, you won`t take a big hit.

Q: How can I best monitor my investments?

A: Examine carefully and promptly any written confirmations of trades that you receive from your broker, as well as all periodic account statements. Make sure that each trade was completed in accordance with your instructions. Check to see how much commission you were charged, to make sure it is in line with what you were led to believe you would pay. If commission rates have increased or will increase in the immediate future, or if charges such as custodial fees are to be imposed, then you should be informed in advance.

If securities are held for you in street name (where the customer`s securities and assets are held under the name of the brokerage firm instead of the name of the individual who purchased the security or asset), you may request that dividends or interest payments be forwarded to you or put into an interest-bearing account, if available, as soon as they are received, rather than at the end of the month or after some other lengthy period of time.

Tip: Set up a file where you can store information relating to your investment activities, such as confirmation slips and monthly statements sent by your broker. Keep notes of any specific instructions given to your account executive or brokerage firm. Good records regarding your investments are important for tax purposes, and also in the event of a dispute about a specific transaction.

Periodically, ask yourself the following questions about your investment:

What types of risks are involved in investing?

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

  1. The higher the expected rate of return, the greater the risk. Depending on market developments, you could lose some or all of your initial investment or a greater amount.

  2. Some investments cannot easily be sold or converted to cash. Check to see if there is any penalty or charge if you must sell an investment quickly or before its maturity date.

  3. Investments in securities issued by a company with little or no operating history or published information may involve greater risk.

  4. Securities investments, including mutual funds, are not federally insured against a loss in market value.

  5. Securities you own may be subject to tender offers, mergers, reorganizations, or third party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.

  6. The past success of a particular investment is no guarantee of future performance.

What steps can I take to avoid unnecessary risks?

1. Never give in to high pressure. A high-pressure sales pitch can mean trouble. Be suspicious of anyone who tells you, "Invest quickly or you will miss out on a once in a lifetime opportunity."

2. Never send money to purchase an investment based simply on a telephone sales pitch.

3. Never make a check out to a sales representative.

4. Never send checks to an address different from the business address of the brokerage firm or a designated address listed in the prospectus.

Tip: If your broker asks you to do any of these things, contact the branch manager or compliance officer of the brokerage firm.

5. Never allow your transaction confirmations and account statements to be delivered or mailed to your sales representative as a substitute for receiving them yourself. These documents are your official record of the date, time, amount, and price of each security purchased or sold. Verify that the information in these statements is correct.

What questions should I ask before making any investment?

Have this list of questions with you the next time you talk to your broker. Write down the answers you get and the action you decide to take. Your notes may come in handy later if there is a dispute or a problem. A good broker will be happy to answer your questions and will be impressed with your seriousness and professionalism.

What questions should I ask before making a mutual fund investment?

Here is a list of potential questions to ask before making a mutual fund investment:

What investment hazards should I look out for?

There are no magic formulas for successful investing. It takes a disciplined, reasoned approach, a commitment to follow some basic, solid rules that have proved effective over time, and to stay in it for the long haul.

Here are some specific tips.

Don`t Let Greed Cloud Your Better Judgment. A disciplined approach, taking into account your investment objectives, will pay dividends in more ways than one. Investors who are constantly chasing the jackpot usually lose in the long run.

Don`t Rely on Tips. The "hot tip" is the bane of investors. There may be short-term gain in some cases, but in this regard, it`s generally wise to follow the maxim, "What goes up must come down."

Be Resolute. Develop a comprehensive, reasoned plan with your adviser, and stick to it, despite the temptation to "take a flyer." When you have developed your plan, and in the absence of other factors, follow it.

Consider All Your Needs and Get a Plan That Fits. For financial planning to be truly effective, all your needs must be considered: money management, tax planning, retirement planning, estate planning, insurance, etc.

Evaluate Investments Periodically. An investment program is not static and unchanging. Your financial situation and objectives may change, as does the economic situation. Review your plan with your adviser and, if necessary, update it to reflect your current and long-term needs.

Monitor your investments. Stay informed. Don`t rely on others to "take care of" your portfolio. Keep up with your reading, whether in newsletters, magazines, or the internet.

Read Broker-Account Forms With Care. Many investors pay scant attention to the forms involved in opening and maintaining a brokerage account. As pointed out earlier, many investors are not aware that much of the paperwork is intended, at least in part, to protect the broker and the form against any complaints they might bring.

What should I invest my IRA in?

Like any other investment, you should match the portfolio with your desired return, risk tolerance and investment time horizon. The higher your desired return and risk tolerance and the longer your time horizon, the greater the portion of your portfolio should be in equity investments such as common stocks. Since IRAs are generally long-term investments, equity investments are generally appropriate for a portion of the account.

For those with a lower risk tolerance, short-term fixed income investment would be appropriate. Many people have their IRAs invested in CDs. This is appropriate only for those with a very short time horizon or very low-risk tolerance. IRA money, like any other investment, should be invested in something that will provide a decent return.

Municipal bonds should never be used within an IRA. In doing so, you sacrifice return and may convert otherwise tax-free income to taxable income when you withdraw the funds.

What are derivatives and options?

A derivative is an investment instrument whose value is based on underlying assets such as stocks, bonds, commodities, currencies, interest rates and market indexes. Options are one of the most common types of derivatives and are a useful tool for enhancing a portfolio`s income and in many cases, reducing risk. Other types of derivatives include futures contracts, forward contracts, and swaps, but these are more appropriate for sophisticated investors.

Stock options are contracts that give the purchaser the right to buy or sell at a specific price and within a certain period of time, for instance, 100 shares of corporate stock (known as the underlying security). These options are traded on a number of stock exchanges and on the Chicago Board Options Exchange.

When investors buy an option contract, they pay a premium, typically the price of the option as well as a commission on the trade. If they buy a "call" option, they are speculating that the price of the underlying security will rise before the option period expires. If they buy a "put" option, they are speculating that the price will fall.

Tip: While options trading can be very useful as part of an overall investment strategy, it can also be very complicated and sometimes extremely risky. If you plan to trade in options, make sure that you understand basic options strategy and that your registered representative is qualified in this area.

How can I avoid the most frequent money-losing mistakes?

Here are the top mistakes that cause investors to lose money unnecessarily.

Q: Should I use a standard asset allocation formula such as those seen in many popular finance magazines?

A: Most investors are satisfied with a one-size-fits-all investment plan. However, your individual needs as an investor must govern any plans you make. For instance, how much of your investment can you risk losing? What is your investment timetable? (i.e., are you retired or a young professional?) The allocation of your portfolio`s assets among various types of investments should match your particular needs.

Q: Can I make a decent return without taking unnecessary risks?

A: You do not have to risk your capital to make a decent return on your money. While all investments have some degree or risk, many investments that offer a return that beats inflation without unduly jeopardizing your hard-earned money. For instance, Treasuries are one of the safest possible investments and offer a decent return with very little risk.

Q: What is the downside of high fees and commissions?

A: Many investors allow brokers` commissions, fees, and other costs to cut into their returns. Be aware of the fees you are paying and make sure they are appropriate for the services you are receiving. The more you pay in fees the lower your net return will be.

Q: When should I start investing?

A: Today. Many investors are not cognizant of the power of interest compounding. By starting out early enough with your investment plan, you can invest less, and in the long run, still come out ahead of where you would be if you start later in life.

Q: What is the impact of taxes on my investment returns?

A: Net profits on your share of your mutual funds` stock sales are taxable to you as capital gains. Unless you are in a tax-deferred retirement account, the taxes will eat into your profits. The solution? Invest in funds where shares are bought and sold less frequently and have a low turnover rate (10 percent or less per year).

Q: Should I let my emotions affect my investments?

A: Never give in to pressure from a broker to invest in a "hot" security or to sell a fund and get into another one. The key to a successful portfolio lies in planning, discipline, and reason. Emotion and impulse have no role to play. Try to stay in a security or fund for the long haul. On the other hand, when it`s time to unload a loser, then let go of it. Finally, do not fall prey to the myth of "market timing." This is the belief that by getting into or out of a security at exactly the right moment, we can retire rich. Market timing does not work.

Instead, use investment strategies that do work: a balanced allocation of your portfolio`s assets among securities that suit your individual needs, the use of dollar-cost averaging and dividend-reinvestment programs, and a well-disciplined, long-haul approach to saving and investment.

What is the difference between my cumulative return and annualized return?

Suppose Mr. N. Vestor invests $100 in an investment that earns 10 percent this year and 10 percent the next year. What is his cumulative return? The answer is 21 percent.

Here`s why. N. Vestor`s 10 percent gain makes his $100 grow to $110. Next year, he earns another 10 percent, leaving him with $121. His investment has earned a cumulative 21 percent return over two years. His annualized return, however, is 10 percent.

The fact that the cumulative return of 21 percent is greater than twice the 10 percent annual return is due to the effect of compounding, which means that your yearly earnings are added to your original investment before the current year`s earnings are applied.

What is the rule of 72?

The rule of 72 is a way of finding out long it will take for your investment to double. Divide an investment`s annual return into 72, and you will have the number of years necessary to double your investment.

Example: An investment`s annual return is 10 percent. Ten percent divided into 72 is 7.2, so your investment will double in 7.2 year.

What is "Total Return" and why is it important?

If you reinvest all of your gains, including dividends and interest, you will be getting the most from compounding. The percentage you achieve is termed "total return." It includes appreciation, interest and dividends. It is particularly important in examining the past and current performance of mutual funds.

Mutual funds must, by law, distribute almost all of their capital gain and dividend income each year. Many investors reinvest these distributions, using them to buy more fund shares. Because the fund`s share price is reduced after a fund makes a distribution, the long-term price trend of a fund`s shares may not accurately reflect the fund`s performance. However, the fund`s total return, which takes into account reinvested dividends, is often a more accurate reflector of the fund`s performance.

How does "yield" differ from "total return?"

Yield is the amount of dividends or interest paid annually by an investment. The yield is usually expressed as a percentage of the investment`s current price. It does not consider appreciation.

Because certificates of deposit and money-market funds maintain the same value, their total return does not differ much from their yield. But because stocks and bonds fluctuate in price, there can be a large difference between yield and total return.

Can I measure my return as the increase in the value of my portfolio over a given period?

Investors often take the following shortcut, which often yields misleading results. Instead of looking at total return, they simply compare their year-end portfolio value with the value at the beginning of the year, and attribute the entire growth to investment gains.

The reason this shortcut may be misleading is that any additional investments or withdrawals made during the year are not taken into account.

What is a bond?

A bond is a certificate promising to repay, no later than a specified date, a sum of money that an investor or bondholder has loaned to a company. In return for the use of the money, the company (or municipality or other government entity) also agrees to pay bondholders a certain amount of interest (referred to as a coupon) each year, and is typically a percentage of the amount loaned.

Bondholders are not owners of the company. They do not share in dividend payments or vote on company matters and the return on their investment does not usually depend on how successful the company is. Bondholders are entitled to receive the amount of interest originally agreed upon, as well as a return of the principal amount of the bond, provided they hold the bond for the time period specified. For example, if you buy a bond with a face value of $1000 and a coupon of 8 percent with a 10-year maturity rate, you`ll receive $80 in interest every year, and at the end of the 10 years, you`ll get your $1,000 back.

What are the various types of bonds?

Bonds are categorized by the entities that issue them such as corporate, US Treasury, GSE (Government Sponsored Enterprises) debt securities, and municipal bonds. Corporate bonds generally are issued in denominations of $1,000 or sometimes, $5,000. Treasury bonds are issued denominations of $1,000 while municipal bonds are issued in denominations of $5,000. These numbers refer to the face value of the bond and is the amount that the company agrees to repay to the bondholder when the bond matures.

The prices at which these bonds trade may differ from their face values because the price or value of a bond is closely related to the movement of interest rates in the economy. As interest rates change, so too will the value of the bond. If you need to sell the bond before it matures, it may be worth more (or less) than the price you originally paid for it.

Some bonds are callable or redeemable, which means that the issuer can elect to buy them back from holders at the face amount before the date of maturity, often referred to as the call date. The price of a callable bond is always lower than the price of a regular bond and the yield is typically higher.

How are bonds classified?

Bonds are classified in three ways: by the issuing organization, by their maturity, and by their quality.

Issuing Organization
The U.S. government sells bonds through the Treasury to finance the national debt and through various federal agencies for special purposes. State and local municipalities sell bonds to finance schools, hospitals, highways, bridges, airports, and the like, and corporations sell bonds to finance long-term capital project such as new plants or equipment.

Maturity means the length of time until the principal is repaid.

Treasury bills have maturity dates of one year or less, Treasury notes mature between one and ten years, and Treasury bonds have maturates of ten years or longer.

Tip: As a general rule, the longer the bond`s maturity, the greater the interest-rate risk.

What is meant by the term "bond quality?"

Bond quality refers to the creditworthiness of the issuing organization; in other words, the likelihood that it will be able to repay its debt. Independent rating services, such as Moody`s Investors Service, Inc. or Standard & Poor`s, publish directories that rate bond quality. A lower rating means the service associates a greater credit risk with that particular bond issue. Rating agencies use a combination of letters A through D to estimate the risk for prospective investors. For example, AAA (or Aaa) is the highest quality bond while C or D rated bonds are in default of payment.

Note: The ratings are not meant to measure the attractiveness of the bond as an investment, but rather the risk. That is, how likely the principal will be paid if held to maturity.

Tip: Only the U.S. Treasury`s debt is considered free of credit risk.

What is a "bond call provision?"

Investors considering long-term bonds should be alert to the possibility of a "call" or redemption feature in bonds, which can frustrate expectations of a high yield over the life of the bonds. Such a call feature gives the issuing corporation the right to call in or redeem its bonds after a specified number of years have elapsed. Growing numbers of corporations are reserving such early redemption features in their bonds in hopes of refinancing later at the lower interest rates. The call feature has three effects:

There are a number of different call provisions, some of which are complex and hard to understand, but brokers are required to disclose call features in writing. Check the indenture, which is the contract between the bond issuer and bondholder, and seek out bonds that either have no call feature or have call protection or choose bonds that have the latest possible redemption date.

What is a bond rating?

The table below provides a summary of the ratings:

Indicates: Standard
& Poor`s
Aaa Highest Quality AAA
Aa High Quality AA
A Good Quality A
Baa Medium Quality BBB
Ba Speculative Elements BB
B Speculative B
Caa More Speculative CCC
Ca Highly Speculative CC
__ In Default D
N Not Rated N

For more detailed definitions of each rating, consult the publications of the rating services.

What factors affect bond prices?

Think of bond prices and interest rates as opposite ends of a see-saw. When rates fall, prices rise. When rates rise, prices fall. Why does it work this way?

Example: You buy a bond worth $10,000, which pays 9 percent interest until maturity in 30 years. Suppose you need to sell that bond after only 10 years, at which time, the interest rates on new loans is 11 percent. Why should investors buy your bond paying only 9 percent when they can get 11 percent elsewhere?

To sell it, you`ll need to drop the price of the bond below the price you paid for it. Then, when the bond matures, your buyer will get more than he or she paid for it, making up for the lower-than-market interest payments received meanwhile.

On the other hand, if you needed to sell the bond when the prevailing interest rates on new loans was at 7 percent, you could charge a premium price for your bond that pays a more favorable 9 percent rate. Your buyer will receive less than he or she paid for it when the bond matures, making up for the higher-than-marketplace interest payments received in the interim.

Bond prices are also influenced by maturity. The extent of the change in bond price is also influenced by the maturity of the bond. The longer the maturity is, the greater the change in price for a given change in interest rates. For example, a rise in interest rates will bring about a larger drop in price for a 20-year bond than for an otherwise equivalent 10-year bond.

Bond mutual fund share values generally reflect bond prices. Fund managers decide which bonds to buy and sell, and when, in accordance with the fund`s investment objective. And, of course, shares in a bond mutual fund can be redeemed or liquidated at any time.

Bond fund managers try to lengthen or shorten the fund`s average maturity (within the fund`s overall investment objectives) to anticipate changing interest rates.

Changes in bond mutual fund prices due to changing interest rates do not reflect on the creditworthiness of the bond issuers. If, however, their creditworthiness changes, bond mutual fund prices may also change. This type of price volatility is known as credit risk.

Tip: This is one good reason to invest in bond funds. Because a fund consists of a pool of bonds from an array of organizations, the effect of one default on the share price of the entire fund is not nearly as great as it would be for an investor who held only that single bond.

Should I buy individual bonds directly or through a mutual fund?

The biggest difference between an individual bond and a bond mutual fund is that with individual bonds you can "lock in" the rate, but with a bond mutual fund because the bond fund contains many different bonds, neither the dividend payments you receive nor the maturity date is fixed. So you can`t lock in the principal or your payment rate.

Let`s examine the implications of this difference.

A bond mutual fund is issued by an investment company of which the sole business is managing a portfolio of individual bonds. Investors purchase ownership shares in the fund, with each share representing ownership in all the bonds in the fund`s portfolio. Thus, a pool of shareholders owns a pool of bonds. Professional money managers use shareholders` investments to buy and sell bonds for the portfolio in accordance with the fund`s investment objective.

Due to pooled resources and the professional money management, bond fund shareholders can invest in far more bonds than the average individual investor could. For example, you would need to pay $25,000 for a single Government National Mortgage Association (GNMA or Ginnie Mae) bond, but you can invest in most GNMA bond mutual funds for only $1,000.

Liquidity is another important difference between an individual bond and a bond fund. By law, the bond fund must buy back your shares at any time. You may receive more or less than your purchase price, depending on how the value of the fund`s underlying portfolio has changed.

In contrast, for an individual bond, if you invested in it directly, you would need to find your own buyer if you wanted to sell the bond before it matured.

Bond fund portfolios can contain many different types of bonds of different maturates and varying quality. Risks also vary depending on the type of fund. All bond funds are subject to interest rate risk and most are subject to credit risk. There may be other types of risk as well. Each fund`s investment objective, the types of bonds it invests in, related risks, fees, and other information can be found in the fund`s prospectus.

What types of bond funds are there?

The table below shows eight common types of bond funds and some of their key characteristics.

Type of Bond
Goals Invest
Primarily In
Corporate Bond Income, Capital Preservation Corporate Debt Interest Rate, Some Credit
Global Bond Capital Appreciation U.S. and non-U.S. Corporate and Government Debt Currency, Policy, Interest Rate, Some Credit
Ginnie Mae (GNMA) Income Mortgage Securities backed by the Government National Mortgage Association Prepayment, Interest Rate
High-Yield Income, Capital Appreciation Corporate Bond Lower Quality Corporate Debt Credit, Interest Rate
Income (Bond) Federal Tax-exempt Income, Capital Preservation State and Local Government Debt Interest Rate, Some Credit
Long-Term Municipal Bond Federal Tax-exempt Income, Capital Preservation State and Local Government Debt Interest Rate, Some Credit
State Long-term Municipal Bond Federal and State Tax-exempt Income, Capital Preservation State and Local Government Debt of Only One State Interest Rate, Some Credit
U.S. Government Income Capital Preservation, Income U.S. Treasury and Other Government Securities Interest Rate

What are municipal bonds?

Bonds issued by states, cities, or certain agencies of local governments (such as school districts) are called municipal bonds. An important feature of these bonds is that the interest a bondholder receives is not subject to federal income tax. In addition, the interest is also exempt from state and local tax if the bondholder lives in the jurisdiction of the issuing authority. Because of the tax advantages, however, the interest rate paid on municipal bonds is generally lower than that paid on corporate bonds.

Rating agencies evaluate bonds issued by state and local governments and their agencies and take into consideration such factors as the tax base, population statistics, total debt outstanding, and the area`s general economic climate.

There are different types of municipal bonds. Some are general obligation bonds secured by the full faith and credit of a state or local government and backed by its taxing power. Others are revenue bonds that are issued to finance specified public works (such as bridges or tunnels) and are directly backed by the income from the specific project.

Prices of most municipal bonds are not usually quoted in daily newspapers.

Tip: If you are interested in a particular bond issue, consult bond dealers for their current prices. Your public library may also have copies of a municipal bond guide or a "Blue List."

What do I need to know about U.S. Government bonds?

Like state and local governments, the U.S. Government also issues debt securities to raise funds. Because these are backed by the federal government itself, they are considered to be very low risk.

Government debt securities include Treasury bills with maturates of up to one year, Treasury notes with that mature between one and ten years, and Treasury bonds with maturates between ten and thirty years.

Other U.S. Government agencies issue bonds, notes, debentures, and participation certificates as well.

While government securities do not have to be registered with the SEC, transactions involving them are subject to the anti-fraud provisions of the securities laws and SEC rules.

Can I buy treasury bonds without a broker?

Treasury bills, notes, and bonds can be purchased directly from the Federal Reserve. Call the Federal Reserve branch nearest you and ask them to mail you information on purchasing through the Treasury Direct program.

How are Stocks Traded?

Generally, stocks are traded in blocks or multiples of 100 shares, which are called round lots. An amount of stock consisting of fewer than 100 shares is said to be an odd lot.

On an exchange, an order that involves both a round lot and an odd lot-say 175 shares will be treated as two different trades and may be executed at different prices.

In the financial world, a trade is jargon for buy and sell. Your broker will charge you a different commission on each trade, and will confirm each of them separately.

These distinctions do not generally apply to trades executed in the OTC (Over-the-Counter) market. OTC stocks are not traded on a formal exchange such as New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX).

What are the Differences between Stock Exchange Trades and Over-the-Counter Trades?

To be traded on an exchange such as the NYSE or AMEX, the issuing company must meet the exchange`s listing standards; these may include requirements on the company`s assets, number of shares publicly held, and number of stockholders. Organized markets for other instruments, including standardized options, impose similar restrictions.

The National Association of Securities Dealers` Automated Quotation System (NASDAQ), operated by the National Association of Securities Dealers (NASD), is considered a stock exchange. Like the exchanges, NASDAQ has certain listing standards which must be met for securities to be traded in that market.

Many securities are not traded on an exchange because the issuing companies are too small to meet exchange requirements. Instead, they are traded Over-the-Counter or OTC by broker-dealers negotiating directly with each other via computer and phone.

Investors who buy or sell securities on an exchange or over the counter usually will do so with the aid of a broker-dealer firm. The registered representative is the link between the investor and the traders and dealers who actually buy and sell securities on the floor of the exchange or elsewhere.

Market prices for stocks traded over the counter and for those traded on exchanges are established in somewhat different ways. The exchanges centralize trading in each security at one location the floor of the exchange. There, auction principles of trading establish the market price of a security according to the current buying and selling interests. If such interests do not balance, designated floor members known as specialists are expected to step in to buy or sell for their own account, to a reasonable degree, as necessary to maintain an orderly market.

Are My Mutual Fund Investments Protected by Insurance?

There are no guarantees for investors. No matter how you buy a fund through a brokerage firm, a bank, an insurance agency, a financial planning firm, or directly through the mail, bond funds, unlike bank deposits, are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Nor are they guaranteed by the bank or other financial institution through which you make your investment. Mutual funds involve investment risk, including the possible loss of principal. Conversely, investment risk always includes the potential for greater reward.

Even though mutual funds are not insured, there are some protections. Mutual funds are highly regulated by both the federal government primarily through the Securities and Exchange Commission and each of the state governments.

For example, all funds must meet certain operating standards, observe strict anti-fraud rules, and disclose specific information to potential investors. After you invest, funds must provide you with reports at least twice a year that describe how the fund fared during the period covered.

How are Securities Held?

Today, debt securities are held in electronic book-entry form, but in the past were issued as paper certificates. Ownership is transferred via computer rather than via actual transfer of paper certificates, reducing the possibility of loss, theft, or mutilation of the certificates.

There are still, however, many securities that are in certificate form. For example, you may have inherited stock certificates in paper form from a grandparent or other older relatives. Certificates representing your ownership of stocks or bonds are valuable documents and should be kept in a safe place. If a certificate is lost or destroyed, it may prove time-consuming and costly to obtain a replacement. Furthermore, some securities certificates may not be replaceable at all.

What are the Differences between Preferred Stock and Common Stock?

Stocks may be designated as common stock, which is the most widely known form, or as preferred stock. Preferred shareholders have more of a stake in the company`s assets and earnings and when dividends are issued, they are paid before shareholders of common stock. in addition, when you hold preferred stock you receive dividend payouts at a regular interval and generally have a stated dividend while common stock dividends are based on company performance. Shareholders with common stock may or may not receive a dividend and are last in line to be paid when a company goes belly up and is liquidated or reorganized in bankruptcy.

What are Restricted Securities?

Some stocks are designated as "restricted" or "unregistered" because they were originally issued in a private sale or other transaction where they were not registered with the SEC. Restricted or unregistered securities may not be freely resold unless a registration statement is filed with the SEC or unless an exemption under the law permits resale.

How Can Foreign Stocks Be Bought?

Foreign corporations that sell securities in the United States must register those securities with the SEC. They are generally subject to the same rules and regulations that apply to securities of U.S. companies, although the nature of information foreign companies makes available to investors may be somewhat different.

U.S. investors who are interested in foreign securities may also purchase American Depositary Receipts (ADRs). These are negotiable receipts, registered in the name of a U.S. citizen, which represent a specific number of shares of a foreign corporation. Denominations are in U.S. dollars and the security is held by a U.S. financial institution overseas. Listed on either the NYSE, AMEX or NASDAQ, ADRs are an excellent way to buy shares in a foreign company, but keep in mind that there are still risks associated with doing so.

What are Dividend Reinvestment Plans (DRIPs)?

Dividend reinvestment plans, often referred to as DRIPs or DRPs, are associated with company-sponsored plans, but may also be purchased through a broker, and offer opportunities to make small, regular cash investments in participating companies without paying prohibitive transaction fees. Further, all or a part of your dividends can be reinvested and used to purchase more shares, although some plans offer the option to receiving dividends by check.

Tip: Treat your decision to enroll in a DRIP just as seriously as you would a decision to invest in a company. Before investing, subject the company to your usual research and analysis.

Many U.S. companies have direct stock purchase programs that allow investors to buy a company`s shares directly from the company instead of using a broker. To enroll in the DRIP, contact the transfer agent or the company`s shareholder relations department, and ask for an enrollment form. Then return the form, usually along with your first optional cash investment, to the company.

Once you are enrolled, you can invest more money directly through the company`s transfer agent. Many companies offer an automatic investment service, that is, they will automatically withdraw a pre-set amount from your bank account to make optional cash investments. There may be a fee for this service.

Direct stock purchase plans cost an investor less, since there is no broker commission to pay, and often no fee. Some programs have automatic investment options, which will debit a set amount each month from an investor`s bank account.

Dividend reinvestment isn`t mandatory. Investors can receive dividend payments, and they can be automatically deposited in a bank account. Some companies that offer direct-purchase programs do not pay dividends.

As with anything else, there are positives and negatives. The main drawback associated with DRIPs is that calculation of capital-gains taxes becomes complex when dividends have been reinvested over the years, and lots have been bought at varying prices. This can be remedied by carefully keeping track of the cost basis of shares when dividends are reinvested. Further, investors who invest through an IRA need not deal with the problem of calculating capital gains taxes at all. In addition, the dividends are taxable income even though you reinvest them.

Will my heirs owe income taxes when they inherit my retirement assets?

Yes, generally under the same rules that would apply to your withdrawals of the same amounts had you lived--unless it`s a Roth IRA. A Roth IRA is exempt from federal income tax as long as the account was opened five years before any withdrawals were taken.

Also, your spouse can rollover your account to his or her IRA. No early withdrawal penalty applies, regardless of your beneficiary`s age, but a spouse who rolled over to an IRA may owe an early withdrawal penalty on IRA withdrawals taken before age 59 ½.

Will my heirs owe estate taxes on inherited retirement assets?

Only a small percentage of estates (based on the value of one`s assets at death, and including large lifetime gifts) are subject to the estate tax and there is no estate tax on assets passing to a surviving spouse or charity. However, if the estate is subject to federal estate tax, (except in 2010, when there was no estate tax) you can deduct the portion of the federal estate tax that is attributed to the IRA. You also won`t have to pay tax on the portion of withdrawals that are attributed to any nondeductible contributions made to the IRA.

Is estate tax deferred if my heir will get an annuity?

No. The estate is taxed on the annuity`s present value.

How can I minimize or eliminate tax on inherited retirement assets?

You can minimize or eliminate tax on inherited retirement assets by using the following methods:

  1. Leave them to your spouse. This saves money owed to estate tax and helps postpone withdrawals subject to income tax--provided your spouse takes no withdrawals before age 59 ½.

  2. Leave them to charity. Although there`s no financial benefit to the family, again, this saves income and estate taxes.

  3. Leave them to family for life, with the remainder to charity in the form of a charitable remainder trust. This reduces estate tax with some benefits to family.

  4. Provide life insurance to pay estate tax on retirement assets. The benefit of this option is that it provides estate liquidity, avoiding taxable distributions to pay estate tax.

How should I take distributions from my retirement plan?

If your assets are in a tax-favored retirement fund such as a company or Keogh pension or profit-sharing plan (including thrift and savings plans), 401(k), IRA or stock bonus plan when it comes time to take distributions you have several options:

Your retirement assets may be distributed in kind as employer stock, or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans, for instance, annuities are more common with pension plans. Other types of plan favor the other options, but for the most part most of these options are available for most plans. And more than likely, you`ll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.

Timing your withdrawal can be a factor, too. Withdrawals before age 59 ½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 70 ½ or face a tax penalty. The only exceptions are Roth IRAs and non-owner-employees still working beyond that age.

When is it best to take a lump-sum distribution from my retirement plan?

Your personal needs should decide. You may need a lump sum to buy a retirement home or retirement business. If your employer requires that you take a lump sum distribution, it may be wise to roll it over into an IRA.

What should I do about my retirement plan assets in my ex-employer`s plan if I change jobs?

There are several things you might do depending upon your needs:

  1. If you don`t need the assets to live on, try to continue the tax shelter and leave the money where it is.

  2. Transfer or roll over the assets into your new employer`s plan--if that plan allows it (this can be tricky, though).

  3. If you`ve decided to start your own business, set up a Keogh and move the funds there.

  4. Roll them over into your IRA.

Can creditors get at my retirement assets?

In general, employer plans such as your 401(k), IRAs and pension plan funds are protected from general creditors unless you`ve used these assets as securities against a loan or you are entering into bankruptcy. If this is the case, there`s a chance they could be seized, but if the money is in a registered IRA, pension plan, or 401(k), it`s more than likely they will be protected in case of bankruptcy (subject to state and federal law of course).

How will my state tax affect my retirement withdrawals?

Each state is different, but in general, consider the following:

  1. While withdrawals are generally taxable in states with income tax, some offer relief for retirement income, up to a specified dollar amount.

  2. If your state doesn`t allow deductions for Keogh or IRA investments allowed under federal law, these investments and sometimes more may come back tax-free.

  3. State tax penalties for early withdrawal (before 59 ½) or inadequate withdrawal (after age 70 ½) are unlikely.

I understand that I`m required to take money out of my retirement plan after I reach age 70 1/2. Why is that?

Retirement plans offer the biggest tax shelter in the federal system since funds grow tax-free while in the plan. But the shelter is primarily intended for retirement. So when you reach 70 1/2 (or shortly thereafter), you must start to withdraw from the plan.

How can I continue the tax shelter for retirement plan assets after age 70 1/2?

The shelter can continue for a large part of those assets, for a long time, assuming you don`t need them to live on. You can spread withdrawals over a period based on, but longer than, your life expectancy, for example, over a period of at least 27.4 years if you`re 70 1/2 now. You are free, however, to withdraw at a faster rate--or even all of it--if you wish. The shelter continues for whatever is not withdrawn.

Suppose there are still retirement assets in my account at my death. Can the shelter continue for those who receive those assets?

Generally, yes. Persons you have named as your plan beneficiaries can withdraw over their life expectancies (or more rapidly if they wish). The withdrawal period is generally shorter where no individual beneficiary is named (for example, where your estate is the beneficiary), but your spouse can sometimes spread withdrawals over a longer period.

Can moving to another state when I retire save me state taxes on my retirement plan?

Money from retirement plans, including 401(k)s, IRAs, company pensions and other plans, is taxed according to your residence when you receive it.

If you move from a state with a high income tax, such as New York, to one with little or no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have none), you will indeed save money on state income tax.

However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.

What is a reverse mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain home ownership. Reverse mortgages work much like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you. Most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home.

Retired people may want to consider the reverse mortgage as a way to generate cash flow. A reverse mortgage allows homeowners age 62 and over to remain in their homes while using their built-up equity for any purpose: to make repairs, keep up with property taxes or simply pay their bills.

Reverse mortgages are rising-debt loans, which means that the interest is added to the principal loan balance each month (because it is not paid on a current basis). Therefore, the total amount of interest you owe increases significantly with time as the interest compounds. Reverse mortgages also use up some or all of the equity in your home.

All three types of loan plans, whether FHA-insured, lender-insured, or uninsured charge origination fees and closing costs. Insured plans also charge insurance premiums, and some impose mortgage servicing charges.

Finally, homeowners should realize that if they`re forced to move soon after taking the mortgage (because of illness, for example), they`ll almost certainly end up with a great deal less equity to live on than if they had simply sold the house outright. That is particularly true for loans that are terminated in five years or less.

When should I use a rollover to my IRA?

That depends on your particular needs and circumstances. Here are some reasons you might want to roll over distributions to your IRA:

  1. You want to, or have to, take a distribution from your employer`s plan and want these funds to continue to grow tax-free in your own IRA.

  2. As a self-employed, you are terminating your Keogh plan or retiring from business and want to continue the tax shelter for these distributions.

  3. You are the beneficiary of a deceased person`s retirement plan and want to continue the tax shelter for these distributions in your own IRA.

Is there a downside to an IRA rollover?

Here are some of the disadvantages of an IRA rollover:

  1. Rollovers from company or Keogh plans may take away your spouse`s right to share in plan assets.

  2. IRAs can`t claim the limited tax relief allowed on lump-sum distributions.

Tip: To avoid tax hassles, rollovers should be done between the trustees of the plans involved. In other words, the check should not be made out to you personally, but to the trustee of the rollover account.

Who is entitled to Social Security disability benefits?

An individual who is determined by the Social Security Administration to be "disabled" receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.

If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

Under the Social Security disability insurance program (title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability:

Under title XVI, or SSI, there are two basic categories under which a financially needy person can get payments based on disability:

For all individuals applying for disability benefits under title II, and for adults applying under title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system. Visit the Social Security Administration`s Website to apply for an estimate.

When do Social Security disability benefits begin?

If you are getting disability benefits on your own work record, or if you are a widow or widower getting benefits on a spouse`s record, there is a five month waiting period and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.

If the sixth month has passed, your first payment may include some back benefits. Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, then you will receive your check on the last banking day before that day. The check you receive is the benefit for the previous month.

Example: The check you receive dated July 3 is for June. Your benefit can either be mailed to you or be deposited directly into your bank account.

Are Social Security disability benefits taxable?

Some people who get Social Security have to pay taxes on their benefits. The rules are the same regardless as to whether Social Security benefits are received due to retirement or disability. If you file a federal tax return as an "individual" and your combined income is more than $25,000, you have to pay taxes. Combined income is defined as your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

How long do Social Security disability payments continue?

Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.

Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.

What happens to Social Security disability benefits when I reach retirement age?

If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person.

If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.

What happens if Social Security turns down my claim for disability benefits?

If you disagree with SSA`s decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are:

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled.

They are as follows:

Will I receive Social Security when I retire?

Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

You can collect early retirement benefits at age 62, but you currently can`t get full benefits until 65 for persons born in 1937 or earlier. For persons born 1938 and later, the full retirement age increases gradually until it reaches 67 for those born in years 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.

How can I find out what Social Security will pay me when I retire?

You can create a my Social Security account with SSA and view your Social Security Statement online at any time.

Can I count on Social Security being around when I retire?

With retirement on the horizon for scores of baby boomers, it`s very likely that Social Security will be in your future; however, the Social Security trust fund will less and less able to pay benefit increases, which increase annually as the taxable wage base rises without some kind of reform.

Should I purchase my own disability insurance policy?

Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age.

Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers` compensation or other sources. However, Social Security, workers` compensation, and employer-offered long-term coverage are often inadequate.

How much disability insurance should I have?

A disability insurance company will usually not cover you for more than 60 percent of your income. Look for a policy that provides coverage for this level. When you shop for a disability policy, be ready to prove your income level. If you purchase the policy and pay the premiums yourself, the income received will not be taxable. Therefore, 60 percent should come close to replacing your after-tax income.

What does workers compensation insurance cover?

Worker`s compensation covers injuries that happen on the job. Benefits vary widely from state to state but typically are equivalent to 66.67 percent of the average weekly wage for the previous 52 weeks. In addition, most states pay benefits for the employee`s lifetime in cases of permanent total disability.

Tip: To get details on worker`s comp benefits, contact your state Department of Labor.

In addition to the requirement that an injury is work-related, the payments you would receive under worker`s comp may be inadequate.

How is disability defined?

The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.

Own-occupation coverage pays benefits if you can`t work in your chosen field--if you are an attorney or teacher, for example. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. Generally, if you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.

Any-occupation coverage pays benefits if you can`t work at any occupation for which your education level and training has prepared you. Therefore, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.

Note: Many policies are own-occupation for a period of years, at which point they convert to any-occupation.

How does long-term care insurance work?

By 2020, 12 million older Americans will need long-term care. Most will be cared for at home; family and friends are the sole caregivers for 70 percent of the elderly. A study by the U.S. Department of Health and Human Services says that people who reach age 65 will likely have a 40 percent chance of entering a nursing home. About 10 percent of the people who enter a nursing home will stay there five years or more.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender; however, women are often at higher risk simply because they live longer.

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the individual covered, the higher the premium is. For instance, premiums for a set amount of coverage on a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policy`s limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility (e.g., allowing them to pay for home care) and less paperwork.

In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must wait after becoming eligible for benefits before coverage actually begins.

The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium is.

How should I select a long-term care insurance provider?

If you decide that long-term care insurance (LTCI) is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area, while others have not. Do not assume the company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

No matter how good a policy sounds, it is worth little if the company won`t be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company`s rating by A.M. Best or Standard and Poor`s, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor`s. Most public libraries have these references.

When can I qualify for Medicaid insurance?

Eligibility rules vary from state to state, but beneficiaries are generally required to "spend down" their income and assets to qualify. New laws in many states make it possible for the spouses of Medicaid nursing home residents to keep more income and assets than previously allowed.

By law, nursing homes cannot discriminate against Medicaid patients, but in reality, many keep "waiting lists" for them while enrolling patients with more income and assets. Medicaid coverage for home care is very limited in most states.

How can I get the best homeowner`s insurance at the best price?

The price you pay for homeowner`s insurance can vary by hundreds of dollars, depending on the insurance company you buy your policy from. One tip is to ask your insurance agent or company representative about discounts available to you, but there are many others, some of which are listed below.

How much homeowner`s insurance should I buy?

Insure For 100 percent of Rebuilding Costs

The amount of insurance you buy should be based on the cost of rebuilding, and not on the price of your home. The cost of rebuilding your house may be higher (or lower) than the price you paid for it or the price you could sell it for today.

Do You Have a Replacement Cost Policy?

Most policies cover replacement cost for structural damage but check with your insurance agent to make sure your policy does this. A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company won`t deduct for depreciation (the decrease in value due to age, wear and tear, and other factors).

Find Out About Flood Insurance

If your home is in an area prone to flooding, contact your insurance agent or the Federal Insurance Administration at (800) 638-6620 and ask about the National Flood Insurance Program.

How much homeowner`s insurance should I buy?

Check Your Policy and Keep Your Agent Informed

Make sure your agent knows about any improvements or additions to your house that have been made since you last discussed your insurance policy.

Look at your policy to see what the maximum amount is that your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy usually appear on the Declarations Page under Section 1, Coverage, Dwelling. Your insurance company will pay up to this amount to rebuild your home.

Contents Insurance: Make a List of All Your Personal Possessions

This includes everything you and your household own in your home and in other buildings on the property, except your car and certain boats, which must be insured separately. Among the things you should include are indoor and outdoor furniture; appliances, stereos, computers and other electronic equipment; hobby materials and recreational equipment; china, linens, silverware, and kitchen equipment; and jewelry, clothing and other personal belongings.

Check Your Policy for Special Limits

Check the limits on certain kinds of personal possessions, such as jewelry, artwork, silverware, and furs.

This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they`ll pay for computers and other home office equipment.

If the limits are too low, consider buying a special personal property "endorsement" or "floater."

How Should I shop for a Home Insurer?

First, do some preliminary research. Start by making a list of insurers to call. Ask your friends about their insurers, search online, check the Yellow Pages, or call your state insurance department. Also, check consumer guides. You can also check with an independent agent.

When talking to insurers, ask them what they could do to lower your costs. Once you`ve narrowed your search to three companies, get price quotes.

Tip: Don`t consider price alone. The insurer you select should offer both a fair price and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.

How much of a homeowner`s deductible should I have?

Deductibles on homeowners` policies typically start at $250. Increasing your deductible saves you money.

Should I buy home and auto policies from the same company?

Some companies that sell homeowner`s, auto, and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them.

Should insurance costs be a factor in the home purchase decision?

A new home`s electrical system and plumbing, as well as its structure, are usually in better shape than those of an older house, so insurers may offer you a discount of 8 to 15 percent for a new home. Check the home`s construction. Brick houses may result in less costly premiums in the East; frame houses are less costly in the West. Choosing wisely could cut your premium by 5 to 15 percent. Avoiding areas that are prone to floods can save you money as well.

Does your town have full-time or volunteer fire service? Is the home close to a hydrant or fire station? The closer it is to either of these, the lower your premium will be.

Should I insure the entire home cost including land?

Insuring the value of the land under your house is not necessary because land isn`t at risk from theft, windstorm, fire or other disasters.

Does home security reduce insurance cost?

You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or another monitoring facility. These systems are not inexpensive, and you should also be aware that not every system qualifies for the discount.

Tip: Before you buy an alarm system, find out what kind your insurer recommends and how much you`d save on premiums.

Do home insurers offer discounts for non-smokers?

Some insurers offer to reduce premiums if all the residents in a house don`t smoke. Ask your insurer if this discount is available.

How often should I review my homeowner`s policy?

Compare the limits in your policy with the value of your possessions at least once a year, to make sure your policy covers major purchases or additions to your home.

Tip: On the other hand, you don`t want to spend money for coverage you don`t need. If your five-year-old fur coat is no longer worth the $20,000 you paid for it, reduce your floater and pocket the difference

Should I buy private or governmental sponsored storm insurance?

If you live in a high-risk area, one vulnerable to coastal storms, fires, or crime, for instance, and have been buying your homeowner`s insurance through a government plan, you may find that there are steps you can take to allow you to buy insurance at a lower price in the private market. Check with your insurance agent.

Should I buy long-term care insurance?

Long term care insurance (LTCI) is both complex and controversial. It covers certain nursing home costs and sometimes home health care. Here is a summary of some of the main points for and against purchasing such coverage.

Reasons Against:

Reasons For:

Some Guidelines

Do not buy long term care insurance unless all of the following apply to you:

What are the alternatives to long-term care insurance?

Here are some options for paying for long-term care, along with their advantages and drawbacks:

Applying For Medicaid

Eligibility rules vary from state to state, but beneficiaries are generally required to "spend down" their income and assets to qualify. New laws in many states make it possible for the spouses of Medicaid nursing home residents to keep more income and assets than previously allowed.

Reverse Mortgage, Equity Conversion

Reverse mortgages and other forms of home equity conversion are often viable alternatives for those who wish to remain at home. Seniors borrow money against the equity in their homes and defer repayment until they die or sell their house. However, for these options to make sense, a home must have a high monetary value and be fully or mostly paid for, and the individual must intend to stay in the home for the long term.

Self Insurance

Self-insurance--paying for costs if they arise--is a gamble but is the current strategy of choice for the majority. Self-insurance makes the most sense for people with major assets; for those who can afford a long nursing home stay and; for people of modest means, who would quickly qualify for Medicaid anyway.

How much does long-term care insurance cost?

Premiums for LTCI vary greatly, depending on your age at the time of purchase, the comprehensiveness of the coverage, and the company selling the plan.

According to the 2017 Long-Term Care Insurance Price Index published by the American Association for Long-Term Care Insurance (AALTCI), a 60-year-old married couple would pay between $100 and $150 per month for long-term care insurance coverage--an increase of six to nine percent over last year.

A 55-year-old single male purchasing new long-term care insurance protection can expect to pay $90 to $150 per month of benefits according to the data in the industry report. A 55-year-old single woman would generally pay less on average than a single man for similar coverage. Costs still vary significantly from insurer to insurer for identical policies so it`s a good idea to shop around.

But, no matter how good a policy sounds, it`s worth little if the company won`t be there when it comes time to pay, so you should always buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up company`s rating by M. Best or Standard and Poor`s, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor`s. Most public libraries have these references.

What should I look for in a long-term care insurance policy?

When you compare long-term care insurance policies, consider the following:

Flexibility. A policy that covers nursing homes should also cover assisted living, a better alternative for many people who can no longer live on their own. If you want a policy with home care, look for one that offers a full range of community-based services, including adult day care, or that pays you a monthly cash allowance to spend as you please for care.

Eligibility. Look for a policy that bases eligibility on the need for help with activities of daily living. Policies that only pay for "medically necessary" care are not usually a good buy. To be sure you are covered for Alzheimer`s disease, choose a policy that covers cognitive as well as physical disability and pays benefits if you meet either criterion.

Inflation. If you purchase a policy before the age of 75, inflation protection is essential to ensure adequate coverage when you need long-term care at some point in the future. Buy a policy that has an additional cost but automatically increases benefits at the rate of 5 percent annually.

Duration. Keep in mind that the chances of needing long-term care for five years or longer are relatively small. For most people, a policy covering two or three years will be more cost-effective.

Do I need long-term care insurance?

Experts estimate that about 43 percent of us will spend some time in a nursing home at some point. But the risk of needing nursing home care before age 75 is relatively low. Also, most people will not need nursing home care for longer than a year.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender. Women are at higher risk because they live longer.

How does long-term care insurance work?

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the individual covered, the higher the premium. For instance, premiums for a set amount of coverage for a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policy`s limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility, allowing them to pay for home care for example, and less paperwork.

In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must wait after becoming eligible for benefits before coverage actually begins. The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium is.

How should I select a long-term care insurance provider?

If you decide that long-term care insurance (LTCI) is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area, while others have not. Do not assume the company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

No matter how good a policy sounds, it is worth little if the company won`t be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company`s rating by A.M. Best or Standard and Poor`s, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor`s. Most public libraries have these references.

Should I comparison shop for long-term care insurance coverage?

Seek independent advice before buying. You might find such guidance from a financial advisor; an elder-law attorney; government-funded counseling and information services; or consumer organizations.

Tip: Use a local independent agent or broker who has been recommended by someone reliable. Don`t buy from an agent who sells door-to-door.

Read the policy from cover to cover; don`t rely on marketing literature.

Don`t be pressured to buy the first policy you see. Compare it with at least two others.

Tip: Don`t pay more than one month`s premium when you apply for coverage. In most states, after you buy a policy, you have thirty days to change your mind and get a refund.

Is it worthwhile buying special types of health insurance?

You may receive solicitations in the mail for the following types of health insurance, or you may run across ads for them. They are to be avoided at all costs.

Note: We realize that there are worthwhile policies out there that fall into the categories we talk about. But we bring your attention to these categories so that you will be wary of them, and will not buy without careful research.

Do I need disability insurance? How can I ensure I have adequate coverage?

If you have dependents, you`ve probably made sure that you have adequate life insurance coverage. But what about disability coverage? Although the incidence of permanent or temporary disability during the average individual`s prime earning years is fairly high, many people neglect to insure adequately against this risk.

Disability insurance generally provides you with an income stream in case you are unable to earn income due to illness or accident. Here are some questions that will get you started in making sure you have adequate coverage.

If employer and government coverage is insufficient you should purchase a private disability policy.

Before you buy a disability policy, check out the following factors:

  1. Make sure the policy can be renewed every year.

  2. Make sure that if you are able to work part-time when disabled, you will still receive benefits.

  3. Choose as policy with a three to six-month waiting period, since it will be less costly, and set aside an emergency fund to cover the waiting period.

  4. Be sure the policy covers you until you reach age 65, at which time you can obtain full Social Security benefits.

  5. Be sure the policy pays when you can`t perform work in your own field.

Should I lease or buy my next car?

Will you save money leasing instead of buying? It depends on three things: (1) how good a deal you can strike with the dealership, (2) how many miles you put on a car, (3) how much wear and tear you put on a car, and (4) what the car will be used for.

To decide whether to lease or buy, compare the costs and other factors involved with both leasing and buying. Consider the following factors:

How do I get the "best buy" when buying a new car?

First, decide on the size and type of car you want, and then decide what options you want (e.g., automatic, air conditioning, anti-lock brakes).

Second, find out what the car dealer is paying for the car(s) you`re interested in. This is known as the dealer invoice cost. this is important because the difference between the invoice price and the sticker price is the amount that can be negotiated.

There are two different ways to go about getting this information. The first (and best) way is to use an auto pricing service provided by a consumer group or an auto magazine such as Consumer Reports New Car Price Service (800-933-5555). This service gives you a complete run-down of the invoice price and the sticker price, adjusted for various options, as well as any rebates or factory incentives. And it tells you how to use the information in negotiating your new car`s price. In addition, using an auto pricing service provides you with the most up-to-date information.

The second way is to use pricing guides found on the Internet, such as Edmund`s New Car Prices.

If you have a car to trade-in, you`ll want to find out what it`s worth, too. You can do this by looking up your used car in the N.A.D.A Official Used Car Guide, available online (www.nadaguides.com) or at the library.

The next step is to begin negotiating with car dealers. Now that you know the invoice price, use that information to bargain for the lowest possible markup over the dealer`s cost.

Tip: Generally, $300 to $500 over the dealer`s cost is a reasonable mark-up, unless the car you want is either hard to get or an extremely popular, exotic or sporty model.

Resist any attempts by dealerships to sell you undercoating, rust-proofing, or other extras. Depending on the repair history of your model, however, you might want to invest in the extended warranty.

How should I negotiate for a new car?

Remember that you are not only shopping for a car; you are choosing a dealer, with whom you will have a long-term relationship as you`ll bring your car in for servicing. So if you don`t like the dealership, go elsewhere.

As far as timing of purchase, the last Saturday of September, October, or December is generally a good time to get a good bargain on a car because sales managers are scrambling to meet their quotas for month and year-end.

Find out about financing alternatives before you begin shopping for a car. If you know what banks are charging, you will be prepared when the dealer talks about financing.

Here are some main points you`ll want to get across during your negotiations.

Finally, even if you get what sounds like a good price, go to other dealers to get quotes.

Should I negotiate a car lease the same way as I purchase a car?

Similar to a loan, the monthly lease payment depends on the lease terms, the initial "purchase price" of the vehicle, and the interest rate. Unlike a loan, another important factor is the "lease-end" or "residual" value. This is the expected value of the car at the end of the lease term.

In a lease you are effectively paying for the difference between initial purchase price and residual value. You should negotiate the best possible (i.e. lowest) purchase price because this will lower your cost of leasing. If it is a closed-end lease and you do not intend to purchase the car at the end of the lease term, you should also try to negotiate a higher residual value.

Example: If you walk into a dealership and ask to lease a car, they will often try to base the lease on the Manufacturer`s Suggested Retail Price (MSRP). You would never pay this sticker price to purchase a car for cash, so you should not do so in a lease situation.

The first step is to negotiate the lowest possible price on the vehicle, and then negotiate the lease terms. For example, assume a Lexus sedan has an MSRP of $36,955 (and the lease provides for a term of 36 months, an implicit interest rate of 6.67% and a residual value of $25,895). Based upon this MSRP, the monthly lease payment would be $481.50, excluding sales/use tax, licenses, etc.

The invoice (dealer) cost on the same vehicle is $32,469. If you negotiated a price between MSRP and invoice, say $34,750; the lease payment would be reduced to $416.00.

How does an auto lease work?

There are two types of lease arrangements: closed-end ("walk-away") and open-end (finance). Here`s how they work.

Closed-End: The Dealer Bears the Risk of Depreciated Value

When a closed-end lease is up, you bring the car back to the dealership and "walk away." You must return the car with only normal wear and tear, and with less than the mileage limit specified in your lease. Since the dealer is bearing the risk that the value of the car at the end of the lease will go down, your monthly payment is higher than with an open-end lease.

Open-End: You Bear the Risk of Depreciated Value

With the open-end lease the customer bears the risk that the car will have a certain value (called the "estimated residual value") at the end of the lease. The monthly payment is lower because of this risk.

When you return the car at the end of the lease, the dealer will have the car appraised. If the car`s appraised value is at least equal to the estimated residual value in the agreement, you won`t need to pay anything at the end of the lease term. Under some contracts, you can even receive a refund if the appraised value is higher than the residual value stated in the contract. If the appraised value is lower than the residual value, however, you may have to pay all or part of the difference.

What are the initial (up-front) costs of leasing a car?

In deciding whether to lease or buy, find out what your total initial costs will be. This is part of the total dollar amount you will arrive at to compare with the cost of buying.

"Initial costs" are the down payment you must come up with when you lease a car. They include the security deposit, the first and last lease payments, the "capitalized cost reductions," the sales taxes, title fees, license fees, and insurance. With a lease, the initial costs usually total less than the down payment needed to buy a car. Further, all initial costs are subject to negotiation during your bargaining with the dealer.

The Federal Consumer Leasing Act requires the Lessor to disclose all up-front, continuing and final costs in a standard, easy-to-read format.

What questions should I ask about a car lease?

Here is a list of questions you may want to ask the dealer before you enter into a car lease (you`ll know some of the answers):

Tip: Look for a "premature termination" clause, which provides for termination prior to the end of the lease term.

Why is a security deposit required when I lease a car?

The Lessor is allowed to keep the security deposit if you owe money at the end of your lease or if you missed a monthly payment. The security deposit can also be used by the dealer to cover damage to the car or mileage in excess of the limit specified in the lease. If you do not owe any money on the lease at the end of the term, then your security deposit is returned to you.

How much can a dealer charge me at the end of an auto lease?

The Consumer Leasing Act (CLA) limits how much the dealer can collect at the end of the lease period. The CLA says dealers cannot collect more than three times the average monthly payment. However, the dealer can collect a higher amount in the following circumstances:

The dealer also has the option of selling the car at the end of the lease term. If the car is sold for less than the residual value stated in your leasing contract, you could be obligated to pay as much as three monthly payments to make up the difference.

Tip: Although dealers will generally not risk the goodwill of their customers and sell leased cars for less than the residual value just to move the car quickly, you may want to negotiate to include the right to approve the final sales price of the leased vehicle as part of your lease agreement.

Here are a few other things you should know:

What ongoing lease items must the dealer disclose?

The Consumer Leasing Act requires dealers to disclose the total number of payments, the amount of each payment, the total amount of all payments, and the due date or schedule of payments. There is usually a penalty for late payment, which the Lessor must also disclose to you.

What about maintenance?

Maintenance is part of the lease and specifies whether the dealer assumes the maintenance expenses or the customer (you) assumes these expenses. If the dealer is to provide repair and maintenance, you will have to bring the car to the dealership in accordance with the manufacturer`s suggested schedule in order to keep the warranty coverage. Even if you have to pay for repair and scheduled maintenance, you usually have to observe the manufacturer`s scheduled maintenance in order not to jeopardize warranty coverage.

What are the typical final (lease-end) costs?

Final costs include:

Excess mileage charges

Mileage limitations usually occur with a closed-end lease. If you have gone over the allowable mileage at the end of your lease, you will have to pay a fee.

Tip: Consider carefully whether the mileage allowance is enough. Make some calculations of the miles you have driven per week, month, and year to find out whether the mileage allowance is sufficient.

Be aware that the low-mileage lease deals currently popular in certain areas offer mileage limits that are insufficient for many people. If you think you need more than the allowable mileage, negotiate a larger mileage allowance in your lease.

Tip: If you buy a car at the end of a closed-end lease and you go over your mileage allowance, you probably won`t have to pay for excess mileage.

Tip: If you stay under the mileage limit, you don`t get a refund.

With an open-end lease, although there is no penalty, if you exceed the mileage limit the appraisal value at the end of the lease term will usually be lower.

Default fees

These cover any payments or security deposits that the dealer does not receive from you and legal fees and costs the dealer incurs to repossess the car.

Excessive wear and tear charges

You`ll have to pay charges for excessive wear and tear when you return the car at the end of the lease unless the contract reads otherwise. The dealer must tell you in writing the specific definition of excessive wear and tear. Generally, it means anything beyond normal usage (mechanical or physical).

Disposition charges

These are the costs of cleaning the car, giving it a tune-up, and doing final maintenance. If the agreement does not state otherwise, the dealer may pass these costs on to you.

What is a lease-purchase option?

Your lease may include the option to purchase the car at the end of the lease term. This option is usually found in open-end rather than closed-end leases. The dealer must tell you the estimated residual value of the car and the formula that will be used to determine your purchase price at the end of the lease.

Tip: If you think you might want to buy the car, be sure the purchase option is in your lease before you sign it; otherwise you`ll have to renegotiate later, at which time you may have less bargaining power.

What is a lease early-termination option?

If you terminate your lease after, say, 36 months on a 48-month lease, you will have to pay an extra charge, based on the difference between the residual value of the car at that time and the estimated residual value at the end of the lease term (stated in the contract). The difference between these two may be great. In most lease agreements, you must keep the car at least 12 months.

Before you sign the contract the dealer must tell you whether you can terminate early and what the cost is.

What is a "capitalized cost reduction"?

This is similar to a down payment. The dealer may ask you to put a certain amount of money down before leasing. The amount of the capitalized cost reduction varies with the business custom prevalent in the geographic area and the credit rating of the customer. The larger the down payment is, the smaller the monthly payment under the lease is; however, most people who want to lease instead of buy don`t want to put down a large down payment, which is one of the major advantages of leasing.

Tip: Trading in your old car can reduce your down payment and/or your monthly payments.

How do I prepare financially for divorce?

If you are considering divorce, it`s vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for.

The time you take to prepare and plan for eventualities will pay off later on. Here is what you can do:

Making an inventory of your financial situation will help you to prepare in two ways:

  1. It will provide you with preliminary information for an eventual division of the property.

  2. It will help you to plan how the debts incurred in the marriage are to be paid off. Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.

First, make a list of all of your assets, joint or separate, including:

Next, make sure you have copies of the past two or three years` tax returns. These will come in handy later.

Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.

Find any papers relating to insurance-life, health, auto, and homeowner`s, as well as pension and other retirement benefits.

Next, list all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

Tip: If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.

How should we handle credit card accounts during a divorce?

First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.

Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the cosigner`s irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

What do I do if my current or former spouse`s poor credit affects me?

If your spouse`s poor credit hurts your credit record, you may be able to separate yourself from your spouse`s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse`s credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration doesn`t reflect your own, and you may have to be persistent.

What happens to my credit history after a divorce?

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply. (The account remains open.)

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.

Do not use only your husband`s name, for example, Mrs. John Wilson for credit purposes.

Tip: Check your credit report if you haven`t done so recently. Make sure the accounts you share are being reported in your name as well as your spouse`s. If not, and you want to use your spouse`s credit history to build your own, write to the creditor and request the account be reported in both names.

Also, determine if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband`s accounts, building your own credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your file. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

What are the legal issues that must be faced in most divorces?

The best way to plan for the legal issues that must be faced in a divorce such as child custody, division of property, and alimony or support payments, is to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solution--either one worked out between the two attorneys or one worked out by a court--will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

Tip: Those who have trouble arriving at an equitable agreement, but do not require the services of an attorney, might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled "Divorce Assistance", or "Lawyer Alternatives."

How does property get divided in a divorce?

The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.

  1. Gain an understanding of how your state`s laws on property division work.

  2. If you owned property separately during the marriage, be sure you have the papers to prove that it`s been kept separate.

  3. Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school or your non-financial contributions to his or her financial success.

  4. If you need alimony or child support, be ready to document your need for it.

If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.

What are the tax implications of divorce?

After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:

Child Support

Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).


Alimony is deductible by the payer and is taxable to the recipient. Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treated is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.

Property Settlements

Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.

What happens when retirement plans or IRAs are divided up in a divorce?

Generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.

Can I deduct the cost of getting a divorce?

Generally, no; however, fees paid specifically for income or estate tax advice pursuant to a divorce may be deductible. Also, fees made to determine the amount of alimony or to collect alimony can be deducted. These deductions would be miscellaneous itemized deductions subject to the 2% limitation.

Who is entitled to deduct the dependency exemption of a child after divorce?

Generally, the custodial parent is entitled to the deduction. However, this is often negotiated in the divorce settlement. If the parents agree in writing, the non-custodial parent can take the deduction.

How can I resolve a consumer complaint?

First, go to the seller of the item. Second, contact the relevant consumer agency. Finally, if neither of these results in satisfaction, you can file a lawsuit or use arbitration.

Contacting the Seller

Before you take your complaint to the store or other entity that sold you the service or product:

  1. Gather any evidence you may need, such as the receipt, a canceled check, photographs showing the problem, a warranty, a contract, or a bill of sale.

  2. Figure out what your goal is. Do you want the product replaced? Do you want your money back? Do you merely want an apology?

  3. Call the store or service provider and ask to make an appointment with the manager, customer service representative, or another appropriate person. Meet face to face with that individual and explain as succinctly as possible the nature of the problem and what you want to be done about it. If you talk on the phone, follow up with a letter, and make notes of the dates of your calls and to whom you spoke.

    Note: If the product is covered by a warranty, it`s usually better to follow up with the manufacturer instead of the merchant.

  4. If this doesn`t produce results, take your problem to a higher authority. This might be a supervisor or a corporate president. You should put your complaint in writing at this point if you haven`t already done so. Your letter should include your name, address, phone numbers, and account number (if relevant). If a product is involved, include the date and place of purchase, and the model and serial number. Briefly, state the problem with the product or service, and write about what you have done so far to resolve it. Finally, tell the letter recipient what you want done, and give him or her a deadline. Include copies of relevant documents (not originals), and keep a copy of your letter. Keep copies of anything you receive from the company.

Contacting an Agency

If you still haven`t achieved the result you wanted, look in the phone book for a consumer complaint agency, such as the state, county, or city consumer protection office, or the Better Business Bureau.

Or, you might want to go the trade association route. Some industry trade associations offer help in mediating disputes concerning their members.

If your complaint involves a bank, you might wish to contact the appropriate state banking regulator. Similarly, you might want to contact the state insurance regulator if an insurer is involved, the securities regulator for a securities problem, or the public utility commission for utility-related problems.

If the problem involves a state-licensed trade (e.g., a general contractor or a plumber), call the state licensing department.

If you bought a "lemon" used car, investigate your state`s lemon laws by contacting your state consumer protection agency.

If the problem involves mail order or mail fraud, contact your area postal inspector, who can be found in the U.S. government section of the phone book.

There may also be a local television news program hotline for resolving consumer complaints.

Tip: Call the agency first to find out what procedures it wants you to follow.

Filing a Lawsuit

When all else fails, you might want to file a court case--either a small claims case, if the amount of money involved is small enough (generally, under $5,000)--or a regular lawsuit.

More often than not, simply contacting an attorney and having him or her write a letter to the merchant or service provider indicating that you intend to file a lawsuit will get you the result you are seeking.

If a small claims case is involved, you generally won`t need to hire an attorney, but if the case doesn`t qualify for small claims, you`ll probably need to hire an attorney.

How can I reduce my bank fees?

There are many ways to reduce your bank fees.

How can I save on my insurance costs?

Here are some ways to save on insurance of all types:

How can I cut my utility costs?

Here are some thoughts to keep in mind when trying to cut utility costs:

How can I reduce the cost of my phone bill?

Today`s cost-cutting competition among phone service providers offers many opportunities for savings on your phone bills, such as:

How can I reduce the cost of my mortgage?

Consider the following options to help you reduce the cost of your mortgage:

Which are the best credit cards?

Finding the best credit card is mostly a matter of comparison shopping, but before you accept a credit card offer, make sure you understand the card`s credit terms. For instance, what is the annual percentage rate? Is there a grace period? How much is the annual fee? Once you have the answers to these and other answers, then you can compare several cards at once and figure out which card meets your particular needs and which one offers you a better deal.

Tip: Figuring out which card is best for you is not always obvious because it really depends on how you plan to use the card. For example, if you plan to pay your bills in full each month, fees and the length of the grace period may be more important than the periodic and annual percentage rate. If you anticipate using your credit cards to pay for purchases over a period of time, then the annual percentage rate (APR) and the balance computation method are important terms to consider. In either case, keep in mind that your costs will be affected by whether or not there is a grace period.

When it comes to shopping around for a credit card there are a few terms you should know and understand. These include:

Annual percentage rate. The annual percentage rate or APR is a measure of the cost of credit expressed as a yearly rate.

Periodic rate. The card issuer also must disclose the periodic rate applied to your outstanding account balance to figure the finance charge for each billing period.

Variable rate. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined. You also must be told how much and how often your rate may change.

Grace period. The grace period allows you to avoid the finance charge by paying your current balance in full before the due date shown on your statement. Knowing whether a credit card plan gives you a grace period is especially important if you plan to pay your account in full each month. And, thanks to the Credit CARD Act of 2009, if the credit card has a grace period finance charges for the month cannot be assessed unless you receive the monthly statement 21 days before the financing charges begin.

If there is no grace period, the card issuer will impose a finance charge from the date you use your credit card or from the date each transaction is posted to your account.

Annual membership. Most credit card issuers used to charge annual membership fees, but this is no longer the case. There are plenty of cards out there with no annual or other participation fees. For those card issuers that do impose annual fees, they typically range from $18 to $95. The annual fee for an American Express Platinum Card is $450.

Other costs. A credit card also may involve other types of costs such as balance transfer fees and fees for cash advances, or late fees.

If someone steals my credit card, how much am I liable for?

Under the Truth in Lending Act, if your credit card is used without your authorization, you are only held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges.

If a thief uses your card before you report it missing, the most you will owe for unauthorized charges is $50. This is true even if a thief is able to use your credit card at an automated teller machine (ATM) to access your credit card account.

To minimize your liability, report the loss of your card as soon as possible. Most companies have toll-free numbers printed on their statements and 24-hour service to report lost or stolen cards.

Are rebate and rewards credit cards a good deal?

The use of rebate and rewards cards has grown rapidly. Costco for example sponsors a credit card (Costco Cash Rebate card) that give rebates on the cost of merchandise you buy with the card once you spend a certain amount. You usually get larger rebates on the sponsoring company`s products and lower rebates on other card charges. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from hotel rooms to gas.

Tip: You`ll get a good deal from a rebate card if you spend a lot, and if you pay your bill in full each month. If you carry a balance on the card, what you gain in rebates you will lose in the excessive interest charged by credit cards.

What is the difference between the average daily balance, adjusted balance and previous balance?

Average Daily Balance (including or excluding new purchases). The average daily balance method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the "average daily balance." This is the most common method used by credit card issuers.

Adjusted Balance. This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.

Previous Balance. As the name suggests, this balance is simply the amount you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance.

What can I do if I am dissatisfied with a credit card purchase?

If you have a problem with merchandise or services that you charged to a credit card, and you have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. Check with your credit card company regarding their policies.

If you do not achieve satisfaction through the seller or credit card company, you can file a small claims court action-an informal legal proceeding that can be used to settle disputes. Check your local telephone book under your municipal, county, or state government headings for small claims court listings.

In addition, you have the following rights:

You have the right to have mail and phone order purchases shipped when promised, or to cancel for a full and prompt refund. If no shipping date is stated, your right to cancel begins 30 days after your order and payment are received by the merchant. If you cancel, the seller has one billing cycle to tell the card issuer to credit your account.

There are two exceptions to the 30-day shipment rule: (1) If a company doesn`t promise a shipping time, and you are applying for credit to pay for your purchase, the company has 50 days after receiving your order to ship. (2) Spaced deliveries, such as magazine subscriptions (except for the first shipment); items that continue until you cancel (e.g. book or record clubs, etc.); C.O.D. (cash on delivery) orders; services; and seeds or growing plants are not covered.

You have the right to a full refund--because of shipping delay--within seven working days (or one billing cycle) after the seller receives your request to cancel.

You may refuse a delivery of damaged or spoiled items.

Tip: If there is obvious damage to a package you receive in the mail, and if you decide not to accept the package, write "REFUSED" on the wrapper (at time of delivery) and return it unopened to the seller. No new postage is needed, unless the package came by insured, registered, certified or C.O.D. mail and you signed for it.

Tip: If you are ordering something to be delivered by C.O.D., make your check out to the seller, not the post office. That way, you may contact your bank and stop the check if there is an immediate problem with merchandise.

When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund (if the amount exceeds $1.00). To obtain a refund, write the card issuer. The card issuer must send you the refund within seven business days of receiving your request.

What can I do if there is a mistake on my credit card bill?

The Fair Credit Billing Act provides specific rules that the card issuer must follow for promptly correcting billing errors. The card issuer will give you a statement describing these rules when you open the credit card account and, after that, at least once a year. Many card issuers print a summary of your rights on each bill they send you.

Billing errors include:

When you find an error you must notify the card issuer in writing within 60 days after the first bill containing the error was mailed to you. Some companies may accept e-mail; others will require that you put your dispute in writing. Be sure to include your name and account number, a description of the billing error and the date and amount of the charge you dispute.

The card issuer, in turn, must look into the problem and either correct the error or explain to you why the bill is correct. If there is an error, you will not have to pay interest charges on the disputed amount. Your account must be corrected. If there is no error, the credit card company must send you an explanation and a statement of what you owe.

During the period that the card issuer is investigating the error, you do not have to pay the amount in question. For further information visit Consumer Information.

How can I get the most benefit from my credit cards?

Here are some suggestions for the use of credit cards:

  1. Pay bills promptly to keep finance charges as low as possible.

  2. Tip: Keep copies of sales slips and promptly compare charges when your bills arrive

  3. Keep a list of your credit card account numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.
  4. Protect your credit cards and account numbers to prevent unauthorized use.

  5. Tip: Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.

  6. Deal only with reliable firms. Check with your local consumer protection agency or the Better Business Bureau (BBB) closest to where the business is located. Study the advertising offer carefully and always ask the company about its refund and exchange policies as well as product warranties offered.
  7. Tip: Pay by money order, check, charge or credit card so you have a record of your purchase.

  8. Never send cash. Keep the ad you responded to and a copy of the order form. If there is no order form, make your own notes with the company`s name, address, phone number, date, amount, the item you purchased, and any delivery date that may have been promised.
  9. Never give out your credit, debit, charge card or bank account numbers unless you`ve checked out the company or have done business with it before.

What restrictions and limitations can a merchant impose before accepting my credit card?

Some merchant practices violate your privacy and expose you to potential credit fraud, and are therefore illegal in many states.

To protect your privacy, say "no" to a merchant who engages in these impermissible credit card practices:

Note: Giving a discount for cash payments is allowed.

How can I stop junk mail or telemarketing calls?

You have the right to tell commercial telephone and direct mail marketers to stop calling you. If you wish to have your name removed from telephone lists of marketing companies contact the federal Do Not Call Registry:

National Do Not Call Registry
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
website: www.donotcall.gov

Consumers who do not wish to receive promotional mail at home should contact:

Direct Marketing Association
1120 Avenue of the Americas
NY, NY New York, NY 10036-6700
Tel. 212.768.7277
website: www.DMAChoice.org

If companies you now do business with also removes your name, you can contact them directly to have your name reinstated. If the marketer violates the do-not-call list, the first step is to file a complaint with the FTC (Federal Trade Commission). You can also file a lawsuit against the telemarketer, but only if there is a "pattern and practice" of violations. You also have to have suffered actual damages of more than $50,000 and be able to prove both of these things.

Tip: If you receive unordered merchandise in the mail, consider it a gift and don`t feel pressure to pay for it.

How will a divorce or separation affect my credit?

Here are some tips for handling the credit aspects of divorce, both in the planning stages and afterward.

Cancel All Joint Accounts. First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.

Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse`s Poor Credit Affects You. If your spouse`s poor credit hurts your credit record, you may be able to separate yourself from the spouse`s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse`s credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration doesn`t reflect your own, and you may have to be persistent.

Women: Maintain Your Own Credit-Before You Need It. If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply, although the account remains open.

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.

Do not use only your spouse`s name, for example, "Mrs. John Wilson" for credit purposes.

Tip: Check your credit report if you haven`t done so recently. Make sure the accounts you share are being reported in your name as well as your spouse`s. If not, and you want to use your spouse`s credit history to build your own, write to the creditor and request the account be reported in both names.

Find out if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you used your spouse`s accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband`s name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse`s or former spouse`s signature to access his credit file if you are using his information to qualify for credit.

Tip: A secured credit card is a fairly quick, easy way to get a major credit card if you do not have a credit history.

What factors affect my credit rating?

Your credit rating is affected by a number of different factors, some obvious and others few consumers are aware of. The following factors are discussed below:

Does having a credit card or using another person`s credit card improve my credit rating?

One of the best things you can have on a credit report is a bank credit card-- such as a Visa, MasterCard or Discover card -that has been paid on time over a specified period in the past. In a credit scoring system, a good bank card reference usually carries more weight than an American Express card or a department store card.

If you are an authorized user (someone who has permission to use a credit card, but is not legally liable for the bills) on someone else`s account, the payment history will likely be reported in your credit file, but you won`t be able to rely on it to help you build your own credit rating. Usually, it will neither help you nor hurt you when you apply for a loan.

Does having a checking or savings account improve my credit rating?

A checking or savings account will usually enhance your credit rating. Some banks give you extra points in applying for their credit card if you have a checking or savings account with them. In fact, some banks also give discounts on loan rates when you hold other accounts with them.

Is my credit rating affected by where I live?

Many creditors give a higher score to those who have lived at the same address for at least two years. Others give extra points just for living in the same area for two years or more.

Creditors may take into account your geographic location in scoring your length of time at one address. If you live in a city, where people move more often, the length of time at your address will probably count less than if you live in the country.

If your address is a post office box, you may find yourself turned down for credit. To fight fraud, some creditors screen out applicants whose addresses indicate commercial offices, mail drops or prisons.

Since post office boxes or rural delivery boxes are commonplace in rural areas, a lender may issue a card to that address while rejecting applicants with a P.O. Box in a large city.

People who own their homes usually earn a higher score than renters.

Does my age affect my credit rating?

If a lender`s credit experience shows that people in a certain age group have a better record of paying their bills than people of other ages, that lender may, legally, give a higher score to the better-paying age group.

However, the Equal Credit Opportunity Act (ECOA), a federal law intended to prevent discrimination in lending, does not allow lenders to discriminate against people age 62 or over. The ECOA requires creditors using a scoring system to give those aged 62 and older an age-factor score at least as high as the best score given to anyone under age 62.

How important is my debt-income ratio in determining my credit-worthiness?

Some creditors look at your "debt/income ratio" to determine whether you qualify for credit and how much credit you qualify for.

To find your debt/income ratio, total up your monthly payments on all bills. Then, divide these payments by your monthly gross income (before tax). This is your debt/income ratio.

If it`s less than 28 percent, you should have no trouble getting a loan (and can consider yourself successful at managing your debt and maintaining a good credit rating). If it falls between 28 percent and 35 percent, you have what`s considered high debt, and you may find it difficult to obtain some loans. If your debt/income ratio is 35 percent or more, you will probably not be able to get additional credit. More importantly, you are potentially in financial jeopardy.

Keep in mind that these are general guidelines. Some large card issuers will accept debt ratios as high as 40-45 percent. Others compare your net (after-tax) income to your debts to determine your debt ratio.

Tip: In determining your debt/income ratio, do not include payments for your mortgage, utility bills, doctor bills or other items that do not appear on your credit report: The creditor will not look at these.

If you should incur unexpected expenses, get ill, lose your job, or get divorced, you could find yourself unable to meet your obligations. Consider seeking credit counseling through a local non-profit consumer credit counseling service.

Will bankruptcies or "charge-offs" affect my credit rating?

Most lenders (but not all) will automatically reject you if your application or credit file indicates a bankruptcy. Both types of bankruptcy -- Chapter 13 (the wage-earner`s plan under which all debts are eventually repaid) and Chapter 7 (straight bankruptcy) -- remain in your credit files for ten years. Few creditors draw any distinction between the two types, so you don`t get any "credit" for having repaid your bills using Chapter 13.

In addition to the bankruptcy itself remaining on your report for ten years, each separate account that was discharged through bankruptcy can be reported in your file for up to seven years.

"Charge-offs" (accounts written off as "un collectible") and "collection accounts" (accounts sent either to the creditor`s own collection department or to an outside collection agency) are extremely negative.

Note: If an account that has been charged-off (other than for bankruptcy), the creditor will usually turn it over to a collection agency, which will then attempt to collect. It then becomes a "collection account" for reporting purposes.

Tip: If you pay the charged-off amount, make sure the creditor updates the account as a "paid charge-off."

Tip: In exchange for paying off a collection account, you may be able to negotiate with the creditor or collection agency the permanent removal of the negative information from your credit bureau files. However, lenders are under no obligation to make such an agreement.

Will delinquent child support payments affect my credit?

Delinquent child support frequently appear on credit reports. In 1984, Congress amended the federal Child Support Enforcement (CSE) legislation to require more routine reporting of delinquent payments.

State child support enforcement agencies must report overdue child support to a credit bureau that requests such information, as long as the amount exceeds $1,000. CSE agencies may also report delinquencies of any amount on a voluntary basis.

Before a CSE agency reports your delinquent child support debts to a credit bureau, it must tell you that it is going to do so and provide you with information on how to dispute the delinquency.

Can my credit rating be negatively affected by having too much available credit?

You may be turned down for a loan because you have too much available credit. When creditors evaluate your application for credit, they ascertain whether, if you were to use all your available credit, you would be over your head.

Accounts you no longer use, or have paid off, can count against you if they are listed as "open" on a credit report. The act of paying off a revolving account does not, in itself, result in its being "closed" in the eyes of creditors. Further, some creditors do not report to credit bureaus the fact that accounts are closed.

Tip: Every time you close an account, ask the creditor to report it as "closed by consumer" to all credit bureaus to which the account has previously been reported. If a closed account appears on your credit report as open, dispute the entry with the credit bureau.

In determining whether you have too much available credit, creditors usually consider:

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for doing so) you should prepay as much as you can every month. There are, however, two exceptions to the general rule:

  1. You do not have an emergency fund of three to six months` worth of expenses stashed away. Any extra money you have should be put towards the emergency fund. Once you`ve achieved this essential financial goal, then you can begin paying down your mortgage.

  2. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

In addition, there are a few individuals for whom paying down a mortgage earlier might not be as beneficial financially, particularly if they achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, the return they can get on an investment, and any long-term investment goals they might have.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to some lenders to determine what rates are available and the costs associated with refinancing. These costs include appraisals, attorney`s fees, and points.

Once you know what the costs will be, figure out what your new payment would be if you refinanced. You can then estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).

Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Should I borrow against my securities?

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Tip: If your margin debt exceeds 50 percent of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against the use of margin debt, unless the amount is kept way below 50 percent. Twenty-five percent is a much safer percentage.

What is a home equity line of credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home is likely to be a consumer`s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit, in other words, the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home $100,000
Percentage x 75%
Percentage of appraised value $75,000
Less mortgage debt -40,000
Potential credit line $35,000

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history.

Once you`re approved for a home equity loan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you draw on your line of credit by using special checks, but under some plans, borrowers can use a credit card or other means to borrow money and make purchases. There may be limitations on how you use the line, however. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example these fees may be charged:

You also may be charged a transaction fee every time you draw on the credit line.

What is an interest rate "lock-in"?

If you decide to apply for financing with a particular lender, and if you do not want to let the interest rate "float" until closing, then get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease (but not increase) before closing. If you cannot get the lender to put this information in writing, you may want to choose one that will.

Most lenders place a limit on the length of time (say, 60 days) that they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, it may be wise to contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed.

What disclosures must a lender give you?

For a financing loan, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan. This is required by the Truth in Lending Act and you usually receive the information around the time of settlement--although some lenders provide it earlier.

Tip: Review this statement carefully before you sign the loan. The disclosure tells you what the APR, finance charge, amount financed, payment schedule, and other important credit terms are.

If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

What is a reverse mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

The reverse mortgage`s benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

What loan interest is tax-deductible?

The deductibility of interest has been limited in recent years. The following types of interest are at least partially deductible:

What are the limitations on deductibility of mortgage interest?

Generally, interest expense on the taxpayer`s primary residence and second (but not a third) home, is deductible. Interest is only deductible on the first $1,000,000 of the acquisition loan ($500,000 if married filing jointly). As the loan is paid off the limit is reduced. In other words, you cannot refinance a loan for a higher amount than the current principal balance and increase the deduction. In addition interest on a home equity loan of up to $100,000 can be deducted.

Is interest expense incurred for business purposes deductible?

Yes. Interest expense incurred for a trade or business is deductible against the income of that business. For example, if you are self-employed the business interest would be deducted on Schedule C.

Is investment related interest expense deductible?

Yes. Investment interest is deductible up to the amount of investment income.

Is interest on educational loans tax deductible?

For FAQs on deducting education loans, see Tax Benefits of Higher Education: Frequently Asked Questions.

When can you stop paying private mortgage insurance?

Generally, if you make a down payment of less than 20 percent when buying a home, the lender will require you to buy private mortgage insurance (PMI). You can generally drop the PMI when you have attained 20 percent equity in the home, or when the value of your home goes up (due to a good real estate market) so that your equity constitutes 20 percent.

Under the Homeowner`s Protection Act (HPA) of 1998 you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high-risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

If PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date.

What banking fees do you need to look out for when shopping for a bank account?

Fortunately, banks are required to give you a list of fees for their accounts. Even with interest, the best account is usually the one with the lowest fees.

Checking accounts are minefields for potential banking charges. Be sure you ask about monthly fees, fees for check processing, and ATM fees. A no-cost checking account may impose a charge if your balance drops below a minimum dollar amount. Check printing charges have sky-rocketed in recent years to as much as $24 at some banks. You can have your checks printed for much less by an outside financial printer.

It rarely makes sense anymore to park money in an old-fashioned "passbook" savings account. Monthly account fees may overshadow the small amount of interest you will earn. Put it in your checking account instead if you can refrain from spending it. If it`s a big enough sum, you might want to put it in a money market account. You will earn more interest than in a savings account, but make sure you don`t get hit with a monthly charge if your balance falls too low.

What are the different types of bank accounts available?

The accounts offered by depository institutions generally fall within one of these types:

What type of account should I open?

The answer depends on how you plan to use the account. If you want to build up your savings and you won`t need your money soon, a certificate of deposit will serve your purposes.

If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.

Tip: If you usually write only two or three checks per month, an MMDA might be a better deal than a checking account. MMDAs pay a higher rate of interest than checking accounts, but require a higher minimum balance.

Checking accounts have other advantages. They simplify your recordkeeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.

Account features and fees vary from one institution to the next. It`s important to take the time to ask bank employees about any account features and fees before you open an account.

Tip: To get the most out of a checking account, find out what the minimum balance for avoiding fees is, and keep that minimum in the account. Further, try to get a checking account that will pay you interest, or that looks to the combined balance in checking and savings accounts to arrive at the minimum required balance. This way, you will not be paying the bank for the checking services, and your money will be earning some interest-although not at a great rate.

How should I shop for a "best buy" bank account?

Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are:

How much protection is provided by federal deposit insurance?

Federal deposit insurance sets apart deposit accounts from other savings choices. Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects the money you have on deposit to a limit of $100,000. Accounts for special relationships, such as trusts or co-owners, may also have some effect on the amount of insurance coverage you have.

Tip: Ask the bank how the deposit insurance rules will apply to your deposit account. Federally insured depository institutions also offer products that are not protected by insurance. For example, you may purchase shares in a mutual fund or an annuity. These investments are not protected by the federal government.

How can I negotiate checking account fees with my current bank?

Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.

Tip: Many banks offer free checking to seniors, students, or the disabled, if the depositor asks for this service.

Tip: If you decide to take your business elsewhere, don`t overlook smaller banks, which may be more eager for your business.

What questions should I ask when shopping for a Checking Account?

You need to know exactly how much a checking account will cost you. Get a list from your banker of all possible fees, including charges for maintaining the account, processing checks, bouncing checks, using the ATM, stopping payment, and transferring funds. Ask if the account will be cheaper if the bank does not return canceled checks. In the rare event that you need one, ask how much, if anything, it will cost to get a copy. To avoid bouncing checks, ask how long you have to wait after depositing funds to draw on them.

For interest checking accounts, ask how the bank calculates the interest. If the bank pays more on accounts with higher balances, be sure you get a "tiered" rate, which pays you the highest interest on all the money you have in the account. Be sure you know the charge for falling below the minimum balance, too. It might be more than the interest you will earn. Finally, some banks reduce charges on checking accounts if you take out a loan or buy a CD. Ask what deals are available.

What is overdraft protection and should I have it?

Many people overlook a valuable service offered by banks: the overdraft protection line of credit. With this protection, if you write a check which would overdraw your account a loan is automatically made from a line of credit. With this protection you will not bounce any checks.

This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches-and at a lower interest rate than other forms of borrowing.

Starting in 2010, automatic overdraft protection is no longer provided by banks and bank customers must opt-in for this protection. Don`t neglect to inquire about this service if it would suit your situation.

What is the Truth in Savings Act?

The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:

To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.

In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.

How can I find out if contributions to a particular charity are tax-deductible?

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition.

When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a "Determination Letter" formally notifying it of its charitable status. Older charities may have a "101(6) ruling," which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual gross receipts (subject to the Gross Receipts test) do not have to apply to the IRS for exemption.

Tip: You can search the IRS database for a list of tax-exempt organization eligible to receive deductible contributions.

What information can I obtain from the IRS about a charity?

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location.

These three publicly available documents are:

Tip: If your request for information involves only Form 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general`s office) may also have a copy of the charity`s latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity`s application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. The charity is not required to provide photocopies of the return but must have a copy on hand for public inspection.

What types of deductible contributions can be made to charity?

Generally, you can donate money or property to charity. A deduction is usually available for the fair market value of the money or property. However, for certain property the deduction is limited to your cost basis; inventory (some exceptions), certain creative works, stocks held short term and certain business-use property. You can also donate your services to charity, however, you may not deduct the value of your services. You can deduct your travel expenses and some out of pocket expenses.

What types of organizations generally qualify for a charitable deduction?

The following types of organizations generally qualify for a deduction. Before making a donation, make sure to verify the organization`s status. You can do this by asking for evidence in writing or contacting the Internal Revenue Service.

What types of organizations generally do not qualify for a charitable deduction?

The following types of organizations generally do not qualify for a charitable deduction:

What is the limit on the deductibility of charitable contributions?

The amount of your deduction for charitable contributions is limited to 50 percent of your adjusted gross income and may be limited to 20 or 30 percent of your adjusted gross income, depending on the type of property you give and the type of organization you give it to. Before you make a donation, verify with your tax advisor which limit applies.

Can I deduct contributions to tax-exempt organizations?

Not necessarily. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. There are more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

What should I look out for in my charitable giving?

Not everything the charity gets from you qualifies for deduction:

Is federal gift or estate tax due on my charitable gift?

Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), along with the current income tax deduction.

Some charities talk about planned or deferred giving. What is that?

Usually they are ways whereby both you (or your family) and charity enjoy your property or its income. The most popular are:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Trust

You transfer assets to a trust that pays an amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust`s termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Trust

You transfer assets to a trust that pays an amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You keep the ability to pass on most of your assets to your heirs. Unlike the charitable remainder trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death. By some estimates, this means nearly 99 percent of estates do not pay any estate tax. In 2017, the exemption limit is $5,490,000 ($5,450,000 in 2016). Estates worth more than $5,490,000 are taxed at 40 percent. For married couples, the exemption is $10.98 million. There are a couple of important exceptions to the general rule, however. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen and estate taxes won`t be assessed on any property you leave to a tax-exempt charity.

Do states also impose estate taxes?

Most states impose estate taxes of some kind. In many cases, there`s a state inheritance tax only where a federal estate tax would apply. But some states have estate taxes that are "uncoupled" from the federal tax, and some have inheritance taxes.

Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you.

Fourteen states and the District of Columbia impose an estate tax while six states have an inheritance tax. Maryland and New Jersey have both and estate tax and an inheritance tax.

Estate Tax

Inheritance Tax

How can I minimize federal estate taxes?

There are several ways. One common way to do this is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($5,490,000 in 2017) and the balance to your spouse.

Can I avoid paying state estate taxes?

In most states that base inheritance taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of estate tax, your professional advisor can help you minimize state tax by taking actions specifically adapted to that tax.

If you live in two states, for instance, Florida in winter and summer in New Jersey, your inheritors may be able to save on estate taxes if you make your legal residence in the state with lower inheritance taxes.

Can I just give all my property away before I die and avoid estate taxes?

You can give up to $14,000 in 2017 (same as 2016) per person per year with no gift tax liability. Gifts exceeding that amount are counted against a gift tax exemption of $5,490,000. Gifts exceeding that exemption are subject to gift tax. At your death, these gifts could become your taxable estate (with a credit for gift tax paid).

There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2017 amount is $149,000 ($148,000 in 2016) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. Money spent directly for someone`s medical bills or school tuition, is exempt as well.

How much will it cost me to raise a child?

We can`t tell you exactly what your child will cost, but we can provide you with estimates. Knowing what to expect will allow you to plan for the future. Here is a breakdown of the items you`ll need, and an estimate of their costs.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. Typically parents with 3 or more children spend 22 percent less per child than those with just two children.

Government estimates say that a middle-income family in 2015, defined as having an annual income between $59,350 and $107,400, will spend a total of $233,610 to raise a child to age 17. This figure represents a 3.0 percent increase from the four-year period 2010-2014 to the four-year period 2011 to 2015 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

According to the USDA report, Expenditures on Children by Families, 2015, annual child-rearing expenses per child for a middle-income, two-parent family ranged from $12,350 to $13,900. The age of the child accounted for the annual variations. For example, child care expenses are greater in the first 6 years of a child`s life, but transportation costs are likely to be higher when a child hits her teen years.

About 30 percent of the amount spent in the government estimates goes to cover housing expenses relating to the new member of your household. Child care and education expenses account for the second highest percent. Other costs taken into account include transportation, food, clothing, health care, and miscellaneous expenses.

Married-couple families in the urban Northeast had the highest child-rearing expenses, followed by similar families in the urban West and urban South. Married-couple families in the urban Midwest and rural areas had the lowest child-rearing expenses.

What costs can I expect during the first year?

Here are the costs you can expect up to birth and during the first year.

How much will I spend on my child during ages one through six?

During these years, you`ll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends daycare or pre-school, add in the cost of these services. Daycare will cost you an average of $12,000 per year, while pre-school costs vary widely. Again, health care costs depend on your health coverage.

How much will I spend on my child during ages six through twelve?

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you`ll have to pay more.

You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won`t be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage.

On the negative side, now that your kids are in school, you`ll want to pay for all those extras that middle-class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

How much will I spend on my child during ages thirteen through eighteen?

During this stage, you can expect your child`s food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

How can I teach my kids good financial skills?

Once they reach school age, children should start learning rudimentary financial skills.

You might start to teach your kids in the following areas:

The Allowance. Giving your child an allowance is a good start. Whether you pay your child a quarter or one dollar to perform weekly household chores, you are instilling a work ethic and a giving them an opportunity to learn how to save and spend their money wisely. You can make suggestions to them about what they should do with it, but allow them the final say on what happens to the money. Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn to budget if he is not provided with extras to tide him over.

Savings and Investment. Beyond the basics of budgeting and saving, you`ll want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own savings account. If you want your child to become familiar with investing, there are a number of child-friendly mutual funds and individual stocks available.

Taxes. Many teens today have part-time jobs. Although they might not make enough to need to file a tax return, encouraging them to fill out a practice tax form is a good way to have them participate in the process--and get them used to the idea of submitting yearly tax forms.

What kinds of household workers are covered by nanny tax rules?

Household workers include anyone who does work in or around your home such as babysitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. In addition, the worker must be your employee, which means you can control not only what work is done, but how it is done.

It does not matter whether the work is full-time or part-time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.

What must I do if I think my worker or worker-to-be isn't a U.S. citizen?

It is unlawful for you to knowingly hire or continue to employ an alien who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.

What are my tax duties if I have a household employee?

You may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both.

  • If you pay cash wages of $2,000 or more in 2017 to any one household employee, withhold and pay Social Security and Medicare taxes.
  • If you pay total cash wages of $1,000 or more in any calendar quarter of 2016 or 2017 to household employees, you must pay unemployment tax.

If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?

When figuring whether you paid an employee $2,000 or more in 2017 to babysitters or others, you generally don't count wages paid to an employee who is under age 18 at any time during the year.

If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee's principal occupation.

Are there ways to pay my household employee that minimize the employment tax?

Wages subject to employment tax do not include the value of food, lodging, clothing, and other non-cash items you give your household employee. However, cash you give your employee in place of these items is included in wages.

If you reimburse the amount your employee pays to commute to your home by public transit (bus, train, etc.), do not count the reimbursement (up to $255 per month in 2017) as wages.

Further, if you reimburse your employee for the cost of parking at or near a location from which your employee commutes to your home, do not count the reimbursement (up to $255 a month in 2017) as wages.

I'm not sure yet whether I'll pay enough this year to require withholding. What should I do?

You should withhold the employee's share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $2,000 or more in 2017.

If you withhold the taxes but then actually pay the employee less than $2,000 in Social Security and Medicare wages for the year, you should repay the employee.

Okay, I've withheld tax on the employee and I owe the employer's share. How do I pay these amounts?

You pay withheld taxes as part of your regular income tax obligation. You don't deposit them periodically. If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Do I have to reduce the worker's take-home pay by the tax on that pay?

If you prefer to pay your employee's Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee's wages. The Social Security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.

In what cases do I owe unemployment tax?

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You may owe only the FUTA tax or only the state unemployment tax, or both. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency.

If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2016 or 2017, the first $7,000 of cash wages you pay to each household employee in 2017 is FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of 2017, but you had a household employee in 2016, the cash wages you pay in 2017 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2016 or 2017 totaled $1,000 or more.

Do not withhold the FUTA tax from your employee's wages. You must pay it from your own funds.

Do I need to withhold federal income tax?

You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee's Withholding Allowance Certificate. If you agree to withhold federal income tax, you are responsible for paying it to the IRS.

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:

  • Meals provided at your home for your convenience.


  • Lodging provided at your home for your convenience and as a condition of employment.


  • Up to $255 a month in 2017 for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
  • Up to $255 a month in 2017 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.

Any income tax you pay for your employee without withholding it from the employee's wages must be included in the employee's wages for federal income tax purposes. It is also counted as Social Security, Medicare and FUTA wages.

What about Earned Income Credit (EIC)? What must I do?

Certain workers can take the earned income credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You must give your household employee a notice about the EIC if you agree to withhold federal income tax from the employee's wages and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2017 wages are less than $48,430 ($53,930 if married filing jointly).

The employee's copy (Copy B) of the IRS 2017 Form W-2, Wage and Tax Statement has a statement about the EIC on the back. If you give your employee that copy by January 31, 2018 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.

What federal tax forms must I file if I have a household employee?

Form W-2 and Schedule H of Form 1040. Specifically:

  • A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31, 2018, and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by January 31, 2018.

  • Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.

  • File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

What pieces of paper do I need to keep in order to do my taxes?

Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.

There are several types of records that you should keep. Most experts believe it`s wise to keep most types of records for at least seven years, and some you should keep indefinitely.

What type of records do I need to keep?

Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.

Here`s a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

While you`re storing your current year`s income and expense records, be sure to keep your bank account and loan records too, even though you don`t report them on your tax return. If the IRS believes you`ve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

How long should I keep these records?

Keep the records of your current year`s income and expenses for as long as you may be called upon to prove the income or deduction if you`re audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it`s due, if that`s later), or two years from the date you actually pay the tax that`s due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:

Should I keep my old tax returns? If so, for how long?

Yes, keep your old tax returns.

One of the benefits of keeping your tax returns from year to year is that you can look at last year`s return while preparing this year`s. It`s a handy reference and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

Audits and your old tax returns

Here`s a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You`d think the IRS would have them handy, but that`s not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor`s request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

What other types of tax records should I keep?

You need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.

Keep the following types of records:

How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

Are there any non-tax records I should keep?

There are other records you should keep, even though they don`t appear to have any use for your tax returns. Here are a few examples:

What kind of recordkeeping system do I need?

Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It`s also helpful to keep each year`s records separate and clearly labeled.

If you have your own business, or if you`re a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

Starting in 2007, contributions in cash or by check aren`t deductible at all unless substantiated by one of the following:

  1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
  2. A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
  3. Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?

If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?

If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?

If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?

It`s important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?

If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn`t mean you`re in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?

If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.

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