Financial Abundance Guide

You may have substantial savings for your children’s education and/or your retirement. You probably have savings in both taxable accounts and tax deferred retirement accounts such as a 401(k).

With the extremely volatile stock markets and low current interest rates, how should you invest your savings? Here are seven ways to increase your investment returns in these turbulent times.

1. Invest in different types of assets – With the current stock market volatility, you may be tempted to get out of the market and put everything in cash. If you do this today, with money market rates at 2.25% and the inflation rate at 4%, you will be guaranteed a negative “real rate of return.” However, by investing in a variety of different asset classes, you will lower your portfolio risk and, over time, have a higher investment return.
2. Allocate all of your liquid assets – Common investment wisdom recognizes that asset allocation can produce up to 90% of your total investment return. When choosing different asset classes, be sure to consolidate all of your financial assets, including your taxable accounts, your 401(k) and IRA accounts, deferred annuities and even rental properties. Often, financial professionals consider only the assets that they are managing when they provide asset allocations. This limited asset allocation approach may provide higher risks and lower total returns on your consolidated portfolio.
3. Pay attention to financial trends - Don’t try to time when the markets will go up or down. However, pay close attention to current market cycles. Today, with a volatile stock market and a declining business cycle, it may be prudent to reduce your equity allocation. If inflationary pressures remain for the foreseeable future, consider having a portion of your portfolio in an inflationary hedge such as a gold fund or a bond mutual fund investing in Treasury Inflation Protected Securities (TIPS).
4. Learn to build “ladders” – Money market funds are typically yielding 2.25% or less. If you are sitting on cash that you won’t need in the short term, improve your yield by 1% or more with a short term CD ladder. Buy a 3 month, 6 month, 9 month and 12 month CD, with 25% of your cash in each CD. This approach could increase your annual yield to 3.5%. Plus, if interest rates start increasing, every 3 months you will be able to invest 25% of your cash funds at a higher interest rate.
5. Consider a Mid Cap allocation – Since 1981, when Mid Cap stocks were first tracked as a separate asset class, the Mid Cap index has performed significantly better than both the Large Cap and Small Cap stock indexes. Year to date, the S&P 400 Mid Cap index is out-performing the S&P 500 Large Cap index by over 10% and the S&P Small Cap 600 index by over 3%. Including a Mid Cap index fund with your equities may improve your total return.
6. Reduce your taxes on investments – Pay attention to which accounts hold your investments. Keep tax-efficient investments, such as municipal bonds and index stock funds in taxable accounts. Tax-inefficient investments, such as actively managed mutual funds and investments that pay non-qualified dividends (example: REITs), should be kept in tax free Roth accounts or tax deferred accounts such as a 401(k).
7. Minimize your investment fees - Investment sales expense (loads and 12b-1 fees), mutual fund operating expenses, brokerage trading costs and asset management fees reduce your total return. A low fee approach can substantially increase your investment returns. Over a 15 year period, paying an extra 1% yearly investment fee can reduce the total return on a $500,000 investment by $200,000.

In the 90s, making a decent return on your investments was easy. For the foreseeable future, you will need to pay much more attention to your investing in order to receive a reasonable investment return. More details on how to increase your investment returns are provided in Financial Abundance Guide.

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What is the world’s most expensive white collar crime? If you guessed drug trafficking you would be wrong. It is identity theft!

In 2008, the Federal Trade Commission predicts that 33 percent of all Americans will be the victim of some form of identity theft. When this occurs, it can easily take over 600 hours of your time to restore your identity and, depending upon the type of identity theft, it can become a personal nightmare for years.

You may not be aware that there are five types of identity theft. Most people think of financial identity theft, in which someone uses your credit cards or your bank accounts. However, of all identity theft, financial is only 22% of the total and is the easiest to fix.

The biggest type of identity theft is criminal or character identity theft. This occurs when someone uses your identity in the commission of a crime. When this happens, there may be a warrant out for your arrest that you know nothing about it until the police arrive at your door.

Medical Identity Theft is the fastest growing type. This occurs when someone uses your health insurance as their own. When this occurs, your Medical Information Bureau records can be completely altered. This type of theft can lead to you being declined for insurance coverage or, in an emergency situation, you could be administered the wrong medication or given the wrong type of blood. In some situations, Medical Identity Theft has been fatal.

Social Security is the fourth area for identity theft. This continually occurs as people come to work in the U.S. without a valid Social Security number. In one case, a woman found out that over 80 people were using her Social Security number.

The final area is Driver’s License Identity Theft. When someone has a driver’s license or state id with your information and their photo, they can open bank accounts, purchase vehicles, get speeding tickets and even DUI’s, and you can be held responsible for all of these activities.

Stealing and selling identities is a multi-billion dollar black market. Once an identity is stolen, it can be bought and sold over and over again, with multiple people in multiple locations using the same identities. Since we are all in many different databases, there is no way to prevent your identity from being stolen. You cannot control which data base with your personal information will be breached next.

The best identity theft protection is to have a service that you can rely upon to quickly restore your identity if it has been stolen. The service should include: 1) Monitoring - your accounts should be constantly monitored and you should be notified when accounts open in your name, your address changes or any other changes occur; 2) Restoration – having an experience person who will work on your behalf to restore your identity to its original form is critical; 3) Legal Protection - for emergency situations, the service should provide immediate access to attorneys who will write letters and make phone calls on your behalf.

No one is immune to identity theft. If you would like more information on what you can do to protect yourself and your family, please do not hesitate to call or email me.

This article was written by Peggy Goehringer, a Certified ID Theft and Risk Management Specialist. Peggy can be contacted by phone at 720-280-1068 or by email at peggygoehringer@aol.com

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Is too much of your income vanishing due to interest payments on credit cards, car payments, mortgages and other debt? Perhaps the American family’s ever-increasing debt helps explain why 75% of Americans think that the economy is in bad shape, when unemployment is only at 5%, interest rates are close to historic lows, inflation is not (yet) spiraling out of control and the stock market is approaching its historic high.

In the past, my financial planning clients mainly came to me for investment advice, to help determine if they were saving enough for their children’s college expenses and their retirement and/or wondering if their retirement savings would last throughout their lifetimes. Recently however, more clients are seeking help in reducing their massive debts. These clients are unable to spend less than they earn due to the high cost of servicing their debt.

Many of my clients earn over $200,000 annually. After paying their taxes, home mortgages, home equity loans, car loans, credit card debt and vacation home payments, they often have less than 30% of their gross income remaining. They have no remaining income to save for educational expenses and retirement. Often, even paying their current bills puts them deeper in debt.

In the past 20 years, Americans have gone from saving 10% of their gross pay to saving less than 0%. Over the same time period, the average mortgage payment has increased from 15% to 30% of gross pay and average non-mortgage family debt has increased from 5% to 35% of gross pay.

After taxes, mortgage payments, non mortgage debt service (such as car loans and credit card interest payments) the average American family has less than 45% of their gross income remaining. Twenty years ago, the average family had 60% of gross income remaining after these payments.

Are you in the “debt danger zone?” To find out, calculate your total annual “debt,” including all taxes, mortgage payments, car payments, home equity loan payments, credit card interest payments, second home costs (net of income) and any other interest paid to service debt. If the sum of these payments exceeds 50% of your gross income you have entered the debt danger zone. If the sum exceeds 60% of your gross income, immediate action is critical.

If you are in the debt danger zone, consider the following:

1. Examine your spending habits. If you are spending more than you earn (including all of your “debt” payments) reduce non critical spending and put nothing further on your credit cards until their balances are completely paid.
2. If you have a vacation condo, selling it will not only provide equity to pay down other debt, it will also eliminate mortgage payments and HOA fees.
3. Use funds held in a savings or a brokerage account, to pay off credit card debt. However, do this only if you can still maintain an “emergency fund” that will cover at least 6 months of your total living expenses
4. If your 401(k) contributions are greater than the maximum employer matching amount, reduce your contributions to the matching amount cap until your high interest rate debt is eliminated.
5. To pay off credit card debt you could borrow from your 401(k) account, if your plan allows. The interest rates for repayment of a 401(k) loan will be considerably less than credit card interest rates. However, if this is done, immediately begin a scheduled repayment plan of the borrowed funds.
6. If you are still in the “danger zone,” consider downsizing your home. Reducing your mortgage by $100,000 can save you over $7,500 annually.

Because our government and financial institutions encourage us to increase debt and reduce savings, it is easy to fall into the debt danger zone. By paying close attention to your personal finances, you can reject this path to financial scarcity and discover the “path less traveled” to financial abundance.

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