 |
 |
 |
Consumer Borrowing and Budgeting Means Making a Plan for 2009
By the Financial Planning Association |
|
|
|
Consumer Borrowing in 2009 Will Mean Making a Plan
If you’re planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment. So that means you’re going to have to work harder—and possibly wait a little longer—to make those key purchases.
What’s a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850, according to reports; that minimum is roughly 20 points higher than it would have been a year ago.
Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.
The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years.
These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers–and they’re having trouble too. If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:
Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or your Capital Advantage financial advisor to learn how to best use credit. It’s always good to determine what your limits should be.
Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization–how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.
Set a credit report review schedule: You have the right to get all three of your credit reports—from Experian, TransUnion and Equifax—once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. By the way, all those ads that advertise free credit reports? Most of them will demand a credit card number from you, which means at some point those reports won’t be free. The aforementioned Web site is the best place to get reports that are truly free of charge.
Pay on time and pay more than the minimum: If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.
Cut up cards, but don't close the account: Closing accounts—even those that have had zero balances for years—is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.
No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. Two years ago banks and other lenders might have bent over backwards to lend to people with unverifiable income, that gravy train is over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.
---------------------------------------------------------------
Whether You Call It a Budget or a Spending Plan, It’s a Good Way to Start 2009
Granted, the New Year is a time for best intentions. People vow to stick to a diet, knuckle down at work, spend more quality time with people they care about, start scratching off that long list of key chores around the house, and of course, keep a closer watch on their pocketbook.
If you find you can do only one of these things, focus on that last item–making and sticking to a budget. It might help you handle the rest of those resolutions:
• Being in control of one’s finances reduces stress. Stress can make people eat more and spend more.
• Having a spending plan in place means you’ll have already prioritized the key activities, expenditures and projects you’ll need to make for the year and the money you’ll need to afford them.
• Spending less time worrying about money means you’ll have more time to think about the people in your life.
Here are some ideas you may want to incorporate into that process:
Don’t be afraid to ask for help: Do you know where you need to be? A qualified financial planner can ask the right questions and develop a customized plan to figure out your starting point and where you’ll finish based on your age, earnings potential and the new habits you’ll develop. Capital Advantage, Inc offers and provides retirement planning and college planning to existing clients. Referrals for comprehensive financial planning are available by inquiring with John, Gary or Donna.
Start tracking every dime you spend: Whether you do it with a pen and a notebook or a computer program, make a concerted effort to track your everyday spending. Physicians say overweight people should track every morsel of food they eat; with money, it’s the same thing. Knowing where every penny goes gives a quick picture where certain pennies can be saved or invested.
Prioritize...When it comes to spending, there are needs and wants. Try this exercise. You can do this on a big 2009 desk calendar (or an electronic calendar that allows space for lots of notes to yourself). Mark down at the appropriate dates and times of the year items for which you need to spend and those for which you want to spend. What are needs? In part, food (not carryout or restaurant meals), monthly mortgage, tuition, auto or rent payments; monthly utilities; home, auto, life or disability insurance; retirement savings; property taxes and credit card payments. What are wants? Non-essential items like vacations, non-essential home improvement projects, restaurant meals (you can cook at home) or treats like clothing splurges or electronics. Compare these total expenditures to your total income. What will this crowded calendar tell you? That by attacking debt, making certain sacrifices and spending and saving smarter, you can eventually un-crowd that calendar and your financial life
...then zero in each month: There has to be a living, breathing side to budgeting that accommodates change. Do this: Near the end of each month, make a list of the specific “needs” and “wants” you’ll face next month, and figure out how much money you’ll have for wants after needs are addressed. For example, if your car needs a necessary repair, that’s certainly going to boost the “needs” side of the page. If you find due to a one-time event (paying off a particular credit card, for example) that you have more to spend in the “wants” column, then it’s time to decide whether it’s time for a treat or to throw more into savings, investments or attacking any other debt.
Identify and plan for long-term goals: You need to think about the things you really want to do with your life and what those things will cost. Putting goals in writing gives them a formality and a starting point for the planning you must do. If these goals require saving, make sure you put those savings dates on the financial calendar you made.
Build failure and recovery into the plan: How many diets have evaporated with the words, “I blew it!” The fact is, with food or money; everyone goes off course at times. The important thing is to have a plan for corrective action – if you’re about to make an impulse purchase; implement a three-day spending rule. That means you should give yourself three days to check your budget and think through the purchase before you make it. If you can minimize the damage and get back on course, your progress will continue.
The above articles were produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided and revised by Capital Advantage, Inc., a local member of the FPA.
|
|
 |
 |
 |
|
| Back To Top >> |
 |
|
|
 |
 |
 |
4th Quarter 2008 Investment Report
From Capital Advantage, Inc. |
|
|
|
The year 2008 ends Capital Advantage, Inc.’s 27th year in the financial services industry - and also marks the close of the worst economic climate since the Great Depression of 1929. As was the case in 1929, loose credit and speculation inflated asset bubbles globally, but this time, the catalyst of the decline was the deflation of the housing market, not the stock market. A year ago, investors were optimistic, unemployment was low, interest rates were relatively low, corporate earnings were good and valuations were reasonable. Top concerns at the time were oil prices hitting a historic high of $147/barrel and gas prices pushing toward $5/gallon, as well as alternative energy and global warming. It was in the beginning of the fourth quarter of 2008 that the seemingly solid financial system fell off a cliff…
Historical Perspective
What began as a correction in the residential real estate market erupted into a fiery downdraft to financial markets (initially through sub prime loans), finding its way to Wall Street and eventually Main Street. The crash of 2008 left no one unscathed - stock, bond and real estate markets worldwide suffered historic losses. The Dow Jones Industrial Average lost 32% - its worst year since 1931, and third worst ever. The Standard & Poor’s 500 fell 37%, while the NASDAQ shed 41%, and the International MSCI EAFE Index lost 45%. It was a rocky year for equities, to say the least. Emerging markets, once the darlings of the investment community, have found themselves in far worse condition then ours, with losses of 65% to over 70%, for China and Russia, respectively. Keep this in mind, as history may provide clues as to where we may be headed:
1) There have been 7 occasions in the 100+ year history of the Dow Jones when the index declined over 25%, and in the 5 years following these 7 occasions, the stock market found its way back to positive territory.
2) In the past 100 years, stocks had negative returns for 2 successive years only 4 times (the Great Depression, World War II, the 1970s Oil Crisis and the 1990s Tech Bubble), and each subsequent rebound proved itself greater than its decline.
3) Since the Great Depression, there have been 12 recessions, each averaging 10 months in duration, with the longest being 16 months (1973-75 and 1981-82).
4) In the first year after a new President enters office, the stock market averages a gain of 5.3%.
Historically, it looks as though we could be in store for quite a recovery, but will this time be different?
Recent Outlook
Our current strategy was initiated in 2007, when we became concerned about the amount of capital flooding into international (especially emerging markets) securities. International markets were leading the global stock markets to great heights, especially emerging countries or those with high percentages of commodity exports such as oil, copper, and lumber. Most firms raised their international exposure to 50%, however, we felt a ‘bubble’ was forming in both commodity and international securities prices; therefore, we reduced our international exposure to under 10%. Understanding that high commodity prices tend to fan the flames of inflation - bad news for both bonds and stocks - we allowed our money market allocation to rise dramatically higher than our benchmark. In retrospect, this proved successful.
Marking the beginning of the near collapse of our global banking system, September 15, 2008 saw the 158 year-old investment bank Lehman Brothers file for bankruptcy protection. Shortly thereafter, on October 2, Congress voted in the $700 billion Emergency Economic Stabilization Act of 2008. The following day, Friday the 3rd of October, the stock market tumbled - ominous news to us that this crisis was much deeper than originally anticipated. After an exhausting weekend of review, research and analysis, each of us came into the office on Monday to begin the greatest degree (in dollars) of selling and ‘raising’ cash in the history of our firm. Year end, while we were not pleased with the overall market volatility or decreased portfolio values, we were pleased that we implemented our decisions rapidly, as dramatic defensive strategies, in retrospect, was the correct decision.
Current Outlook
The Federal Government recently committed $2 trillion of bailout funds, which will be added to our country’s account deficit currently nearing $11 trillion. Such an amount is hard to fathom, but can be put in perspective by understanding this is roughly $60,000+ per taxpayer. We believe this stimulus package is the best decision and will eventually aid recovery of both our country and the global economies – in due course. However, in the short-term, we do not expect a dramatic rebound in equity or real estate prices, and believe this recession will take more time to recover than originally anticipated. The conventional wisdom of analysts and economists in the financial industry trusts that the recovery will begin by mid-2009, but at the present, we are not convinced.
With this outlook acting as our backdrop, we have dramatically shifted, and will continue to reposition within assets capturing interest and dividends. With the Federal Funds rate between 0-0.25% and money market rates now hovering around the 1% range, investment grade corporate bonds yielding 5-7% and dividend paying equity income funds yielding 2-4% currently take center stage in comparison. Back in October of 2008, we reduced our exposure to the equity markets, in particular, growth oriented and foreign company invested funds. Currently, we are considering a further reduction of large growth style funds, but in the meantime have raised our fixed income (bond) allocation. We are actively increasing our corporate bond allocation through bond funds such as Vanguard Intermediate, Dodge and Cox Income, and Loomis Sayles Investment Grade. One could consider this the ‘interest’ part of the strategy equation, while the ‘dividend’ portion will be executed gradually as we witness improving market conditions.
Equity Outlook
Capital Advantage, Inc. has been asked which factors could trigger the implementation of an increased equity exposure. Simply put, a shift from negative to positive in the following categories are just a few of the many factors we take into account when determining the right time to increase our equity allocation: unemployment (fall), housing prices (stabilize), treasury yields (rise), credit spreads (narrow), dollar (stabilize), commodity prices (stabilize), and lastly, we must see consumer confidence return to positive territory and investor fear replaced with greed. Desired movement in these categories has the potential to turn Capital Advantage into cautious equity buyers, but until conditions improve, we will watch (and analyze!) patiently from the sidelines, while confidently continuing to purchase bonds yielding 5-7%. For the time being, we recommend that you continue to focus on paying down debt and reducing your discretionary spending by 10-15% until our economy finds some solid footing.
Financial Stability
Capital Advantage, Inc. utilizes three reputable firms, Charles Schwab & Co., Fidelity Investments and Vanguard, to custody client assets. Personally, we have our own assets divided between these three firms and are in no way concerned about their financial stability. Additionally, Capital Advantage, Inc. has financial stability most would readily classify as ‘AAA’ --- our firm has no debt and stable profits, ‘cash in the bank’, an intact corporate line of credit with a zero balance, and we know that no employee here will be heading toward the unemployment line!
If you have any questions or concerns, please contact us. We appreciate your business and confidence during this difficult time.
|
|
 |
 |
 |
|
|
|
| Back To Top >> |
|
|
| Back To Top >> |
 |
 |
 |
It’s a Good Environment for Roth IRA Conversions
By the Financial Planning Association |
|
|
|
Most of us will not start the New Year happy about our investments. But if you are looking for a bright spot, it’s not a particularly bad time to consider converting a traditional IRA to a Roth IRA. Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).
Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your tax professional about doing a full or partial Roth IRA conversion. Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. But, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them. Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status. The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. But anyone considering such a move—regardless of his or her income status—should first review their current retirement asset strategy with both their financial advisor and tax advisor.
THINGS TO CONSIDER:
The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits and if either spouse is eligible for a qualified plan at work) until they are ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59 1/2 to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains.
Time to review retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them.
Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes.
A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings.
Please call our office if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.
|
|
 |
 |
 |
|
|
|
|
|
|
