The World of Wealth

Flexibility: Good Business Practice or Sucker Move?

theworldofwealth@gmail.com (MEG) — Tue, 01 Dec 2009 06:59:00 +0000

In my last post I detailed the second chance that I've extended to one of my tenants.

He (allegedly) went through a traumatic ordeal, got behind on the rent, and promised to catch up by the end of the year. I agreed not to evict him and to give him the opportunity to catch up and move on.

In the past this naive/soft/lazy spirit has worked for me and my tenants. It may even be arguably good business practice in some cases.

1 - I have allowed another tenant couple to fall very far behind on their rent several times due to various situations (most recently, her mother passing). They have always gotten caught up (slowly and agonizingly, in most cases), and they are extremely grateful and loyal to me because of the flexibility I've shown.

2 - I allow a third tenant to pay half the rent on the 1st and half on the 15th because they have trouble budgeting throughout the month. They also don't trust the mail system so I agree to meet them in person twice a month to collect rent. This is an inconvenience to me, but they may have become delinquent otherwise and had to move. They too are very respectful, responsive, appreciative as a result.

3 - Yet another tenant was allowed to pay the initial deposit over 4 months instead of up front when they moved in. Normally I wouldn't make this exception, but I had a good feeling about these people and was willing to let them move in with just the first month's rent and partial deposit paid.

4 - Last year when one tenant moved suddenly the day rent was due, breaking his lease, I opted not to go after him for payment or to mar his credit report with the default. I knew he didn't have the money, I was only going to lose one month of rent because of his actions, and he'd always been nice and helpful (one he painted the garage for me when I showed up to do it myself).

Of course these acts make it harder to draw the line between personal and business; it makes me expend energy I could otherwise save; it makes it harder to enforce late fees and other policies; and it makes tenants feel like they can talk to me like a friend at times.

It's a fine line to walk, but it's a balance I'm willing to attempt. It's how I choose to interact with people. Because that's what business is, after all. It's just interacting with people. And all of those tenants (even the one who left suddenly) have respected me and have taken good care of the property. In addition, the only thing I've lost so far by treating my tenants this way is a little bit of time here and there and a few months of interest earned on a few thousand bucks.

Of course I reserve the right to alter my approach in the future, as experience strips me of my optimism and naivety!

Tenant Offered a Second Chance

theworldofwealth@gmail.com (MEG) — Tue, 01 Dec 2009 05:46:00 +0000

As usual I've been wafting between stern professionalism and less business appropriate inclinations like leniency, understanding, and trust.

Today I wrote an eviction notice to one of my tenants. He has been there since I bought the second property (over 1.5 years) and lives there with his wife and young child. Until recently he always paid on time, even early some months; he rarely bothered me and was pretty much an ideal tenant.

Over the last few months his rent has come in later and later; in October I didn't get it until the 20th. In general he has called me - or returned my calls - to let me know when to expect it, but this month I didn't hear from him despite leaving several voice mails and a formal late notice.

So today, the 30th, I drafted the letter. It was firm but not harsh. I reminded him that the November rent was nearly 30 days late, and I explained that if I do not receive payment in full by Friday at 5pm that I will immediately post a notice to vacate and begin the eviction process.I signed it, sealed it in an envelope, addressed it, and stamped it; but before I got a chance to stick it in the mail the tenant in question called me.

He apologized for not having the rent and not contacting me, and he said he had been going through a really hard time but didn't want to go into the details. I waited. He apologized again but said he had just started working again and would be caught up soon.

Since it didn't sound like he had the money or planned to anytime soon, I explained that at this point I have no choice but to begin the eviction process. He said he understood but repeated that he was finally back to work after the incident and that he would be caught up before the end of the year (with Nov and Dec rent).

I could tell by his voice that something was different. He has always been a little edgy and argumentative; we've even gotten into yelling matches once or twice over his neighbors, my other tenants. But his voice was flat and apathetic now. He sighed and began rambling. I only let him talk for a minute, but I gathered the following disjointed story:

A a man shot himself in front of him at work about a month ago. My tenant did CPR and tried unsuccessfully to save him. In the process he ingested blood and has undergone tests to see if he now has hepatitis. It may be an initial false negative though and it could take months to know for sure. He seems very depressed about this, and I think he believes his lethargy and apathy may be a symptom of hepatitis or some other illness (it sounds to me like he's depressed).

At this point I'm concerned and curious, so I cautiously said I was sorry he'd endured such a traumatic ordeal and that I couldn't imagine going through something like that.

He went on to explain that he'd let everything get behind, couldn't work, and just hasn't cared about anything. He said he almost just moved away without saying anything; he'd decided to just leave his family and let his wife try to get a divorce or whatever. But then he decided not to and he's doing better and now he's working again. They'd already cut off the electricity when he made that choice, so the little money he had he used to turn that back on.

I am not very sympathetic and nobody has ever accused me of having a "bleeding heart," but for some reason my anger and determination had melted away. I explained that he couldn't remain in that house if he was going to be apathetic about paying the rent. I have bills to pay, too, and I told him I can't make it without a paying tenant. But I also told him that it was unlikely I could get another tenant in there during the holiday season, and so I told him I'd give him until the end of December to get caught up.

He sounded so defeated, but he expressed gratitude and apology again. I spoke to him strongly in an encouraging but no-nonsense tone and told him to take care of himself and his family, pull it together, and do what he has to to move on and honor his obligations. I told him I trusted him, that he'd always been prompt and honest, and that I was willing to give him a chance to prove that now.

And I honestly believe he will. Maybe I am a bit of a softie. Or maybe I'm just lazy and would rather hope he catches up than deal with the hassle of an eviction. Or maybe it's the Christmas spirit. I think it's just the right thing to do. Yes I may be naive, and yes it's possible he made up the whole thing and is really a deadbeat trying to take full advantage of my generosity.

But he has never lied to me before or come to me with any bogus excuses about being late. Of course if he fails to honor this promise then I'll have no problem kicking him out. I have no patience for continual promises and apologies. But I'm not too rigid to deny somebody a little leniency in a situation like this when their prior record has been relatively unblemished.

Should I Gift To My Tenants?

theworldofwealth@gmail.com (MEG) — Tue, 24 Nov 2009 20:02:00 +0000

I was planning to give each of my tenants a small token of appreication this holiday season - a basket of edible goodies or a $25-$50 gift card or at the very least a nice card/letter.

I planned this last year as well but ended up not doing it because a) I had a lot of tenant turnover around that time and b) the ones not moving were behind on their rent.

This year it's the same tenants that have been there all year, with the exception of one family that just moved in a few months ago. But I know all of them pretty well, and in the spirit of the holidays I think a small gift would be appropriate and appreciated.

In addition, two of them have leases coming up for renewal in January, so a kind gesture might entice them to stay, or at least ease their inclination to protest a small rent increase. On the other hand it might be a waste of money if they are planning to leave anyway.

Either way I think I'm going to do it. Why not? Worst case scenario none of them are grateful, but I can deduct the cost on my taxes and get some positive karma.

What do you think? How would you react to a holiday gift from your landlord? What do you think would be most appropriate?

Note: This is the Bible belt, and while I'm not positive my tenants are Christians or celebrate Christmas, I'm not worried about offending them with holiday cheer. Besides I'd choose a "Happy Holidays" type greeting anyway, not a specific religious message.

Boosting Travel in 2010!

theworldofwealth@gmail.com (MEG) — Mon, 23 Nov 2009 21:48:00 +0000

I've been thinking about how to spend my time (and money) now that I am done with the CFP (R) Exam. This fall I had to turn down a 10 day trip to Australia with a friend and a long weekend in Orlando with family because I had to study. I've never turned down a trip in my life before that, and as a result next year I am planning to make up for lost ground!

From September 2007 to September 2008 I spent $5,356 on travel (largely due to a trip to Europe with my family). From September 2008 to September 2009 I spent a more reasonable $3,242. I don't expect my budget to exceed $3,000 by very much, but honestly if it swells near $5,000 I would be fine with that!

Here are my projections for September 2009 to September 2010:

Alabama for Christmas (December): $275
Visit sister 2 in Seattle (January): $200
Wedding in New Orleans (March): $300
Bachelorette Getaway in Myrtle Beach (March): $600
Ohio for sister 3's graduation (May): $150
Visit friend in New York (June?): $375
Ski Trip to Chile (August): $1,000

Items in bold are committed obligations already; the others are optional and not yet planned. Cost above includes only estimated flight and hotel (if applicable).

I'm considering adding another volunteer trip through Cross-Cultural Solutions. I went to Peru for a week in early 2007 and it was really an incredible experience. At that time I set the goal to do something similar every other year. I might be able to fit it in, maybe in July or October...but I'll have to see how the budget and vacation days pan out during the first half of the year before adding that. It would be a large expense, probably around $2,500 total, but it's also tax deductible as a charitable contribution (even the flight!) and is all expenses paid.

Tired of Money Talk

theworldofwealth@gmail.com (MEG) — Mon, 23 Nov 2009 21:34:00 +0000

I am tired of talking and hearing about money. This isn't an ideal frame of mind, given the fact that I work in banking.

All day long I have to sort through a stream of emails about what the Fed is doing, what the Dollar is doing, what the government is trying to do, how our bank is performing, and what the market is doing.

On top of that I have to talk to my clients about their money - the status of their loans, the details of their tax returns, the changes on their balance sheets, the balances in their accounts.

Then of course there is my personal finance. I need to update my transactions on Mint, I need to figure out how I'm going to allocate my Roth IRA contribution in January when I max it out, I need to pay my property taxes and renew my car insurance and collect past due rent from two of my tenants. Oh, and I need to budget for Christmas shopping and figure out what to do with any birthday money that comes in.

In total, I'm kind of burned out on finance!

I have been ignoring my accounts and my cash flow projection spreadsheet. I haven't read the Wall Street Journal in over a week. I haven't been reading blogs or keeping up with columns on Yahoo! Finance or MSN Money. I also haven't been shopping even for groceries, and I delete all market update emails and the like that I get at work without even skimming them for details.

This probably has a lot to do with the fact that I've been studying for the CFP (R) Exam for 4-5 hours a day for over a week. I officially maxed out my interest in reading about finance just before the exam this past weekend. And this blog may suffer, but I just cannot discuss estate planning strategies or asset allcoation or cash flows or the tax treatment of anything for at least a week!

The CFP (R) Exam is 40% Complete!

theworldofwealth@gmail.com (MEG) — Sat, 21 Nov 2009 01:10:00 +0000

Which of course means I still have 60% to go.

Still, I can feel that 40% has lifted off my shoulders. I've been on a sort of high since I finished the first section of the CFP (R) Exam an hour and a half ago.

Overall I feel pretty good about how it went. At least, I feel better than I expected to feel. I felt the questions were fair, and I think I recognized all the concepts they were trying to test. I also don't think studying any more would have changed anything, so in other words I guess I feel like I was adequately prepared.

Which isn't to say that I thought I knew the answer to every question; there were more than a few where I had it narrowed down to two good choices and just don't know which was the "best answer" they were looking for.

There was also a lot more Fundamentals tested than I expected, especially considering this was just one out of three sections. Fundamentals is one of my weakest areas, which might seem weird, but that section comprises hundreds of little details that you pretty much either know or you don't; it's not like learning about all the different types of trusts used in estate planning where you can feel like you are finished learning it at some point and move on.

Then again they say that people always feel like the exam is weighted towards whatever they struggle with.

In any event I did my best and now it's behind me. Well, 40% of it at least.

Just A Little Retirement Reminder

theworldofwealth@gmail.com (MEG) — Mon, 16 Nov 2009 19:29:00 +0000

It never ceases to excite me when I see in writing how much easier it is to accumulate big bucks when you start young (admittedly, this probably has a lot to do with the fact that I am still young).

These pointed analogies are what prompted me to start investing at age 14 when I first read one in a Motley Fool book I found lying in my grandfather's car.

Consider this example:

If you're 25 years old and you want to save up $1 million by the age of 65, you'd only have to invest $85 a month at a 12 percent annual return.

If you wait until 35 to start saving for retirement, you'd have to put away $286 a month to reach the same goal.

At 45, you'd have to save more than $1,000 a month, and if you wait until 55, you'd have to invest a whopping $4,350 a month.

Retirement Savings Through the Ages

Of course, this isn't to say that all you 25 year olds who are contributing at that level or even higher should be content. Keep in mind that 12% is probably on the very high end of what we can expect stocks to return over the next few decades.

In addition, you'll need nearly $5 million in 40 years to buy what you can get for $1 million today (assuming 4% inflation). So even though a million sounds like a lot (and it is), don't forget the power of inflation. The younger you are, the higher a figure you should be shooting for.

Besides, even $1 million in today's dollars might not be enough for you to retire on comfortably, depending on your standard of living. One million invested can safely provide about $40K a year in income - and that's before income taxes.

You can't really save too much for retirement, as long as you're not seriously jeopardizing your current lifestyle or responsibilities. Remember that when you turn 60 and can withdraw funds penalty free, you'll still likely have a third of your life left to live. If you have way more than you need at that point then you can always blow the money then! Trust me, you'll wish you had that option when you get there.

CFP Exam Looms

theworldofwealth@gmail.com (MEG) — Sun, 15 Nov 2009 04:33:00 +0000

Six days to go until the big day. I'm studying 3-5 hours a day, so I apologize for the lack of posts. Preparing for this exam is completely maxing out my interest in finance. Some days I don't even check the market news, and I haven't looked up my personal account balances all week!

PS - Is it really necessary that I memorize every characteristic of every type of retirement plan (FYI there are more than 20), including eligibility, contribution limits, tax treatment, and distribution rules? It turns out there is a lot more to retirement options than IRAs and 401ks. It also turns out I don't really give a crap about most of it.

PPS - Please let this be the last Saturday night that I have to spend memorizing the applicable rules and tax treatments associated with Incentive Stock Options and Non Qualified Stock Options.

Observations from Behavioral Finance

theworldofwealth@gmail.com (MEG) — Wed, 11 Nov 2009 16:54:00 +0000

Behavioral Finance is a field that proposes psychology-based theories to explain stock market anomalies. It argues that people (investors) are not nearly as rational as traditional finance theory makes them out to be.

Studies have been performed which indicate the following:

People's decisions are often affected by how a problem or investment option is framed (for example, a patient who is told he has a 70% chance of living will choose the surgery; if he's told there's a 30% chance of death he will not).

The Touchy-Feely Syndrome is the tendency for people to overvalue things they've actually touched or selected personally. Hence, analysts favor the stocks they research, and investors favor stocks they have picked.

Researchers suggest that full service brokers and advisors are often hired to play the role of scapegoat. Since professionals are clearly shown to be unlikely to outperform the market, rational behavior on the part of investors would not lead to their widespread employment.

People tend to remember their successes, but not their failures. This leads to an unjustifiable increase in investor confidence (similar to the gambler who clings to a handful of big wins as justification for throwing ever more money away in hopes of beating the game).

Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market price already.

People give too much weight to recent experience and assume recent trends will continue, even against statistical odds and long-run averages.

People are more optimistic when the market is high and pessimistic when it is low - even though the reverse would be more rational since odds of a correction are best when the market is on a huge rally. This is what leads so many to buy high (after the run up) and sell low (after a fall which they assume must continue).

[Information summarized from my Kaplan Schweser CFP Study Guide]

Comparing Costs: Should I Drive or Fly?

theworldofwealth@gmail.com (MEG) — Tue, 10 Nov 2009 20:27:00 +0000

I am debating how to get home for the Christmas holidays. My choices are a) to fly, or b) to drive.

When I was in college I made the nine hour drive home to Alabama at least once or twice a year all by myself. I didn't hate it, but I do remember sporadic awful times of boredom, struggling not to fall asleep at the wheel, and the occasional speeding ticket.

It's a long, boring, straight shot down I-20 for about 8 of the 9 hours, and I was often driving the last part at night (due to either classes or my inability to get up and on the road in good time). As soon as I got my first job out of school, flying home for the holidays went straight on my budget.

And oh how I have loved it. It's an easy direct two hour flight (plus one hour at the airport) - and yes, it only takes one hour at the airport. I fly Southwest out of Lovefield (a smaller airport in Dallas), and it's very quick and convenient to where I live. I got a Southwest Rapid Rewards membership, too, and I generally accumulate one free flight a year.

I love flying Southwest out of Lovefield. The baggage checkers out front are so funny and jovial and actually seem to remember me even though I only fly a few times a year. The staff is always pleasant, I've never had a problem getting quickly checked in and through security, and I only recall two instances of a delayed flight in all my years (during which wait I made lots of friends at the airport bar, and it was actually a great experience).

Plus during the holidays the flight attendants are even more festive than usual - I've gotten multiple free drinks and enjoyed several renditions of Christmas classics over the loud speaker. I swear I don't have any vested interest in the airline, but it really is a great way to travel.

So here are the numbers:

$271 Air fare
$40 Taxi to and from airport (I might be able to get a ride...)
$0 Checked bag fee
$5 Tip for the baggage checkers
$7 Magazines to read on the plane
$10 Snacks at airport
$333 Total Cost to Fly

$172 Fuel
$13 Meals on the road
$10 Snacks/beverages on the road
$8 Book(s) on tape
$203 Total Cost to Drive

I'm not factoring in the cost of putting over $1,300 extra miles on my car, but the basic question is whether $130 in savings is worth 12 hours of my life in my car.

I'm thinking it's not.

Non-financial pros for flying:

The 12 hours I'd save are hours that would be spent with my family, who I don't see often.

In addition, the 6 hours in the airport/plane could be spent reading, sleeping, meditating, meeting someone new, or even enjoying a glass of wine - as opposed to driving and endlessly surfing the radio.

Spending 4 hours in flight is less risky from a liability and personal injury standpoint than spending 18 hours driving.

The only non-financial pros for driving that I can see is the potential for flexibility in my travel plans. What do you guys think?

True Investors Don't Buy Mutual Funds

theworldofwealth@gmail.com (MEG) — Thu, 05 Nov 2009 20:29:00 +0000

The value of diversification in a portfolio is heralded constantly in the investment world; nobody really ever argues against it. Along those lines, mutual funds (particularly index funds and ETFs) have been championed for their ability to offer easy diversification to smaller investors.

I learned in a finance class in college that experts generally agree it takes a minimum of 50 stocks to create a diversified portfolio. Without mutual funds you might need at least $50,000 to build that diversified portfolio (assuming that it doesn't make sense to invest less than $1K per stock in order to minimize transaction costs).

But by investing in a mutual fund you get to purchase tiny slivers of hundreds or even thousands of stocks without incurring hundreds or thousands of trading fees. You get the benefits of diversification for a fraction of the cost!

For this reason most investors use these funds as the basis of their portfolio, including myself. I have a Scottrade account with which I trade individual stocks "for fun" and only with a small percentage of my overall portfolio. The majority of my "real" investments - including my retirement savings - are in Vanguard funds.

But consider this excerpt from Investopedia article "Think Like Warren Buffett:"

While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.

Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

I think this is a very significant point that should be considered by all investors. If you really have no knowledge or interest in finance and investing then a simple index fund may be the best thing for you. It also might be the best place to start for most people, especially if you have limited capital to invest.

But if you've got significant money to invest and you are educated in matters of investing (and an argument can be made that all of us should be), then could you be better off by condensing your holdings to a collection of fewer stocks - and bonds - that you have personally evaluated and selected?

In reality, you aren't an "investor" in the true sense of the word if all you do is dump your money blindly into mutual funds. A true investor can and does evaluate businesses on a fundamental level. They make informed decisions about where to invest their limited resources. They evaluate performance based on expectations and the earning potential of that business or industry.

In short, a true investor knows what she owns and why. Do you?

Saving Money This Holiday Season

theworldofwealth@gmail.com (MEG) — Wed, 04 Nov 2009 20:24:00 +0000

I've come up with several ways to save some serious bucks this holiday season. They may not all work for you, but here are some ideas:

I'm returning the $200 formal gown I bought to wear to a ball that my employer is requiring me to attend. I'm wearing an old prom dress instead (I also get to return the $80 spanx I needed to pull off the slinky new gown).

I am driving 8 hours to see my grandparents in Louisiana this Thanksgiving, even though I have flown every year since I graduated from college. It will only cost me about $80 in gas compared to a $300 flight.

I'm also driving home to Alabama for Christmas for around $300 savings.

I'm also spending extra days at home this holiday season, which will save me money on food and entertainment this season.

I'm saying "no" to at least 2 charity parties that I have gone to in each of the last few years. Savings is roughly $200 (sorry kids).

Due in large part to the previous point, I will not be needing quite so many manicures/pedicures as I usually get this time of year. Savings = $150

I'm not buying any extra or holiday-themed (and therefore overpriced) foods, decorations, flatware, scented goods, gifts/ornaments or anything else this year.

As I'm not dating anybody in particular (I don't think...) I will save significantly on Christmas gifts this year. Also, I'm going to scrimp on my family and not feel bad since I've been relatively lavish in years past. Savings = $250

The reality is that most of this savings revolves aroung the Giving portion of my budget. I have noticed my giving has declined by about 50% year-to-date compared to 2008 (charitable giving, gifts for others, political donations, and donations to my alma maters).

Expensive Day and Night

theworldofwealth@gmail.com (MEG) — Fri, 30 Oct 2009 19:14:00 +0000

Tonight will not be a cheap evening for me.

I'm meeting a friend from out of town for sushi at this hip new place where I will probably spend $50 for two drinks, my half of an appetizer, and one specialty roll. My friend lives in south Texas where they don't have trendy sushi restaurants, so this is her guilty pleasure when she visits.

I will then be paying $15 for a cab to take me to a charity party for which I just paid $50 for a ticket online.

Luckily drinks will be free at this event, so my only costs for the remainder of the evening will probably be $15 for a cab ride home (unless I can catch a ride with a friend...).

Dinner/Drinks - $50
Charity Event - $50
Cabs - $30

This in addition to the fact that I just spent roughly $300 over my lunch break when I made the mistake of going to the mall (via Nordstrom) to get a sandwich at this place I like in the food court.

$75 - this Spanx thing I need to wear with my clingy formal dress at a ball in November
$130 - this really classy and unique work blouse that will go with most any skirt or pair of pants
$75 - two versatile DKNY tanks (one black, one dark pink) that will be perfect under a suit jacket or sweater - and even by themselves around the house.
$7.95 - the sandwich, plus a bottle of water

Everything I bought was 40% off except for the spanx. And I didn't buy the fantastic Burberry jacket that I tried on (which would beautifully fill a seriously gaping coat hole in my wardrobe). She told me it might go on sale next week though. In which case I might just have to find my way back to the store...

Tis the season.

Shield Your Assets - Protection from Creditors, Lawsuits, Taxes, Heirs

theworldofwealth@gmail.com (MEG) — Wed, 28 Oct 2009 21:28:00 +0000

Protecting ones assets isn't discussed as often as accumulating them, investing them, and even distributing them to charities or heirs. But it's one of the most important aspects of financial planning.

There are various people and entities from whom you might want to shield your assets: creditors, lawsuits, any taxing authority, even your spouse (or future ex-spouse). Whatever your purpose, there are many strategies to help you protect your assets.

Note: We are talking about legal and ethical methods of asset protection here. Other methods will not be discussed and are not endorsed, such as setting up offshore accounts for purposes of tax evasion; giving away assets in order to qualify for medicaid or other government assistance; or hiding assets from your spouse for purposes of leaving him/her in the cold after a divorce.

Insurance Policies
Insurance policies are a relatively simple and common way to protect a person's biggest asset - his or her earning potential. You can purchase disability insurance or long term care insurance to protect yourself in case you lose your ability to work. Or you can purchase a variety of life insurance products which will protect your loved ones by providing them a lump sum or annual annuity upon your death.

Tax Sheltered Accounts
Individual Retirement Accounts, 401ks, pension plans, 529 plans and many other types of accounts enable investors to legally shield certain investments from the tax collector. These can be powerful tools, especially when utilized over a long period of time. Plus they are often legally protected from creditors even in the event of bankruptcy.

Similarly, homesteads provide large income tax deductions and in many states are protected from creditors in case of bankruptcy.

Trusts
Trusts can also be used to shield assets from taxes, creditors, and lawsuits, but in addition they can protect your assets from your own family members.

Often the head of a family will set up a trust or trusts for the benefit of the children (and/or for his future widow) with very specific rules about when and how that money can be accessed. This can help protect the estate from the financial ignorance or apathy of the heirs, from any addictions they might have, from their creditors and lawsuits, and it also may have the added bonus of keeping that money in the family in case of a divorce on the part of a beneficiary.

On a personal note I have decided to quit taking distributions from a trust that was set up for my benefit by my grandfather in order to keep those assets sheltered. I used to take out enough each year to max a Roth IRA and for other purposes, but now I've realized that while that strategy might be a good tax strategy, once I take money out I can never put it back in - and it becomes accessible by my creditors, by my tenants if they ever sue me and win, and by any future spouse I may acquire and subsequently divorce.

Contracts
Any number of contracts can protect both parties in legal arrangements. A Pre-nuptial agreement, for instance, can protect assets you accumulated prior to marriage in case of divorce. It can also ensure any inheritances you receive during the marriage are yours alone.

Business Entities
Corporations, LLC's, Partnerships, and other business entities can function like trusts to get assets out of your estate and, therefore, protect them from estate taxes, spendthrift family members, creditors, litigious rivals, and even from personal bankruptcy.

My New Conservative Asset Allocation

theworldofwealth@gmail.com (MEG) — Mon, 26 Oct 2009 18:42:00 +0000

My asset allocation has changed dramatically over the last month, due to certain decisions made on my behalf by the trustee of my largest investment account. I was consulted in advance about the potential changes, and I said that I was fine with whatever they decided.

So my portfolio just got a lot more conservative.

I have about $175K left in a trust which was originally set up solely for my educational benefit; I won't control those funds until I turn 35. Throughout my entire life they've been invested 100% in Vanguard stock index funds, but recently my grandfather had a change of heart that he decided should trickle down to those accounts (most of which are still being tapped for college by my cousins and siblings).

But in addition to that I have nearly $50K in retirement funds I've saved on my own, in addition to $15K of other investments and $15K in cash. Not to mention $130K in real estate equity.

My previous total portfolio allocation if you add up all those investments was:

Stocks - 58%

Bonds - 2%

Cash - 5%

Real Estate Equity/REITs - 35%

Now that they've moved 50% of the trust into cash, it looks like this:

Stocks - 35%

Bonds - 2%

Cash - 28%

Real Estate Equity/REITs - 35%

Honestly I'm fine with this new allocation. Not only is it pretty balanced with a third in RE, stocks, and cash, I may end up tapping the trust to pay for a wedding and/or a car and/or a new rental property within the next 5 years, so part of it may as well be in cash.

Besides I'm focusing on my retirement accounts as my primary long term investments, and the allocation in those is 15% bonds and 85% stocks (about a third of which are international). That's all I can really control at this time (RE is what it is, and the trust isn't officially mine), so that's all I worry about. In a few short years as I continue to add to retirement accounts, that allocation will take over.

Deducting Charitable Gifts - More Complicated Than You Think

theworldofwealth@gmail.com (MEG) — Thu, 22 Oct 2009 19:28:00 +0000

For a charitable gift to be deducted from your income for tax purposes, many rules must be taken into account.

First of all the Donee must be a qualified Public Charity, Private Operating Foundation or a certain kind of Other Private Nonoperating Foundation. Any gifts to other people or organizations, however charitable in nature, do not qualify for a tax deduction.

Second, the Donor must have "donative intent," meaning they knowingly chose to donate and knew what they were doing and the value of the gift; the Donee must accept the gift; and there must be a lack of consideration from the Donee (i.e. the Donor doesn't benefit from the gift).

You can deduct travel costs associated with charitable work ($0.14 per mile for auto), but you cannot deduct the cost of your time or any services you provide.

Now that we've got the definitions settled, let's consider the tax implications of charitable giving.

Qualified gifts may consist of:

Cash,

Ordinary income property (property that would give rise to ordinary income if sold),

Short-term capital gain property (such as inventory), and

Long term capital gain property, which is further divided into the following categories: Intangibles, Tangible Property (related use to the charitable organization), Tangible Property (unrelated use to the charitable organization), and Real Property.

The type of property donated affects the deduction that you can take.

Gifts to Public Charities & Private Operating Foundations
The general rule is that a Donor can deduct the lesser of the adjusted basis or the Fair Market Value of any charitable gifts given - but only up to 50% of his or her Adjusted Gross Income in any given year. Any amount given in excess of that ceiling can be carried forward for 5 additional years and deducted against future income.

However if the gift consists of Intangibles, Tangible related-use property, or real property, then the rule is different. In those cases you can deduct the FMV of the gift up to only 30% of AGI. Or the Donor can make a "Basis Election" in which case he or she can deduct their basis in the gift (as opposed to the FMV) up to 50% of AGI.

Gifts to Other Private Nonoperating Foundations
The AGI ceiling in this case is 30% for cash and Ordinary Income and Short Term Capital Gain property. The AGI limit is 20% for gifts of all types of Long Term Capital Gain Property whether or not the Basis Election is made.

And there you have it.

Income Not Subject to Tax - It Does Exist!

theworldofwealth@gmail.com (MEG) — Thu, 22 Oct 2009 19:01:00 +0000

Did you know that there are some forms of income that even the IRS doesn't count for tax purposes? It's true. The IRS allows exclusion of the following types of income:

Gifts and Bequests - When you are given or inherit money it is 100% income tax free.

Child Support - Child support is not taxable income, though alimony is.

Scholarships for Tuition, Fees, and Books - but not for housing or other expenses.

Workers Compensation, Life Insurance Proceeds, and Damages awarded by the courts for bodily injury

Return of Capital - i.e. the basis component of proceeds from a sale, or the amount you invested

Fringe Benefits from your Employer, such as meals and lodging under certain circumstances, workout facility access, group term premiums for up to $50K of life insurance, employee discounts on merchandise up to a point, education expenses up to $5,252, dependent care up to $5,000, adoption expenses up to $12,150, and "no additional cost services" such as a flight attendent flying standby for free.

Rental Income from a primarily personal use property. If you have a home that is rented less than 15 days a year you can exclude the rental income from your tax return! (But you can't deduct any "rental expenses" like marketing or maintenance either).

Roth 401(k) vs Roth IRA

theworldofwealth@gmail.com (MEG) — Wed, 21 Oct 2009 15:32:00 +0000

Individual Retirement plans such as the 401(k) and IRA offer significant tax incentives to individuals to save for retirement. Not only do your investments grow tax deferred, but you either get to deduct your contribution in the year it is made (Traditional plans) or you get to withdraw investment proceeds income tax free when you retire (Roth plans).

Which route you take depends on whether you think your income tax bracket will be higher when you retire. Since income tax rates are near historical lows and the national deficit is at record highs, the smart bet for many folks is a Roth plan, because tax rates are likely to go up for all of us.

Assuming you have decided that a Roth is right for you, which is better - a Roth IRA or a Roth 401k? Consider these differences.

Who Can Contribute?
You can only contribute to a Roth 401k if your employer offers one, and many still do not. If you have access to one at work though, there are no income limits to be able to contribute.

Anybody can open a Roth IRA, but you can only make a full contribution to it if your AGI in 2009 is less than $105,000 (single) or less than $166,000 (married filing jointly). These income limits change every year.

You CAN max out a Roth IRA and a Roth 401(k) each year, assuming you qualify under the parameters above. This is of course the best option if you can afford it! If you must choose however, read on.

How Much Can I Contribute?
In a Roth 401(k) the 2009 contribution limit is $16,500. If you are 50 or older you can make an additional $5,500 "catch up" contribution as well.

The 2009 Roth IRA contribution limit is much lower at $5,000. If you are 50 or older you can put in an extra $1,000.

When Can I Get Money Out?
In both Roth plans, you must be 59.5 or older and you must also have waited at least 5 years from January 1st of your first contribution year to avoid paying income taxes on your earnings.

To avoid a 10% penalty on distributions from a Roth 401k you must be over 59.5, have died, have become disabled, or have opted for substantially equal annual distributions under rule 72(t) where you must liquidate the entire account. In addition, you can make penalty free distributions to the extent of your deduction for qualified medical expenses.

You can avoid a 10% penalty on Roth IRA distributions under any of those same parameters, plus a few extras: you can make penalty free distributions for higher education expenses, to purchase your first home, or to pay for health insurance if you are unemployed.

With a Roth IRA you can take out your contributions at any time tax and penalty free, but once you've put them in a 401k you can only access them via a loan (unless you leave your job).

Am I Required to Make Distributions?
In a Roth 401(k), minimum distributions are required by the April after you turn 70.5 years of age. Otherwise you face a 50% penalty of what you should have taken out. The amount required depends on the IRS life expectancy tables. If you are still working the RMD's do not apply, unless you are at least a 5% owner in the business.

It's important to note that these RMD requirements also apply to beneficiaries of Roth 401ks once the account owner passes away. Beneficiaries must take out all the funds within 5 years or begin substantially equal annual distributions based on their life expectancies.

These RMD's do NOT apply to Roth IRAs, which can be a huge advantage to consider if the funds are not likely to be needed in retirement and will be passed down to heirs.

Other Differences to Consider:

One advantage with a Roth is that you can make 2009 contributions all the way until April 14th of 2010.

Account fees and fund expenses are likely to be much higher in an employer-sponsored Roth 401k plan than in a Roth IRA you set up on your own, and investment options will be limited to a handfull of funds selected by your employer. With a Roth IRA you can choose your investment company and invest in any securities you choose.

On the other hand, you won't face account minimums in a Roth 401k, so it may be easier to get started investing there if you can only afford to save a little bit each month.

Your employer may offer to match your contributions to a Roth 401k, which is a huge advantage that can outweigh increased fees and poor investment options. Where else can you get a guaranteed 50% or higher return on your money?

CFP Exam Study Guide - It's Go Time!

theworldofwealth@gmail.com (MEG) — Tue, 20 Oct 2009 18:46:00 +0000

The CFP Exam begins exactly one month from today: November 20-21, 2009. We are officially down to the wire!

I can begin to see light at the end of the tunnel, and it's tempting to daydream about how great it's going to feel when this is all over, but I have to stay focused. And I have to be part of the 50-60% who will pass it. Because I'm not sure I have it in me to try again if I fail.

SO that means I need a study guide. I kicked it off this past month with a $1,000, 4 day long, 9 hour a day, intense review course. In four days we reviewed everything I've (allegedly) learned in classes over the last year.

The real benefit of that course for me was that it condensed the multitude of information that's been thrown at me in 7 courses and 15 books over 1 year into one handy "most important stuff to know" binder. The instructors were great, too and had a lot of insight as to which specific topics are tested, what percentage of the questions are on which category, and also how certain topics are most often tested.

Here are the main components of my preparation plan for the next month:

Do 3 case studies each Sunday from now until the exam (12 total).

Do the online Diagnostic Exam (100 questions) this Saturday to see where I should focus my study efforts. Then on each Saturday afterward do a Mock Exam section (4 hours).

During this week and next, thoroughly review each section of the Review Binder and do all practice questions. Learn any remaining new concepts. Review online videos and books for any topics I struggle with.

During the following 2 weeks, focus on memorization. Make flash cards for any formulas / lists / charts I struggle with and carry them everywhere.

When exam site is released do a test drive and find parking, the exact room, etc. Get new calculator batteries, pencils, and a good eraser. Clear my work calendar for the day before and day of testing.

I can't wait for this to be over so I can have my life back! I literally have no idea what I used to do with all the time I've been spending on CFP stuff over the last year. I guess blogging, reading, sleeping, going out, working out...oh, and travel! I've had to turn down 2 trips this fall because of this exam. :(

Property Taxes Are Due

theworldofwealth@gmail.com (MEG) — Mon, 19 Oct 2009 18:27:00 +0000

Property tax invoices go out in early October in Texas. Property taxes are due and payable as of October 1, but they aren't late until January 31 of the following year.

I have a big fat stack of these invoices piling up on my dining room table. I own my own residence plus two duplexes, and each unit of the duplexes is taxed separately. In addition the two rentals are in different cities in Dallas county and so I get separate invoices from the city and from the county that I have to keep track of. In total I end up with about 10 separate invoices to track and pay.

I owe $5,450 on my most expensive rental property, which I purchased for $220K last year. I escrow taxes on my other rental, so I don't have to worry about those (around $3,000).

In addition I have to pay just over $3,000 on my own personal residence.

So in sum I'll be paying out over $11,000 in property taxes by the end of the year. Fun, fun. If all goes according to plan (i.e. no tenant defaults or moves between now and the end of the year), then I'll be able to pay all my taxes without dipping into reserves. We shall see.

Oh, and in other exciting news I found out you can pay your property taxes online with a Mastercard or Visa, and it doesn't look like Dallas county charges any additional fee or service charge for that privilege. So I can put all those taxes on my credit card and get points!

Here's the link in case any of you want to check it out. It's also kind of unsettling that you can search any name or address and find out what properties are owned, their values, the tax levy, and who paid the taxes and how much going back years and years.

So Close to Retirement Savings Milestone

theworldofwealth@gmail.com (MEG) — Wed, 14 Oct 2009 21:13:00 +0000

By the end of this year I just might have closed in on a major milestone - $50,000 in retirement savings!

Not only is this a great round number, it also happens to be just over my average annual expenditures (the average is actually $47K, which doesn't include savings).

Right now I have $25,550 in my Roth IRA and $20,500 in my Roth 401k at work for a total current balance of $46,075.

I contribute $500 a month to the 401k, and my employer puts in another $150 a month, so that's another $2,000 to be added by year end. With a little help from the markets I might just tip right over the $50K line in time for New Years!

If not, I'll probably hit it in January when I make my annual $5,000 Roth IRA contribution (unless the markets really tumble again).

A Great Texas Traffic Court Experience

theworldofwealth@gmail.com (MEG) — Wed, 14 Oct 2009 19:23:00 +0000

Last week I had to drag myself to traffic court. I got a ticket in February of this year and - very uncharacteristically - failed to do anything about it until the court date on the ticket had passed.

It had been years since I'd gotten a ticket, and apparently now (in Dallas at least) the court date / deadline to act is only about 2 weeks from the date of the citation. By the time I looked at the ticket again it was literally 1 day past my court date.

I panicked, called the court, did research online, and even called an attorney friend for advice. I knew a warrant could be issued for my arrest for failing to appear in court. But the lady at the court didn't seem worried and told me to chill out and that they'd just assign me another court date. My attorney said the same thing, trying to assure me by telling me they had literally thousands of issued warrants piled up in Dallas county that nobody was much concerned about.

So my new court date was set for last week. I had to wait 8 months to take care of this, and I'd lost the option to just pay it online or request drivers ed from the court clerk - because I'd missed my initial court date, I had to be present at this hearing and talk to the judge himself.

It was pouring rain and the courthouse was 15 miles away for some reason, which I realized as I Googled it on my way out the door, so I was 10 minutes late and this was shaping up to be a horrible experience. But it wasn't. The judge was a humorous, grandfatherly Black man with a booming voice who came out and immediately told all of us to quit frowning and relax because there was nothing to be afraid of and to save our game faces for trial, if in fact we intended to come back another day and fight.

He explained in detail our 4 options:

Plead Not Guilty and come back next June for trail to fight the ticket with or without an attorney.

Plead No Contest and ask for Defensive Driving (which you can take in TX once a year and subsequently get your traffic ticket dismissed).

Plead No Contest and ask for Deferred Disposition.

Plead Guilty and pay the ticket.

He gave a long winded, entertaining speech about the difference between Defensive Driving and Deferred Disposition, explaining that both would reduce your fine, both would result in the ticket being dismissed, but one required you to spend 6 hours in drivers school.

"Do the math! Which one would you choose? I know which one I would choose, because I went to [X] elementary school right over here, a really great school! Maybe you went to some other school like [Y] over the bridge, so maybe you'd rather spend all that time in drivers school to save only $8. I don't know! It's your decision!"

He then started to say that he couldn't dismiss any ticket for a moving violation (i.e. speeding - which is what I had) unless the arresting officer was present...then paused to answer his ringing phone and proceeded to have a 5 minute long conversation. When he hung up he asked for questions, and then teased us all for not having the guts to ask any. I tentatively raised my hand.

He beamed at me and made me stand, and I asked what he meant by not being able to dismiss a ticket if the officer wasn't present; did that mean I had fewer options than the four he'd outlined since my officer wasn't present? He asked my name and what my fine was. I fumbled around my papers searching for a figure and finally said "I'm not sure...I think $135?"

"GOOD TRY!" He yelled at me, and then burst out laughing. "It's $235." He verified I could still do any of the 4 options he'd outlined - he just couldn't dismiss it outright. Then he did the math for me and told me deferred disposition would decrease my fine to $171 (if I remember correctly). This is all in front of the entire court including all 20 or so people there waiting to take care of their tickets.

A few other people asked questions, and then he began to process us one by one. I guess because my file was on top (or as a reward for asking the first question), he handled me first. I walked up, he asked me what I wanted, I said "deferred..." and he stamped my file and handed it to me and asked me to follow a clerk out the door just to his left.

Within minutes I paid the $171, received documentation that the ticket was dismissed, and walked out the door. The incredible moral of the story is that you don't have to do Defensive Driving to get a ticket dismissed! What an amazing discovery! You just show up and ask for deferred disposition! I guess they don't have to give it to you, but this judge didn't seem to have any inclination to deny it.

Oh, and even though the Internet told me that a $200 fine could have been added for failure to appear in court, that never happened and I was never charged and no warrant ever appeared.

Stocks Are Risky - No Matter How Long You Hold Them

theworldofwealth@gmail.com (MEG) — Tue, 13 Oct 2009 23:04:00 +0000

My grandfather woke up yesterday morning and began calling his children to let them know of a surprising decision he'd made. He'd called his investment advisor and ordered him to sell every equity he currently owns. In addition, he wants everything he has moved into ultra-safe treasury backed securities (TIPS, T-bills, T-notes, T-bonds).

I talked to him later in the day, and he explained his reasoning: he can afford to live the rest of his life with all his investments in treasuries, but he can't afford to lose another chunk of his portfolio in the equity market.

He is in his mid/late 70's, and he (and my grandmother) are living off their investment income. He's been following the markets carefully and attending investment conferences regularly, and many experts seem to think this could be a "double dip" recession (i.e. the market could tank again next year) due to a commercial real estate meltdown, among other possibilities. Some say it could take 10 years for us to really pull out of this.

He underlined his belief that we will ultimately pull out of it even if we are in a double dip or prolonged recession; but he's just not confident it would happen in his lifetime. He seemed to be asking for my opinion, so I told him that frankly I was surprised that he had much in equities at all at his age anyway, and I didn't think it was unreasonable for him to eliminate riskier asset classes if he can afford to live off proceeds from very safe ones.

A WSJ article highlighted on Yahoo Finance today discusses this very issue: Don't Let A Market Crash Hit You At The Finish Line.

As the article points out,

In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If "risk" is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods.
...
Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn't risk, what is?

So in other words, another crash might not much impact my grandfather's average annual return over the decades he's been invested. But it could still have a substantial negative impact on the annual income he can safely withdraw from his portfolio.

In related news, he's considering selling all or at least half of the equities in the grandchildren's trusts as well. His only concern is that with our longer time horizons that wouldn't be prudent. However if we are planning to use those funds for school or weddings or real estate in the next decade then maybe they SHOULD be out of the market.

He seemed to welcome my input, and I told him simply that I fully support whatever he thinks is prudent and chooses to invest in those accounts. They've been in Vanguard equity index funds for my whole life, and though I told him that I don't plan to withdraw any more funds from it anytime soon, that I wouldn't lose any sleep if he wanted to shift some or all of the balance to safer securities.

Nothing has been decided for me yet, but he's going to send me a copy of the balance sheet and get my input. Off the top of my head I'm thinking 50% stays in US stocks, 10% is moved to International stocks, 25% put in bonds, and 15% in TIPs...and I can balance around that with my retirement funds and the rest of what I've saved outside that account anyway.

The Cost of Having the Flu?

theworldofwealth@gmail.com (MEG) — Mon, 12 Oct 2009 23:27:00 +0000

I'm sick. Which I wouldn't even admit except for the fact that I've had a fever all day and my throaty cough gives me away. I haven't been sick in years. Basically I feel hungover (mild headache, dizziness when I move quickly, chills/sweats, drowsy) except that I haven't had a thing to drink since Friday night .

Yesterday I felt OK and had a moderately productive day. I was a bit tired though, and last night I started coughing and my chest hurt. I slept for 10 solid hours and woke up tired. My temperature is just over 100 degrees.

None of this is that big of a deal yet, but just in case I went to the pharmacy and picked up some cough drops, NyQuil, tomato soup, and a box of Kraft macaroni and cheese, plus some granola bars. Total cost: $16.50. I also downed an Immune Booster smoothie with antioxidant boost from Smoothie Factory, which was totally worth the $5.50 I paid.

But leaving the house is when I realized that I was totally out of it - and probably shouldn't have been operating a motor vehicle.

So despite my very ambitious study and workout plans, I've gotten pretty much nothing accomplished today. My head still aches slightly, and I tried to do some CFP reading but just couldn't focus (plus the light hurt my eyes). My back hurts from lying on the couch all day on top of it all. Ugh.

I'll either wake up tomorrow a lot better or a lot worse. I have a feeling either the fever and cough will subside or this will build into a full on flu situation.

I am most annoyed not about the prospect of getting behind at work, but that of getting behind in my fitness/diet routine and CFP study plan.

Total Cost of Obtaining My CFP

theworldofwealth@gmail.com (MEG) — Fri, 09 Oct 2009 16:57:00 +0000

Today I got my final reimbursement check from my company related to the CFP process! I registered for the exam, enrolled for a review course, and submitted my final grades for the last two education courses two weeks ago. The total final costs were $3,000 which I had to put on my credit card (at 0%) until my reimbursement came though. That money went straight to my reserve fund, and thankfully I am now back up over the 6 months of expenses mark!

Here is a breakdown of the total cost I have incurred to obtain my CFP:

Experience Component:
You have to have 3 years of related experience before you can utilize the CFP designation. In my case I don't associate any additional or specific cost with this.

Ethics Component:
You have to have a clean record to obtain a CFP designation. Theoretically you may have to incur legal costs to take care of or avoid a blemish on your record in this capacity, but I associate no additional or specific cost with this component.

Educational Component:
Here's where the real expense begins. Each class was taught for 3 hours a week for 11 weeks at a university nearby by CFP Certified professionals within each field. You can take a variety of courses online and in person to complete the educational requirement, but 30 hours of classtime in a CFP accredited class for each topic is required before you can sit for the exam. Here's what I spent.

Course Application Fee - $50
Fundamentals Class Tuition - $497.50
Fundamentals Books - $166.37
Investments Class Tuition - $497.50
Investments Books - $166.37
Tax Class Tuition - $575.00
Tax Books - $181.61
Retirement Class Tuition - $497.50
Retirement Books - $175.38
Insurance Class Tuition - $497.50
Insurance Books - $215.38
Estate Planning Tuition - $497.50
Estate Planning Books - $162.48
Capstone/Case Study Class - $497.50
Capstone Books - $266.72

You also have to have a college degree, but I don't include that here as a specific CFP expense.

Exam Component:
Exam Registration Fee - $595
Kaplan Review Course - $995.28
(Includes books, online videos and question bank, and 4 days of live instruction with 24/7 access to professors to answer your questions).

In total, I have spent $6,534.59. Unless I have to take the exam again, that should be all I spend.

Of course the cost of my time is an intangible that should be considered as well. I have dedicated over 200 hours of classtime and at least another 150 hours of study time over the last year. Before the exam I'll have put in another 100 hours of studying, not including the 35 hour long Kaplan Live Review.

I have made back around $600 of the cost by selling my used books on Amazon after completing each course. The Kaplan Review comes with an entire set of new books to study, so when the exam is over I'll have 7 more books to sell for (hopefully) around $40 each.