Carnival Round Up For The Week #4

Here are the Carnivals from this past week that I am reading :

The Carnival of Personal Finance #90 is hosted by Mapgirl's Fiscal Challenge	My Carnival choice is $5k Crunch presented by InsureBlog, which shares the numbers on how everyone CAN afford mandatory health insurance, no matter what their income. Given that a health catastrophe can be major wealth destroyer, I agree. I would not take risk of not being insured.
Towards Better Life #6 is hosted by Toward Better Life.	My Carnival pick is When Not to Buy a House posted at Silicon Valley Real Estate Blog, which list five reasons when one should avoid thinking about buying a house. I absolutely agree with him, especially his point about needing an "exotic mortgage."
The Carnival of Money Stories #6 is hosted by Money, Matter and More Musings.	My Carnival choice is Timeshares: Should we buy one? at It’s Just Money. A great story that illustrates my opinion about buying a timeshare - The best deal one gets is in the sales presentation - i.e. the free dinner, gift or lodging. For me, "no" is the right answer on whether to buy.
The Carnival of Taxes #13 is hosted by Gina's Tax Articles.	My Carnival pick is Money Monday: Choosing A Tax Professional Is No Longer a Coin Flip by Queercents. This article is an excellent, comprehensive and informative post on how to choose and evaluate a tax professional. I would add, "Get a referral from a financially savvy colleague or friend who has worked with a good tax professional."
The Festival of Under 30 Finances is hosted by Money $mart Life.	My Festival choice is Ouch: Experiencing Volatility posted at An English Major’s Money. Stock market investing is always fun in a rising market. In today's choppy markets, volatility and stomach wrenching drops are the norm. While I don't like it, I believe the latter situation is what one needs to expect for the next few years.

I hope you enjoy reading these Carnivals and finding tips you can use.

Check back on Saturday for the next Reflections and Musings segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

IRA Choices - Roth or Traditional?

All IRAs provide for tax free earnings. Some IRAs have additional tax benefits, either at the beginning (contribution) or at the end (withdrawal). Deciding which IRA to use will depend on whether one wants the additional tax benefit earlier or later. Here is how I see the choices.

Deductible Traditional IRA - If qualified for this IRA, the entire contribution (maximum $4000 per person) is deductible from one's taxes. For people in the 25% tax bracket, a $4000 deductible IRA contribution will results in a $1000 tax refund. A deductible traditional IRA is a great way to use other people's money to fund one's retirement. For details on qualifying for a deductible IRA contribution see 2006 IRA Contribution Deadline is April 17, 2007.

Withdrawals from a deductible traditional IRA are fully taxable.

Roth IRA - Contributions to a Roth IRA are not deductible. However, withdrawals from a Roth IRA during retirement (after 59 1/2) are federal income tax free.

The idea of paying zero taxes is very appealing to me :-) On the surface, this seems like the better deal to me.

Which is the better financial choice - a Roth or Deductible Traditional IRA? To determine the answer, I looked at two situations. In both situations, I assume that the retiree will need 100% of their pre-retirement income and therefore, have the same tax rate (25%) before and after retirement. Also, I assume earnings of 10% over 30 years in both taxable and non taxable accounts.

In the first situation, I assume that the person needs to spend the tax savings. Thus, they invest $1000 less in the Roth IRA, which is equivalent to the tax savings of the deductible IRA. This case shows no difference between the two types of IRAs.

	Spend Tax Savings
IRA Type	Contribution	Tax Rate	After Tax Value
Traditional	$4000	25%	$20182.5
Roth	$3000	0%	$20182.5
Difference			$0

In the second situation, I assume they invest the tax savings in a taxable retirement account. This example shows that the Roth IRA will have about 10% higher earnings return, over 30 years. The reason is that the $1000 invested in a taxable account will not earn as much as investments in the tax deferred accounts.

	Invest Tax Savings
IRA Type	Contribution	Tax Rate	After Tax Value
Traditional	$4000	25%	$24430.35
Roth	$4000	0%	$26910
Difference			-$2479.65

Of course, if future tax rates are lower (not likely) or Roth IRAs become taxable (more likely) the conclusions from these analyses will be more favorable for the deductible IRA.

Finally, the actual best choice will depend on each person's own financial situation. Please consult your personal financial advisor before taking any action.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Lessons From My Daughter - "New One"

Halloween 2006 was our two-year old daughter's first time to wear a costume and go Trick or Treating. At first, she was reluctant to do it. Walking up to a house, ringing the doorbell, saying "Trick or Treat," accepting candy, and saying "Thank You," were not activities she had done before.

For the first five houses, she stayed close to me, informing everyone she was with Daddy. However, at each successive house she was more comfortable with one of the activities. By the sixth house, she was doing all the elements on her own and adding another one. As we left each house, she would immediately say "New one," meaning for us to get to the next house. "New" was something exciting and something to anticipate.

"New" is a concept that I think is important to maintain as I get older - new experiences, ideas and opportunities. For me, when was the last time I thought, "New career," or "New location?" Sometimes I spend so much effort reducing risk and optimizing the current situation that I forget there are unbounded new opportunities waiting. Too often, the thought is stay with what's known and avoid the "new."

So how can I flip the natural tendency to maintain the status quo? How might I make new the norm instead of the exception? As my daughter taught me, it might be as simple as being willing to look for and be ready to experience "new ones."

For more on Crossing Generations, check back every Thursday for the next segment.

Photo Credit: morgueFile.com, Dee Kull

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Investing 101 - Lump Sum Performs Better Than Dollar Cost Average

In Make IRA and College Fund Contributions in January, I shared the benefits of making my entire 2007 529 Plan (college savings account) and 2007 IRA contributions in January. Several readers questioned whether it was prudent to invest a lump sum contribution, given the risk of a short term downturn in the market. (An even more appropriate question given the market results for the past week:-)

I recalled, but could not find, an article that concluded even if one had invested at the S&P peak every year, one would still have good investment returns. However, I did find this article, Lump Sum Beats Dollar-Cost Averaging, which share an analysis that shows lump sum (LS) investments beat dollar-cost averaging (DCA) about 60% of the time from 1926 to 1991. This difference was statistically significant. Based on this information, The Sun's Financial Diary did his own analysis and concluded that not only did DCA have lower returns, but that the volatility with DCA was also higher.

As it turns out, the further analysis shows that investing one's money as soon as possible is the right strategy. This is true primarily because the markets have been rising over the long term since 1926. So waiting to invest LS will likely return less that DCA. Of course, if the market should to into a prolonged decline (20+ years), the results of the study will no longer hold true.

On the other hand, dollar-cost-averaging significantly reduces the impact of market risk versus a single purchase. For instance, if one had invested LS versus 1/12 the amount in a monthly DCA prior to decline on February 27, 2007, the market impact on your entire investment woudl have been very bad. This phenomena is discussed in Dollar Cost Averaging - A Technique that Drastically Reduces Market Risk. Also, psychologically, it feels less risky to use DCA since DCA enables one to benefit should there be a drop in the market, as there was last week.

Net, one needs to use the strategy with which one is most comfortable. However, the data show, that one needs to be invested, whether that be using LS or DCA. Otherwise, one risks missing out on the long term trend of a rising stock market.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Telephone Excise Tax Credit - Claim It or Lose It

How many of us would walk past a $20 bill on the ground and not pick it up? That's what 30% of tax filers have done to date. Out of 34 million tax returns filed, 10 million have not claimed the telephone excise tax credit, according to the IRS . About half of the returns that didn't claim the credit were done by tax professionals.



Here's what one needs to do to get the credit:

Everyone who has had long distance or bundled service qualifies for the tax credit, even if one does not file a tax return. Net, nearly every tax filer qualifies.

Here's how to take the standard credit: Use the number of exemptions on line 6d to calculate the credit. Go to Line 71 on the 1040 and enter the amount based on the claimed exemptions.

Exemptions on Line 6d	Tax Credit on line 71
One	$30
Two	$40
Three	$50
Four or more	$60

If you think you may have paid more taxes (due to high amounts of long distance calling or use of bundled services), Form 8913 can be used to calculate the exact credit amount. This method will require one to have copies of the billing statements from March, 2003 to July, 2006.

Personally, I am using the standard credit allowed by the IRS. I did a quick check of our current bills and we don't make enough long distance calls nor have enough bundled services that would cause the tax to exceed the standard credit.

For more on Ideas You Can Use , check back Tuesdays for a new segment.

Photo Credit: morgueFile.com, Anita Patterson Peppers

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

2007 Wealth Building Plans - February Review

“He who fails to plan, plans to fail.” - Proverb quote

As a reminder, I have three financial goals for 2007:

1. Keep investment income to salary ratio >0.8.
2. Increase savings to salary ratio by 1.5.
3. Decrease debt to salary ratio by 0.1.

Next month I will publish how I have done versus these goals in Q1 2007.

Below is my plan for the Q1 2007, broken down by month. I have crossed out the items that have been completed. The red items are late. Blue items were completed ahead of time. Green items were added after the initial plan was developed.

January	Send payment to pay down 4% of mortgage principal. Make maximum 2007 IRA contribution. Make maximum 529 plan contribution for college. Meet with Financial Advisor to review investments status. Consolidate tax records by end of month for April 15th filing. Get preliminary estimate of capital gains from stock investments. Adjust automatic savings deposits to be 20% of salary. Review stock selection model and invest in picks. Allocate a portion of 401K to international funds. Executor work - complete transfer of assets to trust.
February	Do first draft of 2006 tax return. Make full year contribution to Church via appreciated stock. January Executor work - complete getting basis for 2005 and 2006 returns. Open up UTMA account for daughter.
March	Final draft of 2006 tax return. Review Company retirement plan results. Calculate Q1 Wealth Ratios.

Overall, I am satisfied with the completion of action items for February, 2007. For our tax filing work, the first draft shows I will not trigger the AMT tax for the first time in two years. However, I will owe a large tax payment due primarily to capital gains for stock sales. I opened up a UTMA for my daughter's future allowances. And we will get a free IPod Nano for opening the account. In addition, I completed compiling the basis for Dad's stock sales in 2004. I was very impressed that he had one stock go up about 500% from 2002 to 2004.

My only outstanding task item is the executor work that I wanted to complete in January. Given the lighter task load in February, I thought I would complete the executor work in that month. I have completed about 1/2 of it and will continue to work on it in March. The work is not difficult, but requires a lot of effort since new accounts need to be opened for each DRIP. Each new account requires the same amount of documentation. This work continues to confirm my personal decision to avoid using DRIPs.

For more on Strategies and Plans , check back every Monday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Q1 2007 Stock Purchases Update - Closed All Positions

This week the market got ugly and I got out. In addition, my stock picking system had sell signals for Biogen and Apple, leaving only Avnet and Coach as buys. I sold all of the positions I had purchased in the first quarter of 2007 for my personal account. Next week, I want to confirm the direction the market. I will be looking for the market to clearly reach a bottom and resume rising before making any new stock purchases.

Here's how my Q1 2007 purchases performed:

Stock (Sell Date)	Ticker	Shares	Purchase Price 1/22/07	Sell Price	Gain Loss	Percentage Gain/Loss
Avnet (2/27/07)	AVT	200	$26.115	$35.54	$1,885.66	36.1%
Coach (3/2/07)	COH	50	$44.01	$47.81	$190.50	8.6%
Biogen Idec (3/2/07)	BIIB	50	$51.14	$44.35	$339.47	13.3%
Genlyte (3/2/07)	GLYT	50	$76.5	$69.93	$328.47	8.6%

The overall gain is $1,407.75 and return of 10.2% on a total investment of $13,805.50, excluding commissions. Long term, I am still bullish as I think corporate earnings will continue to be strong this quarter. At this time, I believe the market may have a correction that could last a couple months. Therefore, I have sold all of my Q1 stock purchases, plus Apple, which I had owned since 2006.

For more New Beginnings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Carnival Round Up For The Week #3

Here are the Carnivals from this past week that I am reading :

The Carnival of Personal Finance #89 is hosted by Binary Dollar.	My Carnival choice is Free Money: Federal Excise Tax Refund posted by Simple Guru. This is about the one-time $30-$60 tax credit for a federal phone tax from 2003-2006. I chose this post because many filers have not taken the credit. To date, out of 34 million filers, 10 million people have not claimed the credit, which is available to everyone. (I think the reference is a Wall Street Journal article, which I can't find at the moment.)
The inaugural edition of the Investors Blog Network (IBN) Festival is hosted by BioHealth Investor.	My Festival pick is Big Business Betting on Your Second Life! presented by SciTech Investor. Virtual money=Real money, virtual lives and real companies - an exciting blurring between reality and what can be. However, I agree with SciTech Investor that my real life (versus a virtual world) is where I want to spend my time.
The Carnival of Family Life is hosted by Modern Sage.	My Carnival choice is Do It All presented by Home School Daze, which points out that a good strategy may be to choose a few things versus doing it all. I fully agree. Doing what's important or needed (and avoiding the unneeded or unnecessary) should be the highest priority.
The Festival of Frugality #63 is hosted by Stingy Students.	My Festival pick is My 25 Frugal Habits & 5 Spendthrift Confessions by The Frugal Duchess, which make the point that no one is 100% perfect in their strategies. While every habit is not for everybody, the list is a good starting point if one is looking for ideas. Personally, I use about 10 of the frugal habits described.
The Carnival of 30s and 40s Personal Finances: The Wealth Accumulation State is hosted by Making Our Way.	My Carnival choice is presented by the host, Making Our Way, and is titled Thoughts on portfolio construction & All About Asset Allocation. The post reminded me that Small Cap and Value stocks tend have higher returns over the long term. In thinking about my own portfolio, I am under represented in Small Cap, at this time. The reason is that, historically, Large Caps outperform Small Caps in the later stages of the economic recovery, which is the current stage, theoretically. Based on this article, I am going to revisit my Small Cap portfolio allocation.

I hope you enjoy reading these Carnivals and finding tips you can use.

Check back on Saturday for the next Reflections and Musings segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

A Very, Very, Bad Retirement Plan

"You know horses are smarter than people. You never heard of a horse going broke betting on people." - Will Rogers

Tonight's jackpot for the Mega Millions is $267,000,000 with an estimated cash payout of $163,983,325. While I don't typcially play the lottery, I'm going to buy a ticket (or maybe two:-) for tonight's drawing. Here's why I am playing:

The cash payout is reasonable given the odds of winning are 1:175,711,536.

It is a reasonable amount of entertainment for one dollar. For a few hours, my ticket has the potential to return a lot of money.

Here's why I don't play the lottery regularly:

The odds of winning are 1:175,711,536. As Durago Bill points out in Mega Millions Odds, even at a $163,983,325 jackpot, the statistical return on every $1 ticket is only $0.60. So it's a bad return, statistically. Unless, of course, one is holding a jackpot ticket :-)

While it is reasonable amount of entertainment for one dollar, investing a dollar a day produces a guaranteed jackpot.

Part of the money is used for our schools. I don't like the concept of putting the money to good use to convince me to make a bad decision.

So even though I don't usually play the lottery, I will do it today. It's one of the bad personal finance decisions that I make four or five times a year:-) On Sunday, the dollar I might have spent on a lottery will be put back into savings.


For more on Reaping the Rewards, check back every Friday for a new segment.

Photo Credit: morgueFile.com, Clara Natoli

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Lessons From My Dad - Create Guaranteed Income Streams

As we have been working through the estate of my father, I continue to learn more about investing and retirement finances. My Dad was a pretty smart guy. In retirement, he was receiving 10% more guaranteed income than in his final job. He did it by creating multiple guaranteed streams of income during retirement. There first three streams are ones that people typically get. The last two streams are significant ones he created from real estate investments.

Pension - He receive a small pension from his final job with the government. The monthly pension amount essentially covered his retiree health insurance payments. This was 10.3% of his retirement income.

Money Market Interest - He kept earned a little bit from money market accounts which maximized his return on waiting cash. 2.7% of retirement income.

Social Security - Since Dad retired at 72, he did not start taking social security payments until 70, the maximum age one can start the payments. As a result, he received the maximum social security payment. When he passed away, the payment amount was transferred to my mother.

As it turned out, Dad was ahead of his time. When he retired, the common recommendation was to begin social security payments at 62, to maximize one's total payments. The current recommendation is for married couples to wait until 70, the latest age possible. This is because the lifespan of one of the couple is usually past the break even age of 80.

Social security payments were 42.5% of my parent's retirement income.

Rental Income - Dad had invested in a very successful joint venture real estate partnership. The monthly payments were 36.6% of their retirement income

Mortgage Interest - For one of the properties Dad sold, he was the first mortgage provider. As a result, he received a payment from the buyer every month for 7.9% of their retirement income.

As one can see, without the real estate investment income, my parent's retirement income would have been reduced by 44.5%. Quite a difference in income. My parents also had investments in stocks, but they never spent any that component since their guaranteed streams of income were more than sufficient.

I now understand why Dad was always encouraging me to invest in real estate.

For more on Crossing Generations , check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC