The recent credit crunch, financial meltdown, and congressional inaction are unprecedented in market history.

Or are they?

We’ve never seen anything quite like this, and yet, market history is littered with “unprecedented” events.

Here’s a list of some events that have caused short-term volatility (and in some cases panic) in the markets:

• The Cuban Missile Crisis (1962)
• Arab oil embargo (early 1970’s)
• Wage and price controls (1971-1974)
• Nixon’s Resignation (1974)
• Sky-high interest rates and inflation (early 80’s)
• Stock Market Crash of 1987
• The S&L Bailout (1989)
• Foreign Currency Crises (1994-1998)

In the aftermath of all of these events (and too many others to name), the markets swiftly and decisively rewarded those who stuck with a diversified and deliberate strategy and ruthlessly punished those who threw in the towel.

Burn this series of events into your memory. Buy today’s newspaper and save the headline. Keep a journal of your daily emotions as this saga unfolds. The memory of events like these will make you a much better investor if you seize the opportunity to learn its lessons.

A key part of managing your money is managing your emotions, particularly when the stock market is going through a period of uncertainty. Being able to keep your cool is one of the most valuable skills you can have as an investor.

Stay on course by continuing to save

Even if the value of your holdings fluctuates, regularly adding to an account that’s designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging.

If you’re using dollar-cost averaging–investing a specific amount regularly regardless of fluctuating price levels–you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.

Stick with your game plan

Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Diversification can’t guarantee a profit or protect against a loss, but it can help you balance risks.

Look in the rear-view mirror

If you’re investing long term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years, though past performance is no guarantee of future returns.

Think about why you made a specific investment in the first place. That can help you determine if it still deserves a place in your investing strategy. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity. If you don’t know an investment’s purpose in your overall strategy, now’s the time to find out.

Remember that everything’s relative

Most of the variance in the returns of different portfolios is generally attributable to their asset allocations. If you’ve got a well-diversified portfolio, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are at least matching those benchmarks, that realization might help you feel better about your overall strategy.

Remind yourself that nothing lasts forever

Ups and downs are normal for the stock market. If you regret not selling at a market peak, or missed a bargain, remember that you’re likely to have other opportunities at some point. Having predetermined guidelines for buying and selling can prevent emotion from dictating investment decisions.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

What’s the difference between early decision and early action?

If you and your child think the early decision process is too limiting, one alternative might be for your child to apply to college under an early action plan.

Early action plans are similar to early decision plans, but are less restrictive. First, a student can apply to more than one college early action. Second, if a student is accepted under an early action application, he or she can either commit to the college immediately or wait until the spring to do so.

Early action thus offers a huge advantage over early decision–your child gains the peace of mind that comes with early acceptance (and may even have several early acceptances by December or January), but can take a wait-and-see approach to making a commitment to any one school. This gives you and your child the opportunity to review the financial aid packages that come in from all the colleges your child has been accepted at, both under the early action process and the regular admissions process.

Not all colleges offer early action (or early decision) applications, however. In fact, in recent years, a handful of highly selective colleges have dropped their early action and/or early decision programs, believing that the process favors affluent students who are less likely to rely on financial aid. For a list of colleges that offer early action or early decision programs, visit www.collegeboard.com.

Considering the flexibility of early action plans, why would a student apply early decision? The answer is commitment–colleges likely consider the early decision applicant more committed, since he or she is bound to attend if accepted.

Students who apply either early action or early decision will need to have all applications and teacher recommendations completed by October or November of senior year.

Should my child apply to college early decision?

In the college early decision process, your child applies early to a particular college (typically in November of senior year), and hears back early (usually by December or January) as to whether he or she has been accepted.

For the student who has his or her heart set on a particular college that’s also a good fit, applying for admission early decision can be a favorable way to get a leg up on the competition. It’s also a good way to try to avoid the anxiety that typically comes with having to wait until spring for an acceptance letter. A student who gets accepted early may better enjoy his or her senior year, since there’ll be more time for hobbies, courses, work, or activities that he or she might not otherwise have the time or inclination to pursue.

However, there’s a catch: an early decision application is a binding contract. If the college accepts your child (and offers an adequate financial aid package), your child must agree to attend that college. Consequently, a student can apply to only one college early decision.

There are two situations where applying early decision may not work in a student’s favor. First, if a student needs senior year grades or extracurricular activities to boost his or her chances of admission, early decision will preclude consideration of these items. Second, if a student wants or needs to compare financial aid packages from several schools, early decision is not the route to go. Not only will the student have just one financial aid package to review, but the package may not be as generous as it would be for a traditional applicant. Why? Because the college knows that it’s the student’s first choice–in effect, the student has shown his or her cards.

Keep in mind that if your child does apply to one college early decision, he or she can still apply to other colleges through the regular admissions process as a backup–those applications are typically due by December or January.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

If you’re entitled to a distribution from your 401(k) plan (for example, because you’ve left your job), and it’s rollover-eligible, you may be faced with a choice. Should you take the distribution and roll the funds over to an IRA, or should you leave your money where it is?

Across the universe

In contrast to a 401(k) plan, where your investment options are limited to those selected by your employer (typically mutual funds or employer stock), the universe of IRA investments is virtually unlimited. For example, in addition to the usual IRA mainstays (stocks, bonds, mutual funds, and CDs), an IRA can invest in real estate, options, limited partnership interests, or anything else the law (and your IRA trustee/custodian) allows. (Certain investments may not be right for everyone, and some may have adverse tax consequences, so be sure to consult your financial professional.)

While the investment flexibility that IRAs provide can be a benefit for some people, it may be a drawback for others. If you lack investment knowledge and experience, you may be more comfortable with the limited investment alternatives your 401(k) plan provides.

Take it easy

The distribution options available to you in a 401(k) plan are typically limited, usually to a lump-sum payout, or installments payable over a period of years. And many plans require that distributions start if you’ve reached the plan’s normal retirement age (often age 65), even if you don’t yet need the funds.

Similarly, 401(k) plans often require that a beneficiary take a lump-sum payment shortly after the plan participant dies. This may not be a problem if your beneficiary is your spouse–he or she can roll the funds over to an IRA after your death. But a nonspousal rollover is possible only if your 401(k) plan allows it. And some don’t, forcing your beneficiary to take a distribution he or she may not yet need.

On the other hand, you can access the funds in an IRA at any time. You–and your beneficiary after your death–can take out as much, or as little, as you want. While you’ll need to start taking required minimum distributions (RMDs) after you reach age 70½ (and your beneficiary will need to take RMDs after you die), those payments can generally be spread over your (and your beneficiary’s) lifetime. (You aren’t required to take any distributions from a Roth IRA during your lifetime, but your beneficiary must take RMDs after your death.) A rollover to an IRA lets you and your beneficiary stretch distributions out over the maximum period the law allows, letting your nest egg enjoy the benefits of tax deferral as long as possible.

Note: Distributions from 401(k)s and IRAs may be subject to federal income tax. In addition, a 10% early distribution tax may apply if you haven’t reached age 59½. (Special rules apply to Roth 401(k)s and Roth IRAs.)

Gimme shelter

Your 401(k) plan may offer better creditor protection than an IRA. Federal law currently protects your total IRA assets up to $1,095,000–plus any amount you roll over from your 401(k) plan–if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in a 401(k) plan generally enjoy unlimited protection from your creditors under federal law, whether you’ve declared bankruptcy or not.

Let’s stay together

Another reason to roll your 401(k) funds over to an IRA is to consolidate your retirement assets. This may make it easier for you to monitor your investments and your beneficiary designations, and to make desired changes. You may also want to consolidate all of your IRAs. However, make sure you understand how Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) limits apply if you keep all your IRA funds in one financial institution.

Fools rush in

* While some 401(k) plans provide an annuity option, most still don’t. By rolling your 401(k) assets over to an IRA annuity, you can annuitize all or part of your 401(k) dollars.

* Many 401(k) plans have loan provisions, but you can’t borrow from an IRA. You only can access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.

* If you were born before 1936, lump-sum distributions from your 401(k) may be eligible for special 10-year averaging or capital gains treatment. A rollover may make you ineligible for these tax rules.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

They’re not all in run-down neighborhoods, and they’re not all in complete disrepair. As the housing market’s woes continue, more homes go into foreclosure, and more real estate investment opportunities open up. While a buyer still has to prepare and beware, it may be possible to purchase a property in foreclosure at a discount off its market value.

Foreclosure is a legal process whereby a lender terminates a borrower’s right to redeem a property, generally because the borrower has defaulted on the mortgage. Once the foreclosure process is complete, the lender can sell the property to repay the mortgage.

If you’re considering buying a foreclosed property, keep in mind that there are many pitfalls to watch out for, and laws vary from state to state. You’ll want to work with an experienced real estate attorney.

The three stages of foreclosure

Depending on state law, foreclosure can be a relatively short or lengthy process. You might be able to buy a property in pre-foreclosure, at a foreclosure auction, or (if it didn’t sell at auction) in the real estate owned (REO) phase.

Pre-foreclosures

In order to identify properties that are in a pre-foreclosure status, you’ll need to locate loans that are in default. To do this, you may need to spend time in the courthouse researching foreclosure filings or subscribe to an online foreclosure reporting service that will do this for you. Once you find a property you’re interested in, you’ll need a title search performed to determine what liens are against the property, and you’ll need to contact the owner to negotiate a purchase. You’ll also need to have the property inspected (it may need some repair work) and then determine its market value. In making an offer on the property, consider the cost of paying off liens, repairing the property, and any other fees you’ll need to pay (such as those associated with securing financing to make the purchase).

This option requires a lot of legwork on your part and (preferably) the services of others experienced in the process. Contacting an owner (especially one who hasn’t listed the property for sale) can be difficult and stressful. However, pre-foreclosure sales may require minimum down payments, and you may be able to acquire a property at a good discount off its market value.

Auction sales

Once the foreclosure process is complete, the foreclosing lender (usually the holder of the first mortgage) may attempt to sell the property at auction–a fast-moving, public proceeding. Before you buy, you should have the title researched just as you would when making a pre-foreclosure offer. However, you generally won’t be allowed to have the property inspected beforehand (which precludes the possibility of obtaining a mortgage to purchase it), so you’ll be buying it “as is” and may not know all of what that entails. If you’re the successful bidder, you’ll need to make at least the required minimum down payment in cash (or with a certified check) on the spot and pay or finance the balance within 30 days, sometimes sooner.

Because you can’t first inspect the property and arrange financing, and because you must buy it “as is,” buying a property at auction can be very risky. However, you can receive a substantial discount off the market value of a property when it’s bought at auction.

Real estate owned (REO) properties

If a foreclosed property doesn’t sell at auction, the foreclosing lender takes possession of it. As a result, junior liens (such as second mortgages or home equity lines of credit) that may have encumbered the property’s title are discharged, and any taxes owed are paid. Any occupants remaining in the property are evicted, and the property is usually listed with a real estate agent.

At that point, the property becomes available for inspection. You may be buying an REO “as is,” but you’ll be able to find out what that means, and can adjust your purchase offer accordingly. While the lender holding the REO will try to get as much as possible for the property, it may consider discounts off market value in order to get the property off its books.

Purchasing an REO is probably the least risky way to buy a foreclosed property. You have time to arrange financing, and you may be able to obtain some discount off the property’s market value. However, the discount off market value will generally not be as substantial as with the other options for buying foreclosed property, and working with the bank can be a lengthy process.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

If you’re like most people, you probably bring your automobile to a professional mechanic for routine maintenance. You see a doctor when you have concerns about your health, and for regular exams. When the need for legal counsel arises, you consult an attorney. All of us rely on the expertise of others. It’s no different when it comes to personal finances–most people could benefit from working with a financial professional. Here are some good reasons to do so:

You don’t know what you don’t know

No one can be an expert on every subject. Managing your finances on a day-to-day basis is one thing; implementing a comprehensive investment plan to fund your retirement while setting aside funds for your child’s education is something else. That doesn’t mean that you’re not capable of doing it, only that you shouldn’t underestimate the expertise needed to put together an effective plan. If you’re going to go it alone, you’ll need to educate yourself, and that brings us to the next point …

You have good intentions, but never set aside the time

There’s an entire industry built around providing individuals with the tools they need to do their own financial planning. Books, magazines, websites, calculators, worksheets, and videos all empower individuals to take a more active role in their financial future, whether they’re working alone or with a financial professional. Not one of these tools, however, will help unless you set aside both the time to learn to use the tool, and the time to apply the tool to your own situation. Working with a financial professional forces you to stop procrastinating, and shifts the time commitment from you to the professional.

Doing it all yourself isn’t efficient

There’s a long list of things that we could do ourselves but choose to pay someone else to do for us instead. For example, you could paint your house, but you may be happy to pay someone else to do it. Why? It’s more efficient. You can spend the time working on other things and, if you choose the right professional, it will probably be done faster and better than if you did it yourself. The same goes for working with a financial professional.

You’re not objective

It’s hard to look at your own situation objectively. Having someone else with experience analyze your financial condition can be extremely helpful. And, in cases where you and your spouse aren’t on the same financial page, a financial professional can listen to all concerns, identify underlying issues, and help you find common ground.

Keeping up with change is a full-time job

In the last two years, there have been at least five major pieces of tax legislation signed into law. Even seasoned financial professionals have had a difficult time keeping up with the changes. Not understanding how these changes might affect your financial plan could be dangerous, but understanding the changes takes time and effort.

You see the trees, but not the forest

A good financial professional can help you see the big picture. He or she can show you how your financial goals are related–for example, how you might save for both your child’s college education, as well as your own retirement. He or she can work with you to prioritize your goals, implement specific strategies, and choose suitable products or services. A financial professional can also stay on top of your plan to make sure it remains on track, recommending changes when conditions, or your circumstances, dictate.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

For many married couples, when one spouse dies, all marital property passes to the surviving spouse. This means that the surviving spouse has sole responsibility for deciding what happens to that property when he or she dies. In the traditional family, this is rarely a concern. But, more and more often, the so-called traditional family is the exception, not the rule.

Remarriage can create unique estate planning concerns, especially if you want to provide for both your current spouse and your children from a previous marriage. In many cases, remarriage creates a situation of “yours, mine, and ours.” Your spouse may not have developed a close relationship with the children from your previous marriage, and may feel very little responsibility toward them. If this describes your family situation, you need to take positive steps now to ensure that your estate is ultimately distributed according to your wishes.

Why the logical solution may not be the best solution

A logical plan would be to leave all your property to a trust, allowing your spouse to live in your home rent free and live on the income from trust assets for the rest of his or her life. Then, when he or she dies, the property would pass to your children. This plan, however, could result in conflict between your surviving spouse and your children because:

* Your children’s investment objectives may not match your spouse’s

* Your children may watch every penny your spouse spends

* Your children may essentially be waiting for your spouse to die

Fortunately, there are other solutions that sever the money connection that is the source of the conflict described above.

Use life insurance

Life insurance can be a particularly effective method of providing for children from a previous marriage, and you have several options. First, you can make your children beneficiaries of a life insurance policy that you own. Second, your children can purchase insurance policies on your life, and you can gift funds to pay the premiums. Third, you can establish an irrevocable trust to hold life insurance purchased for their benefit. This third option is especially appropriate if you have minor children. In any case, your children are the beneficiaries of the life insurance policy, and you are guaranteed they will receive a certain amount of money when you die.

Name your children as beneficiaries of your retirement plan

Making your children the beneficiaries of your IRA or employer retirement plan is another way to provide for their needs after your death. Be aware, however, that you may need your spouse’s written consent if you wish to name anyone other than your spouse as the beneficiary of certain types of retirement plans.

Create a postnuptial agreement

Postnuptial agreements aren’t right for everyone, but they can help eliminate conflicts between your spouse and your children from a previous marriage. The agreement is a written contract between you and your spouse that states how property will be owned and distributed during the marriage, in the event of divorce, and at death.

Make your children joint owners

Giving your children joint ownership of property during your life will ensure that they receive that property upon your death. However, there are risks associated with this strategy. As joint owners, your children may have unlimited access to the property, meaning they would have the right to sell the property and use the proceeds for their own benefit. Also, the jointly owned property could be in jeopardy from your children’s creditors if your children run into financial difficulties, or they get divorced.

Leave your surviving spouse a lump sum

Consider leaving your surviving spouse a lump sum and dividing the remainder of your property among your children. Or conversely, leave a lump sum to your children and the remainder to your spouse. While this seems like a simple approach, there are instances when it can be very effective, especially if you have a relatively small estate.

It is important to note that there are income tax as well as estate and gift tax considerations associated with many of the options mentioned. See an experienced estate planning attorney for more guidance.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

If you used a credit card to make what turns out to be an unsatisfactory purchase, you should first seek a refund or a replacement from the merchant that sold you the item. But if you have no luck there, you may have some recourse through the credit card company.

There are some requirements. First, you must have used the credit card to purchase the merchandise for personal (not business) use. Second, if you’ve already paid the credit card bill on which the sale is listed, the credit card company generally won’t help you.

Additionally, the unsatisfactory purchase must have been made either with a charge card issued by the merchant or with a bank’s card. If the item was not purchased with the merchant’s own card, then the item must cost $50 or more.

Further, unless you used the merchant’s own card, the purchase must also have occurred within your home state or within 100 miles of your billing address. Catalogue sales, Internet sales, and orders placed by telephone may be considered in-state purchases. State laws may vary, but these purchases are generally protected.

If you’re unable to resolve the matter with the merchant, be sure to write the credit card company within 60 days of when the charge first appeared on your statement. Include in your letter your name, account number, information about the unsatisfactory item, and what you’ve done to try to resolve the matter with the seller.

The card issuer will usually investigate the matter, and you may withhold payment on the unsatisfactory merchandise until the matter is resolved. (Until then, no interest or late fees will be charged.) If the investigation reveals you are right and the merchant is at fault, you won’t have to pay for the item or any finance charges on it. However, if the card issuer doesn’t believe the merchant is at fault, you’ll be expected to pay for the item. If you want to continue the dispute with the merchant, you’ll have to do so in court.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Your credit score is the result of a mathematical formula that’s applied to all the information in your credit report (both positive and negative) and then compared to millions of other credit reports. The most common credit score is a FICO score, developed by the Fair Isaac Corporation. A variation of the basic FICO model is used by each of the three major credit reporting agencies: Equifax, Experian, and TransUnion.

Your FICO score is based on five categories, each of which accounts for a percentage of your total score:

* Your payment history: 35%

* An analysis of your debt: 30%

* The length of your credit history: 15%

* Recent inquiries/new credit activity: 10%

* Types of credit in use: 10%

The result is a three-digit number between 300 and 850 that estimates your level of credit risk. The higher the number, the lower the risk.

This number significantly affects your ability to get credit and the terms you’re offered. Generally, lenders consider people with scores above 700 to be in good financial health, and worthy of the best interest rates and credit terms. Those with scores below 600 are considered to be financially risky, and may be turned down for credit or offered stricter terms (higher interest rates, lower credit limits, and/or requirements for collateral or a cosigner or both).

To keep your score high:

* Pay your bills on time

* Repair any damage (i.e., overdue payments) as quickly as possible

* Keep your balances on your credit cards low (especially in relation to your credit limits)

* Pay off your debt

* Don’t open new accounts you don’t need

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

A financial cushion can improve your ability to survive bad times, but right now that cash may be earning a relatively low interest rate. However, try to think of it as you might insurance: your emergency fund is designed to be there when you need it. Here are some possibilities that balance safety with liquidity:

Interest-bearing checking accounts

Deposit accounts are federally insured up to $100,000, so they’re as secure as it gets. Bank deposit balances are insured by the Federal Deposit Insurance Corporation (FDIC); credit union balances are insured by the National Credit Union Administration. Lower costs often permit higher yields on online accounts, and minimum balances for online accounts also are typically low. However, depending on the institution, your access with an online-only account may be somewhat less convenient than you’re used to; for example, the number of deposits or check-writing privileges may be limited. An ATM/debit card linked to a checking account is convenient, but if the temptation to use it for a “retail emergency” proves too great, it could end up pulling the stuffing right out of your financial cushion.

High-yield savings accounts

Savings accounts typically offer higher interest rates than checking accounts. Again, some of the best rates may be available online. However, make sure you find out whether the yield quoted is an introductory rate and what minimum balance is required to get it. Also, some high-yield savings accounts require that a certain number of purchases be made using a linked credit or debit card–hardly appropriate for an emergencies-only fund.

Money market savings accounts

A money market savings account (MMA) may offer higher interest than a checking or even a regular savings account, but also may have some restrictions on access; for example, it may limit the number of transfers, withdrawals, or checks, and may require a higher minimum initial deposit or balance. (On the other hand, such constraints may force you to think twice before accessing that money without good cause.) MMAs generally invest in short-term commercial loans, CDs, and government securities.

Money market mutual funds

Money market mutual funds may offer higher rates than checking or savings accounts. Even though they may invest in similar types of securities as money market savings accounts, don’t confuse the two. An investment in a money market mutual fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. If you’re in a high tax bracket, consider municipal money market funds, which offer the federal tax advantages of muni bonds. A fund that concentrates on munis from your state also may offer state tax benefits.

Laddered cash equivalents

Certificates of deposit (CDs) or short-term Treasury bills provide less liquidity, but a laddering approach could improve your access while still limiting to some extent your ability to raid your fund without a good reason. For example, you might buy six CDs; the first CD matures in one month, the second in two months, the third in three months and so on up to six months. When the first CD matures, you could buy another six-month CD; you’d do the same with each succeeding CD at maturity. That would make some cash available once a month, and laddering lets you adapt to changing interest rates. A similar strategy could be used with short-term T-bills, available in maturities of 4, 13, 26, and 52 weeks. However, be aware that if you need to sell or cash in a CD early, you may have to pay a substantial penalty that could wipe out any incremental yield. In the case of a brokered CD sold before maturity, you also might suffer a loss. Also, interest rates could affect the value of a T-bill sold before it matures.

Short-term bond funds

Sometimes used as an alternative to a money market fund, short-term bond funds have typically offered higher yields with relatively modest increased risk (though they also are not FDIC-insured). However, recent credit market conditions have underscored their hazards. Short-term bond funds may be more stable than long-term funds, but some investors have been surprised at losses resulting from their fund’s exposure during the past year’s credit turmoil to investments considered relatively safe.

Whatever you use for your cash stash, have a plan for replenishing it after the emergency has passed.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

With average college tuition up 6.3 percent at private schools and up 6.6 percent at public schools this past school year, money management is a bigger issue than ever on college campuses. That’s why it’s good to send your freshman off to school with a 10-point plan on how to best manage their money:

Take baby steps with credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away. Parents may co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus.

Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and how banking fees (particularly for overdrafts) can eat away at their money. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. You want your child to be independent, but if necessary, make it a joint account and check those balances online.

Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza and mochas are not an emergency.

Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of the child’s “tax capacity” and other income tax opportunities. It will be a good learning experience.

Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.

Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to HYPERLINK “http://www.annualcreditreport.com” www.annualcreditreport.com for theirs.

Help them open their first IRA: Get some advice on this from a trusted financial planner but if your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in.

Discuss identity theft. Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your kid to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.

Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities freshman year so they’ll be in the front of the line when it’s time to apply.

Handle mistakes the right way: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.

August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Gay, a local member of FPA.

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Life insurance is primarily a product for families. If you have a spouse and children who depend on your income and you don’t have extensive resources, then life insurance is a useful tool to help them pay expenses. Single people without dependents typically don’t need the same amount of life insurance because they don’t have as many responsibilities that will outlive them.

Most financial planners would tell you that insurance is not a replacement for a long-term savings or investing strategy but an additional cushion. Depending on your financial situation, life insurance and its ancillary products can have some very attractive tax characteristics as well.

Who needs life insurance: Those with dependents, either children or friends or family members with special needs; with a nonworking spouse or one with an income substantially lower than yours or those with a big mortgage that will be too overwhelming for one income to pay off.

How much is necessary: Optimally, the right amount of life insurance allows your survivors to invest the insurance payout and then draw down the account over time in a way that matches the income you would provide if you were still around. You need to figure far more than a family’s basic living expenses adjusted for inflation. Also consider:

Education funds needed for each child from grade school to college.

Money to cover special health expenses for a family member already diagnosed at the time of the insured’s death.

Funds for child care if the surviving spouse needs to keep working.

Emergency funds that your survivors can keep in reserve.

Types of life insurance: There are six basic types of life insurance.

Term: Term life insurance is the simplest kind of life insurance because it pays if death occurs during the term of the policy, which is usually from one to 30 years. There are two kinds of term life insurance: Level term means that the death benefit stays throughout the duration of the policy, and decreasing term means that the death benefit drops in one-year increments over the duration of the policy.

Whole life/permanent: Whole life or permanent insurance has a level premium and pays a static benefit whenever you die. For this guaranteed benefit, whole life is usually the more expensive choice because it front-loads its costs into the early premium years of the policy so it can invest the money to pay for death benefits at the end of several years or decades. At a certain point, the policy owner will pay in enough where he or she will start accruing cash value on that money which can be withdrawn if the policy owner decides to cancel the coverage.

There are four types of permanent insurance:

Whole or ordinary life: This is the most common type of permanent insurance policy, offering a death benefit with a savings account. You agree to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.

Universal or adjustable life: This variation offers a little more flexibility, such as the possibility of increasing the death benefit if you pass a medical exam. The savings product attached to this kind of account generally earns a money market rate of interest, and after you start accumulating money in this account you’ll generally have the option of altering your premium payments. This helps if you lose your job or have some other financial misfortune.

Variable life: This policy lets you invest your cash value in stocks, bonds and money market mutual funds which is good if those investments go up. If they go down, your cash value and death benefit will shrink, but you need to make sure there’s a guarantee that your death benefit won’t fall below a certain level. This type of policy can be fairly risky for ordinary consumers.

Variable-universal life: This choice allows you the flexibility of premium payments with a more aggressive investment scenario for the cash value of the policy.

Life insurance proceeds don’t generally go into Uncle Sam’s collection plate, which makes life insurance an attractive purchase for many individuals hoping to maximize the amount to give to heirs. Yet life insurance can also be purchased in a way to give the living policyholder tax-free income during retirement. Since we’re talking about estate issues here, getting proper advice is critically important. The federal government’s current estate tax ceilings were set to expire in 2010, and this fact alone could affect the attractiveness of this strategy for your situation.

August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Gay, a local member of FPA.

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If you’ve thought about buying or building a vacation home, but have hesitated because you aren’t sure that you want to limit yourself to a single location, there’s an alternative you may want to consider: purchasing a membership in a destination club.

What are destination clubs?

Destination clubs are becoming increasingly popular. In return for a one-time membership fee and annual dues, destination club members are allowed to use a club’s global network of luxurious properties for a certain amount of time each year, depending on their membership level. Club holdings are generally restricted to high-end
properties–typically those with values of $1.5 million to $3 million. Accommodations are usually large, luxurious private homes, villas, and apartments that are located in travel hot spots such as cities and resort areas. They offer upscale amenities, and a host of personal services.

A destination club or a vacation home?

If you’ve ever fallen in love with a vacation spot, you know that there are some places worth going back to. You may be happy to own a home in a favorite locale and travel to it year after year. One of the main advantages of owning a vacation home is that you’re in the driver’s seat. You can use the property as often as you like, invite friends or family members to use it, or even rent it out. You can also customize your home and decorate it as you wish. But no matter how much you enjoy owning a vacation home, there’s no escaping the fact that it’s a big responsibility. You have to worry about maintaining it, and you must handle all expected–and unexpected–expenses.

The hallmark of a destination club, on the other hand, is flexibility. Joining a destination club allows you to travel to many different places and stay in homes spacious enough to accommodate your family and friends, without the hassles of owning vacation property.

Comparing costs

To compare a destination club membership financially with the purchase of a second home, you have to consider the upfront and ongoing costs of each. Some costs may be similar. For example, maybe you’re considering a destination club with a one-time membership fee of $300,000 and annual dues of $25,000. Alternatively, you could buy a comparable property, let’s say one that’s worth $1.5 million. If you opt to finance the home, your $300,000 (20%) down payment would be equivalent to the destination club’s membership fee, and the amount you’ll spend annually on home maintenance and utility costs could be equivalent to the destination club’s annual dues. (Of course, financing the remaining $1.2 million of the home’s purchase price will also mean making significant monthly payments.)

Costs can vary widely, however. Initial membership fees for a destination club typically range from $100,000 to $1 million or more, and annual fees typically range from $10,000 to $75,000 or more. Home ownership costs may include mortgage expenses, taxes, insurance, utilities, and maintenance (which may be offset somewhat by any rental income you receive).

Another variable to account for is what you’ll get for your money. Destination club memberships entitle you to a certain number of days of use annually, whereas you can use a vacation home as much as you’d like. You’ll also need to take into account home values. For example, joining a destination club may entitle you to stay in a home worth much more than one you could afford to buy (and will also give you access to personal concierge services), but it depends on the specifics.

As a vacation home owner, you can decide when to sell your property, and you’ll benefit from any appreciation in value. Destination clubs, on the other hand, are frank about the fact that becoming a member should be viewed mainly as a lifestyle decision, rather than as an investment decision, although some do allow you to benefit directly or indirectly from any appreciation in the club’s property values. Most destination clubs also have provisions that enable you to “cash out” your membership at your request. For example, you may be allowed to cash out your membership for a specified percentage of the membership fee being charged at the time (generally 80% to 100%). If that’s the case, you might benefit if you cash out at a time when the club’s holdings have risen in value and membership fees are higher than when you joined.

Do your homework

When you join a destination club you’re committing a substantial amount of money. So, make sure that the club is financially sound. Get information about the club’s finances, and carefully read materials and contracts before you sign on the dotted line.

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Copyright ©2008 Forefield Inc. All Rights Reserved.

A Parent PLUS Loan is a federal student loan available to parents with good credit histories who want to help pay for their dependent child’s undergraduate education. (A similar Graduate PLUS Loan is available to graduate students.) Under the program, parents can borrow up to the full cost of their child’s college education each year, less any financial aid received. For example, if college costs $30,000 this year and a student receives $10,000 in financial aid, parents would potentially be eligible for a $20,000 PLUS Loan. To qualify, students must be attending an eligible school at least half time.

PLUS Loans aren’t based on financial need; parents need only pass a credit check. Under new federal legislation passed in May, parents who are delinquent up to 180 days on their home mortgage or medical debt will still be considered creditworthy to borrow under the program.

The interest rate on all PLUS Loans issued on or after July 1, 2006, is capped at 8.5%. (For PLUS Loans issued before this date, the interest rate is variable, adjusted each July, and capped at 9%.)

Interest begins accruing upon the first loan disbursement, but thanks to the recent legislation, parents have the option to defer repayment of the loan for up to six months after their child leaves school. Previously, repayment was required to begin within 60 days of the last loan disbursement for that year.

PLUS Loans can be made either by private lenders who participate in the Federal Family Education Loan Program (FFELP), or directly by the federal government under the William D. Ford Federal Direct Loan Program. The federal government recently took steps to pump liquidity into the FFELP market due to turmoil in the general credit markets, so fund availability isn’t expected to be a problem.

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Copyright ©2008 Forefield Inc. All Rights Reserved.

It’s hard to say whether the credit crunch will prevent students from obtaining the financing they need to pay for college. According to the College Board, last year students and their families borrowed nearly $60 billion in federal loans and $17 billion in private loans for college. In order to understand the current student lending market, some background is helpful.

Federal student loans. Under the Federal Family Education Loan Program (FFELP), private lenders receive subsidies from the federal government to issue federal student loans at reduced interest rates. But last year, Congress slashed subsidies to FFELP lenders. This, coupled with tightening credit and near paralysis in the secondary debt markets, created the perfect storm–a student lending market in potential turmoil due to the unwillingness and/or inability of some private lenders (to date more than 50) to make, package, and sell federal student loans.

The problem was big enough to attract the attention of the federal government–legislation passed in May allows the Department of Education to buy billions of dollars in federal student loans from private lenders to keep money flowing into the widely used FFELP. The consensus is that there will be enough federal student loan money–Stafford, Perkins, and PLUS Loans–in the FFELP to go around for the 2008/09 academic year.

Private student loans. Over the past decade, the use of private student loans to finance college has soared as federal student loans fail to keep up with rising costs. This year, college students in need of private loans are expected to face higher interest rates and more stringent credit checks. Unfortunately, this means that some students who qualified for a loan last year may not this year, or they may have to pay a higher interest rate. The federal government has not proposed buying private student loans, so lenders will be on their own to raise the necessary capital.

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Copyright ©2008 Forefield Inc. All Rights Reserved.

When times are tough, that pool of dollars sitting in your 401(k) plan account may start to look attractive. But before you decide to take a plan loan, be sure you understand the financial impact. It’s not as simple as you think.

The basics of borrowing

A 401(k) plan will usually let you borrow as much as 50% of your vested account balance, up to $50,000. (Plans aren’t required to let you borrow, and may impose various restrictions, so check with your plan administrator.) You pay the loan back, with interest, from your paycheck. Most plan loans carry a favorable interest rate, usually prime plus one or two percentage points. Generally, you have up to five years to repay your loan, longer if you use the loan to purchase your principal residence.

You pay the interest to yourself, but …

When you make payments of principal and interest on the loan, the plan deposits those payments back into your individual plan account. This means that you’re not only receiving back your loan principal, you’re also paying the loan interest to yourself instead of to a financial institution. But the benefits of paying interest to yourself are somewhat illusory.

Here’s why. To pay interest on a plan loan, you first need to earn money and pay income tax on those earnings. With what’s left over after taxes, you pay the interest on your loan. When you later withdraw those dollars from the plan (at retirement, for example), they’re taxed again because plan distributions are treated as taxable income. In effect, you’re paying income tax twice on the funds you use to pay interest on the loan. (Note: Special tax rules apply to Roth 401(k) contributions.)

The opportunity cost

When you take a loan from your 401(k) plan, the funds you borrow are removed from your plan account until you repay the loan. While removed from your account, the funds aren’t continuing to grow tax deferred within the plan. So the economics of a plan loan depend in part on how much those borrowed funds would have earned if they were still inside the plan, compared to the amount of interest you’re paying yourself. This is known as the opportunity cost of a plan loan, because you miss out on the opportunity for more tax-deferred investment earnings.

Other considerations

There are other factors to think about before borrowing from your 401(k) plan. If you take a loan, will you be able to afford to pay it back and continue to contribute to the plan at the same time? If not, borrowing may be a very bad idea in the long run, especially if you’ll wind up losing your employer’s matching contribution.

Also, if you terminate employment, your plan may require that your loan become immediately payable. If so, and you don’t have the funds to pay it off, the outstanding balance will be treated as a taxable distribution to you, and if you’re not yet 59½, a 10% early distribution penalty may also apply to your taxable balance.

Still, plan loans may make sense in certain cases (for example, to pay off high-interest credit card debt, or to purchase a home). But make sure you compare the cost of borrowing from your plan with other financing options, including loans from banks, credit unions, friends, and family. To do an adequate comparison, you should consider:

• Interest rates with each alternative
• Whether the interest will be tax deductible (for example, interest paid on home equity loans is usually deductible, but interest on plan loans usually isn’t)
• The amount of investment earnings you may miss out on by removing funds from your 401(k) plan

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Copyright ©2008 Forefield Inc. All Rights Reserved.