5 Top Tips for Keeping Your Belongings Safe When Traveling

Although it would be nice to think that we could all travel safely without the fear of being separated from our belongings en route, airports, train stations and bus stations make easy pickings for the light-fingered.  Here are a few top tips to ensure that you arrive at your destination with all of your belongings in tow:

1. Attach a few small bells (like the ones on Christmas decorations) to your hand luggage so that if anyone tries to move it while it is stowed, you will hear instantly.

2. Invest in a few items of clothing with concealed pockets, and wear them while traveling and while out and about in busy places when you reach your destination.

3. Whether you are seated during your journey or waiting around to board planes, trains or buses, place your foot through the handles of your luggage, if possible, to ensure that it doesn’t stray.

4. Don’t let any type of commotion distract you from your luggage.  Thieves often use distraction techniques to buy them the few vital seconds that they need to grab and run.

5. Avoid removing your wallet from a purse or from your person when in public, otherwise would-be thieves will know exactly where to target.  Go somewhere private such as a restroom to remove whatever cash you need, and immediately hide your wallet again.

Buying Organic Without Breaking the Bank

As anyone who has checked out the prices of organic produce in his or her local supermarkets knows, switching to foodstuffs that are free of pesticides and chemicals can be a very expensive business.  With these few simple tips, you can eat more healthily for less:

1. Don’t assume that supermarkets offer the best value for organic produce.  Check out natural food stores too, because they can often be cheaper overall or for certain items.

2. Instead of shopping for the ingredients for a particular recipe, buy the cheapest organic ingredients and devise meals around them.  Also, adapt traditional recipes so that they use the cheapest organic produce.

3. Design your meal plans around seasonal produce, because it is always less expensive.

4. If you have relatively easy access to local organic growers, then buy directly from them to cut costs.

5. Remember that organic produce that is frozen is still better than nonorganic produce that is fresh.  Consider buying frozen if the ingredient that you want is out of season.

6. Some foodstuffs are more heavily contaminated with pesticides and chemicals than others, and it is estimated that we can reduce our exposure to contaminants by 90% simply by buying the organic versions of these alone.  Even if you can’t afford to go fully organic, try cutting out nonorganic apples, strawberries, peaches, nectarines, grapes, blueberries, spinach, celery, sweet peppers, potatoes, lettuce and kale, because these are the worst offenders.

Hidden Financial Mistakes … And How To Fix Them

You pay your bills on time. You try to save as much as you can. You even follow the advice which you read in books and hear on the radio about how to keep your finances in check. But you’re still not getting ahead. Well, sometimes, it’s the unchallenged assumptions about how we’re handling our money which rise up and bite us in the keister.

Hidden Mistake #1: Inappropriate Mental Accounting

Definition: Tendency for families to divide money into separate accounts based on subjective criteria.

Typical Example: Treating $100 you received as a gift from Grandma, differently than a $100 bill earned.

Typical Example #2: Having money languishing in a savings account earning 0.25%, while carrying high-interest debt to pay off at 12%.

Cure: Funnel income, no matter the source, into one savings account.

Any “found money”, such as a tax refund or gift from Grandma, quickly decide where that money is best utilized. As for expenses, occasionally change how you pay. If you always pay with a credit card, try cash. This will get you remembering that all of it, for the purposes of your mental “books”, should be lumped into one, monthly bucket.

Hidden Mistake #2: Manipulative Price Anchoring

Definition: Our tendency to relate the value of a purchase to a price point which, rationally, should have no bearing on the amount spent.

Typical Example: The “rule of thumb” to spend two months’ salary on an engagement ring.

Typical Example #2: A realtor will tell you that “in 2007 this house was going for $500,000 and is now listed at only $350,000!” … causing you to think this house is undervalued.

Cure: For big ticket purchases like a house, car, or engagement ring, ask a friend whose financial values you respect for their input.

For everyday purchases, avoid looking at the MSRP or sticker price. Ask yourself:

Can I afford this today?

What do I really want to spend?

What is this really worth to me?

Marketers are experts at this sort of price-anchoring, and we really should know better … but yet we still fall prey to it. Try not to let outside sources set up the comparison by which you should be considering such large purchases.

Hidden Mistake #3: Loss Aversion Costing You

Definition: Our consistent tendency to avoid loss, rather than acquiring gain.

Typical Example: An investor is more likely to sell a stock which has increased in value, rather than selling stock that decreased. Over time, her investment portfolio is made up of investments that have decreased.

Cure: Don’t think of selling a stock for less than you paid for it as being a loss. It can actually work as a gain for two reasons:

* Tax deduction (which can really help!)

* The other side of opportunity cost: opportunity GAINED (i.e. you can better utilize that money elsewhere)

So, don’t check your portfolio so often. If you don’t know you’ve lost money, you don’t experience the pain. (And riding the roller-coaster of your portfolio’s value is a waste of emotional space.) Since stock prices go up in the long-run, the longer you go without looking at your portfolio, the greater chance of seeing a gain. Sometimes taking that loss really is the best thing you can do.

Hidden Mistake #4: Following the Herd

Definition: The tendency for us to want to do the same thing as a large group of others, with no thought to whether that action is rational or irrational.

Typical Example #1: Buying when prices are high because everyone else is.

Typical Example #2: Selling when prices are low because everyone else is.

Cure: Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”

Keep this in mind when making your next financial decision. If everyone is telling you to buy this or buy that (i.e. gold, silver, real estate) do the opposite. In the financial investment world, if it’s too good to be true, it usually is. Write up an investment policy statement or contract. Include factors such as:

* Investment objective

* Investment goals

* Desired asset allocation and diversification

* Summary of your risk tolerance

* Rebalancing schedule

Before making any changes, consult with this contract. You can also take advantage of this inherent tendency to do what’s approved by others to affect positive behavior. For example, let’s say you trying to pay off debt. Tell your 3 closest friends, make an informal contract, sign your name at the bottom, and then email it to them. The pain you would incur from breaking that contract is high relative to the pain of breaking your behavior if you went about it alone.

Happy 2012!!

Happy New Year!!

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Three Lessons in Work and Life

Business icon Jack Welch once told Reader’s Digest what he’d learned from three jobs he had growing up: caddying, punching holes in a piece of cork, and selling shoes.

• Caddying. The future CEO of General Electric loved being out on the golf course hearing all about the big deals being made by the businessmen and the affluent. “It was like being a fly on the wall at a meeting.”

• Cork. Punching holes into a sheet of cork for a Parker Brothers game called “Dig” was his first glimpse into monotony. “It lasted about a month,” he says, “and I concluded that I never wanted to do anything like that again—ever.”

• Shoes. It was through his third job, selling shoes, that he learned the basic tenet of business: Close the deal. “If they didn’t like a shoe,” he says, “I always tried to be thinking ahead to a pair they might like better.” Every time someone walked into the store, he said, he felt he was stepping up to the plate to swing for a home run.

“Today I believe that the worst sin in running a big company is to manage its size rather than using that size,” he says. “The advantage of size is the resources it gives you to go to bat often. You have to take risks in business. If you take a risk and fail, get up to bat and swing again.”

Always Question the Premise

After World War II, Gen. Dwight D. Eisenhower served for a time as president of Columbia University. According to one story, a committee of faculty members once asked him to issue a rule prohibiting students from walking on the grass in the main quadrangle.

Before issuing a statement, he asked, “Why do they walk on the grass?”

“Because it’s the shortest way to the central hall from the main entrance,” the committee answered.

“If that’s the way they are going to go,” he said, “then cut a pathway there.”

Eisenhower understood that telling people what not to do isn’t always the best course of action.

Borrowing from Your 401(k)

With the current economy, people are borrowing from their 401(k) plans at record levels.  When times are tough that particular pool of money begins to look very attractive.  But, deciding to access that pool might not be as easy or straight-forward as you think.

While every 401(k) plan is different, most will let you borrow as much as 50% of your vested balance up to $50,000.  The loan is paid back through your paycheck, with interest.  Most plans have competitive interest rates and the loans can be carried for up to 5 years.  If you use the proceeds of the loan to purchase a primary residence, that pay-off term may be extended.

When you are making payments back into the loan, you are paying yourself interest on the money you borrowed.  This is where it gets a bit foggy.  First, when you draw your paycheck, you pay taxes on the earnings.  Then you pay the interest on the loan out of what remains.  At a later date, say retirement, you begin drawing from the plan.  Those distributions are taxable income, therefore taxed again.  You are paying income taxes twice on the funds you use to pay interest on the loans.  (Special tax rules apply to Roth 401(k) contributions).

There is an opportunity cost with taking a loan from your 401(k) as well.  If those funds are not invested, they are not continuing to grow tax deferred.  So, what is the opportunity cost?  Well, you need to compare the interest you are paying yourself and the future tax implications previously discussed with the lost opportunities of tax deferred investment returns.

There are other considerations as well.  For instance, if there is a separation from employment, the plan may require that the loan be immediately repaid.  If you don’t have the funds to repay the loan, it is treated as a taxable distribution.  If you are not age 59 ½ or more, a 10% early withdrawal penalty may also apply to the taxable balance.

Whether or not you can afford to pay back the loan and still make contributions to the plan should be carefully considered.  Would the circumstances that have lead you to look at borrowing the funds as an option impair your ability to repay the loan?  If so, this might not be considered a viable option.

The interest you pay on alternative financing options may be tax deductible.  For example, the interest on a home mortgage often qualifies for a tax deduction.  However, the interest on a plan loan repayment often is not.  Be sure to weigh the comparisons of tax deductibility for both alternatives before making a decision.

Every plan is different and will have various restrictions.  Consult with your plan administrator before deciding to borrow from your 401(k).

Taxes and Social Security

   If you are looking forward to retirement and tax-free Social Security income, you might be surprised when the IRS comes around for a bite. Yes, way back when Social Security was a young program, President Franklin D. Roosevelt promised no income taxes would be exacted, but that promise ran out in the 1980s for some people whose income exceeds certain levels.

Now the federal government considers the retirement entitlement as taxable income when your other income plus half of your Social Security exceed an amount based on your filing status ($32,000 if you filed jointly, $25,000 for single filers). First, only 50 percent of your benefit above a certain threshold is taxable. When you exceed the first threshold, up to a maximum of 85 percent of your benefit can be taxed.

You can continue to work and still receive retirement benefits. Your earnings in (or after) the month you reach your full retirement age will not reduce your Social Security benefits. But your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.

If you work for someone else, only your wages count toward Social Security’s earnings limits. If you are self-employed, the federal government counts only your net earnings from self-employment.

Income from other sources is not counted, such as other government benefits, investment earnings, interest, pensions, annuities and capital gains.

If you work for wages, income counts when it is earned, not when it is paid. If you have income that you earned in one year but the payment was made in the following year, it should not be counted as earnings for the year in which you received it. Some examples are accumulated sick or vacation pay and bonuses.

If you are self-employed, income counts when you receive it—not when you earn it—unless it is paid in a year after you become entitled to Social Security and earned before you became entitled.

Is Your Mental Accounting Adding Up?

     The stock market drops 50 percent and comes up 50 percent, so you are back where you started, right? Not so right. After a moment of thinking about it, you probably realized the real math does not add up that way, but consumers see it that way in their “mental accounting,” a phenomenon that affects how people spend, save and invest their money.

The faulty stock market perception can be illustrated with the following equations.

If you were to ask people what the average of 3 and 5 is, they typically respond as follows: (3 + 5 = 8)/2=4. The average is 4.

If you were then to ask them for the average of a negative 50 and a positive 50 they would do the equation the same way. So the typical investors assume that if they are getting positive returns and negative returns that they are still doing fine.

So what if you were then to ask them, “What is the impact of losing 50 percent one year and gaining 50 percent the following year? Back to your starting amount, right?” Actually, that would work out like this:

·        $10,000 down 50 percent is $5,000

·        Then up 50 percent is $7,500

·        This is a 25 percent loss (13 percent annualized) after “offsetting” years.

Let’s look at an example in which the gaining percentage is greater than the losing one. A return of +66 percent followed by -50 percent would seem to add up to an 8 percent return. But actually:

·        $10,000 up 66 percent is $16,600

·        Then down 50 percent is $8,300

·        +66 percent followed by -50 percent produces a negative 9 percent annualized return.

But look at the compounding gain of two 8 percent years:

$10,000 x 1.08 = $10,800 x 1.08 = $11,664        

So, many people wrongly think that if they are getting a greater return than a loss, then they are doing well. But obviously that’s not true. Another misperception is just how deep a hole is created by losses. A 100 percent return would be necessary to offset a 50 percent loss. But a 300 percent return is required to offset a 66 percent loss. And then 400 percent for a 75 percent loss.

So, the next time you’re thinking about taking a risk, make sure you are doing an accurate mental accounting.

How Do Fees Affect Mutual Fund Performance?

    When investors consider mutual funds, they often hear warnings about the impact of fees and expenses on returns. But these seem invisible to investors, so what really is the impact?

A mutual fund’s fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has performed in the past. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the fund’s assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

 Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

 The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by Moolanomy.com.

But even that isn’t the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

 The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the fund’s turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the Journal reported.