Our Daughter's Investment Earnings Won't Be Taxed

According to 2007 federal income tax laws, dependent children under 18 can earn up to $850 of interest or dividend income and owe zero income taxes. From $850 to $1700, the child's investment earnings are taxed at 10%. Above $1700, the child's investment earnings are taxed at the parents rate.

For 2007, our daughter received interest from our UTMA (Uniform Transfer to Minors Act) account and dividends from her grandparent's UTMA account. The total of the earnings was less than $850 and thus, she owed no income tax. In addition, since her earnings are below the amount for one exemption, she does not need to pay state taxes either.

Any investment earnings by our daughter's UTMA accounts will be tax free until $850 is reached. If the funds had been saved in our (the parent's) or her grandparent's accounts, the earnings would have been taxed at the parent's or the grandparent's tax rates. While the tax on $850 may not seem very large, using a UTMA account reduces our overall family taxes by $200 to $250 versus the case having the $850 in our (the parent's) income. For me, $200 saved in income taxes is $200 earned :-)

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

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

Copyright © 2008 Achievement Catalyst, LLC

Why We're Keeping Our Mortgage In Retirement - For Now

One of our retirement goals was to be debt free, including not having a mortgage. However, when I retired in my forties in October, 2007, we were still about 12 years away from paying off our mortgage. For now, we have decided to keep paying on our mortgage for at least the next few years. Here are our reasons for keeping the mortgage:

1. Payoff size. Although our loan principal is about 45% of our home value, it would still require about 138 times our monthly payment to pay off the mortgage. In other words, we can pay our mortgage for 11.5 years with the money needed to payoff the loan. From a different perspective, the money required was 7.7% of our total savings. Overall, I thought it was less risky to continuing paying the mortgage than to reduce our savings by 7.7%



2. Ability to use the deductions. Since our investments and converstions to Roth IRAs will create income, I can still use the mortgage deductions to reduce taxable income. If we didn't expect to have taxable income, the deductions would not be as useful.



3. Low interest rate. We currently have a 5-3/8% fixed interest rate. By investing in the stock market, we hope to achieve 8-10% gains with the funds. Hopefully, the next couple years of stock market returns will be better than January, 2008:-)

Originally, we wanted to pay off our mortgage by retirement. Doing so would reduce our monthly expenses by 21%, which made the pay off option attractive. However, after doing the above analysis, we determined it would be advantageous to delay paying off the mortgage for at least a couple years. Keeping the mortgage will help us have more liquid savings, which can be a buffer against stock market fluctuations.

For more on The Practice of Personal Finance , check back every Wednesday for a new segment.

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

Copyright © 2008 Achievement Catalyst, LLC

Options For Our Tax Rebate - Reduce Debt Or Save

I know the proposed tax rebates are designed to encourage spending to help the economy. However, I consider the tax rebate a windfall that we can use to help build our wealth. Here are five options we will consider for our rebate:

1. Pay down debt. Our only debt is our home mortgage. The tax rebate could be used to pay down principal and accelerate the pay off of the loan. If we had credit card or other consumer debt, we would pay against those amounts first.



2. Put in tax deferred savings. The tax rebate can help fund our IRA accounts. We've already made our 2007 contribution. The rebate would give us a head start on our 2008 contribution.



3. Add to college savings accounts. We have been making regular yearly contributions to our three year old's college 529 plan. Since we have already made the 2008 contribution, we could put the tax rebate towards the 2009 contribution.



4. Increase savings for a future purchase. We prefer to pay cash for our major purchases, by saving the money and paying lump sum. We have a couple of home improvements for which we are saving. Also, we will likely replace a car in the next five to ten years. The tax rebate would accelerate reaching our savings goal in these areas.



5. Boost general funds. Since we retired in our forties last year, we no longer have a separate emergency fund and expense fund. It is all one general fund, and we keep short term needs (e.g. about three years) in cash, bonds or CDs. If we were still working, I would add the tax rebate to our "emergency" funds.

Our goal will be to avoid the "impulse purchase." I'm sure there will be a lot of "tax rebate" sales in May, 2008. Flat screen HDTVs, new cars or car leases, and vacation packages will all be competing for the tax rebates. Unless the item is already in our plans, we won't be spending money on it.

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

Photo Credit: morgueFile.com, Jane M. Sawyer

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

Copyright © 2008 Achievement Catalyst, LLC

1/28/08 Stock Purchase Update - Recovered Slightly

In my 1/21/08 stock purchase update, I wrote about how the 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) was performing. In that article, the portfolio had pulled back further to a gain of $1,072, yielding only a 7.5% return. As of 1/25/08, the portfolio had rebounded slightly to a gain of $1,479 for a 10.4% return, due mainly to a jump in POT. The portfolio is now down 16.7% from its high on 12/28/07. The new purchases of PCU, CNH and BHP are down $1,588 for a 14.9 % loss. Both PCU and BHP continue to have large losses of 19.3% and 11.4% respectively. CNH dropped $7.20 this past week due to disappointing forward guidance. CNH now has a loss of 12.5%. Here's the current status of the stocks I own in the portfolio:

	My Wealth Builder 10/15/07 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 1/25/08
Potash (POT) [6/7/07]	50	$71.59	$132.74
Southern Copper* (PCU) [11/13/07]	40	$108.24	$87.28
CNH Global NV (CNH) [11/13/07]	50	$55.22	$48.34
BHP Billiton (BHP) [11/27/07]	50	$71.54	$63.42

*On 1/18/2008, the system gave a sell signal for PCU. I will sell PCU during an upcoming market rally, hopefully above the purchase price.

The market activity continues to be downward and ugly. As of the close on 1/25/08, the Dow, Nasdaq and S&P 500 indices were down 8%, 12.3%, and 9.4% year to date. Unfortunately, there are no indications that a turnaround will occur soon.

I continue to believe that the probability of a recession in 2008 is relatively high. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in January, 2008 may cause the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008. At this time, I will continue to hold this portfolio. However, I do not plan to add any more to the amounts that I have already invested in the above table.

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

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

Copyright © 2008 Achievement Catalyst, LLC

Making Small Purchases Of Stocks On My Updated Buy List

Over the last two weeks, I made 20 to 25 share purchases of six stocks. Five were new positions: Intuitive Surgical (ISRG), Priceline (PCLN), Apple (AAPL), Core Labs (CLB), and Research in Motion (RIMM). I also added to our existing position of Google (GOOG). As of Friday, January 25, 2008, these stocks were down between 13% to 36% from their peaks.

The basis for choosing these stocks comes from three stock picking systems, of which the first two I have been using regularly:

A Modified Unemotional Investor Growth System. I have been using this system for a little over three years, with relatively good results. For a short summary of the system, see My Stock Picks for Q1 2007. The current picks in this system are: Apple (AAPL), Potash (POT), and Research in Motion (RIMM). I already own Potash since it has been a consistent pick of the system since June, 2007. I purchased 25 shares each of Apple and Research in Motion on 1/17/2008.

Core Holdings. Our Core Long Term Stock Holdings shares three stocks, Google (GOOG), Amazon (AMZN) and General Electric (GE), that I believe are positioned for excellent results over the next 20 years. Although, these stocks are down 24%, 23%, and 19%, respectively, from their highs, I believe their fundamental business models are still very good.

Last week, I added 20 shares to our position in Google. I may purchase additional shares of Amazon this week. I don't plan to add to the General Electric position, for now.

Unemotional Investor Growth Top 5. This is using one of the systems shared by Robert Sheard in his book The Unemotional Investor. The current picks using this system are: Intuitive Surgical (ISRG), Priceline (PCLN), Apple (AAPL), Core Labs (CLB), and Potash (POT). Since I already owned Apple and Potash from the Modified Unemotional Growth System, I only purchased Intuitive Surgical (20 shares) and Core Labs (25 shares).

Here are the results as of Friday, January 25, 2008 for these new purchases:

	My Wealth Builder January, 2008 Purchases
Stock [purchase date]	Shares	Purchase Price	Current Price 1/25/08
Apple (AAPL) [1/17/08]	25	$160.93	$130.01
Research in Motion (RIMM) [1/17/08]	25	$88.71	$91.05
Intuitive Surgical (ISRG) [1/18/08]	20	$261.81	$269.00
Priceline (PCLN) [1/18/08]	25	$92.33	$104.58
Core Labs (CLB) [1/25/08]	25	$116.25	$112.65
Google (GOOG) [1/25/08]	20	$582.66	$566.40

The results have been mixed so far. This portfolio is down $679 for a loss of 2.4% due primarily to the declines of Apple and Google. The market action of this week will prove whether I bought these stocks too early, or if I anticipated a short term bottom correctly. If the market declines further, I plan to hold on to these positions. If the market rallies significantly, I may take some profit as the rally appears to weaken.

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

This is not financial or stock investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Week In Review - Too Much, Too Late

Wow! What a week. It was a quite an exciting one for the financial markets. Here were the key events:

Bernanke blinks. On January 22, 2008, the Fed cut the fed funds rate by 0.75% from 4.25% to 3.5%, the largest cut since records were kept in 1990 and the first change between meetings since 2001. Currently, the Fed is expected to cut interest rates by another 0.50% at next weeks meeting. Quite a change from the Fed's position in August, 2007 which indicated that no action was needed.

Wild market volatility.On January 23, 2008, after being down almost 300 points, the Dow reversed itself in the last three hours and closed up 298 points. Some are claiming the bottom has happened. Others are claiming the bear market has only just begun. Either way, watching the market gyrations has been exciting. Trading in this market is better than ________. (Put in your own noun. My noun is "blogging." :-)

Politicians working together. The Stimulus Package of 2008 has been announced, after three days of discussion. If only the parties could work together regularly and get things done this fast, think of how much government waste could be avoided. Next week Congress will put their arms around their colleagues and sing "Kumbaya." :-)

Overall, I think the actions of the past week were too much but too late. Short term, I expect the stock market will rally, especially if there is an interest rate cut, good jobs report and good company earnings in the next week. However, I expect the stock market to decline further before reaching a bottom later in 2008.

For now, I continue to hold my current positions and have made 20-25 share purchases of five new stocks, Intuitive Surgical, Priceline, Apple, Research in Motion, Core Labs, and added to our position in Google. If the market rises next week, I may sell some shares, at a gain, into the rally. If the market declines, I will hold the positions but make no additional purchases until there is a clear bottom.

For more on Reflections and Musings, check back every Saturday for a new segment.

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

It's been over four years since I started My Wealth Builder. As I think about topics to write , I often remember, "I've written about that before," and decide to find a new topic. However, since many principles of personal finance are timeless, I want to include them in a recent post on My Wealth Builder. Therefore, I have started a series called "Timeless Articles from the Archives" and am highlighting posts from the same week in 2007-2010.


2007

Continual Growth and Reinvention - Here's one way to avoid becoming obsolete.

On-line Bill Paying Services -Save Money, Time and Reduce Stress - Electronic bill paying is a great banking service because it benefits me.

Assisted Living - Pros and Cons - These were some of my thoughts as my mom moved to assisted living.

Retirement Planning - A Staged Approach - Before the housing crash, here's how I was intergrate home ownership into our retirement planning. Even after the housing crash, it will till work for us.


2008 -update

Statistics and Probabilities Can Be One's Friend - Using a strategy that is validated by the statistics and probabilities will eventually pay out.

Retirement Expense Planning - Allocation To Fixed Income And Cash - Fortunately, in early 2008, we funded four years of retirement expenses with short term fixed income investments and money market funds.


2009

Choosing Between Taxable and Tax Deferred Saving Accounts - I've summarized my view of the tax treatment for tax deferred and taxable saving accounts.

Teaching Delayed Gratification Skills - I believe that delayed gratification is an important life skill.


2010

My Incentives to Work in Retirement - While I still work for pay, the incentives for choosing the job are often other than money.

Remembering my Time is Precious - I want to get the most out of the time that I have.

It's the People's Government, Stupid - I want elected officials who will serve all the people.

To me, the content of these posts are still relevant today and worth reading again.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial, career, investing, political, retirement or saving advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Retirement Expense Planning - Allocation To Fixed Income And Cash

On November 17, 2007, I wrote about Pondering Financial Risks In Our Retirement, with a stock market crash or recession being a potential issue. Only two months later, I get to evaluate whether the strategy we developed is working.

For our case, we have funded four years of retirement expenses with short term fixed income investments and money market funds. Fifty percent is invested in CDs and municipal bonds that mature within the next four years, and 50% is in money market funds. While our equity investments have declined 8% in 2008 (and 10% from the peak), the fixed income part has risen slightly while paying 3.6% (tax exempt) to 5.3% (taxable) in interest. Our money market accounts are earning 2.9% to 4.3% respectively on tax exempt and taxable funds.

For reference, we started putting funds in fixed income investments in the summer of 2006, before we needed the money. At the time, the stock market was still doing well and interest rates were still increasing. I recall agonizing on locking in 4.5% for 5 years and missing out on stock market gains or subsequent interest rate increases. In hindsight, with January, 2008 wiping out all of 2007 and part of 2006 stock market gains, 4.5% returns do not look too bad anymore:-) In addition, we do not need to sell stock while the market is down in order to cover our retirement expenses.

At this time, the strategy of keeping short term expense needs in cash or short term fixed income investments is working. We have access to sufficient funds, and will not need to sell any stock, while the market is correcting. Hopefully, the market will recover before any stock sales need to be made for future funds:-)

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

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

Copyright © 2008 Achievement Catalyst, LLC

College 529 Savings - 2006 and 2007 Gains Gone

For our three-year old's college education, we are invested in four Vanguard funds through a college 529 plan. While we won't need the money for another 14 years, it has been particularly painful to watch the decline during the January, 2008 stock market correction. The accounts has lost virtually all of its 2006 and 2007 gains, as of 1/18/2008. Two years of gains have been wiped out in two and a half weeks:-(

I am not too concerned yet. At this point, I will continue to hold the funds and wait for a recovery. Hopefully, we won't have to wait 14 years:-) In addition, this correction validates a future strategy of transferring funds to "stable" investments, such as CDs, in the one or two years prior to attending college. I'd hate to have a drop in the stock market reduce the account value just before I needed the money.

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

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

Copyright © 2008 Achievement Catalyst, LLC

Links to Carnivals from January 21 - 24, 2008

Here are links to select Carnivals from January 21 -24, 2008:

Festival of Stocks #72

Carnival of Personal Finance #136

Festival of Frugality #109

Carnival of Financial Planning

Please give the hosts some recognition for their hard work and check out their Carnivals.

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

Anticipating A Stock Market Bottom

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. ~ Warren Buffett.

On January 17, 2008, I wrote that the U.S. stock market was likely in the first stage of a bear market, i.e. the continual volatility and painful decline. The events of the last couple days lead me to believe that the second stage of capitulation and bottoming may be getting close. However, as with many economic events, one doesn't know it has happened until a while later. Since I think capitulation and the bottom are near, here is what I am doing to prepare:

1. Continue to stay calm. We've been preparing for the possibility of a bear market for several months. Our strategy has been to protect our principal, especially the savings we need for the next three years. We (hopefully) won't need the money invested in stocks for the next 5 to 10 years.



2. Identify buying opportunities. I've updated my stock buy list using the Modified Unemotional Investor Growth system and will publish it on Monday, January 28, 2008.



3. Start making small purchases. I have begun making purchases between 25% and 50% of the total position that I want to hold of my updated buy list. I do this for emotional reasons. I realize that the market may go down further, but it may go up suddenly also. Investing only a fraction enables me to feel better if the market declines or to participate if the market goes up.
   
   However, if the market continues to decline after the first small purchase, I won't make any additional purchases.



4. Be patient. The bear market may last several months or several years. However, there will be a recovery. Of course, the quicker the bear market reaches a bottom, the better:-)

At this point, the 2008 stock market feels more like the 2002 stock market with each passing day. In 2002, I made the mistake of continually "buying on the dips" only to have the market fall further throughout the year. In addition, I sold out of most of my positions by the end of 2002, and missed the beginning of the bull market in 2003. By following the four above steps, I hope to avoid making the same mistakes in 2008.

While I hope this will be short bear market, there is a possibility that the decline may be extended. If the market continues to fall through February, I will revise my short term investing strategy and begin looking at individual stocks to sell short.

For more on The Practice of Personal Finance , check back every Wednesday for a new segment.

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

Copyright © 2008 Achievement Catalyst, LLC