What is a traditional economy?
Posted on October 23, 2008
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A traditional economy is an underdeveloped economy in which communities use primitive tools and methods to harvest and hunt for food, often resulting in little economic growth. Traditional economies are often found in rural regions with high levels of subsistence farming. Countries that evolve their economies past the traditional level often develop into market economies or command economies.
Social Security Benefits
Posted on September 9, 2008
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Here are the basics of what you’ll get and when.
Social Security, which gets much of the credit for driving down the poverty rate among America’s senior citizens, has become a political hot potato in recent years. Depending on who’s talking, the system stands to go bankrupt sometime in the next three or four decades unless something’s done. Simply put, there will be too many Americans living longer and becoming eligible for Social Security and too few younger Americans to support their payments.
In the meantime, here’s a rundown of what you get for your Social Security taxes.
Retirement benefits
You’ll get regular monthly checks if you reach a certain age and have worked a certain length of time in a job covered by Social Security. You are considered fully covered if you have worked in a covered job for at least 40 calendar quarters (employees of nonprofit organizations who were forced to join Social Security in 1984 get a more generous schedule). You needn’t be fully insured to qualify for benefits.
The earliest you can retire and receive benefits is age 62, but your payments will be reduced if you retire before your full retirement age. The age for receiving full benefits and the reduction for early retirement is increasing. The schedule will add two months each year until 2027, when workers born in 1960 and later will have to be 67 years old to qualify for full benefits. Eligibility for reduced benefits at age 62 won’t change, nor will the age of eligibility for Medicare, which is 65.
A spouse entitled to benefits from his or her own work record receives whichever is larger: his or her own entitlement, or an amount equal to half of the spouse’s.
Taxes on benefits
For most retirees, Social Security benefits are still entirely tax-free, and they are at least partially tax-free for the rest. If your adjusted gross income, plus nontaxable interest, plus one-half of Social Security benefits exceeds $25,000 if you’re single, or $32,000 if you’re married, then up to 50% of your benefits can be taxed. And if your income is more than $34,000 on a single return, or $44,000 on a joint return, a different formula takes over that almost always requires 85% of your benefits be taxed.
The IRS uses an 18-line worksheet to figure this out. Here, in a nutshell, is how the three-tier taxing system works: Assume that you and your spouse get $10,000 in Social Security benefits. If half that amount plus your adjusted gross income and tax-exempt interest total less than $32,000, none of your benefits would be taxed. If the combination totals $33,000, however, $500 worth of your benefits (one-half of the amount over the threshold) would be subject to tax. The one-half-of-the-excess rule would operate until your income plus half your benefits totaled $42,000. From that point on, half of your benefits — $5,000 — would be considered taxable income.
How work affects social security
If you are between age 62 and full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different limit until the month you reach full retirement age. The amount is indexed for wage inflation and rises a bit each year. From full retirement age on, you can earn any amount and still receive your full benefits. And note that the limitations apply only to money you earn, not to income from stocks, bonds, real estate, pensions, or other “nonearned” income. See www.ssa.gov for annual limits.
Disability income
People who are blind, or disabled in ways that prevent them from working, may receive assistance based on their average earnings under Social Security. The rules are tough, though. Disability is defined as an inability to work because of a physical or mental impairment that has lasted or is expected to last at least 12 months or to result in death.
Survivors’ benefits
The spouse, children, parents, and, in some cases, grandchildren of a deceased eligible worker may be entitled to cash benefits. Specifically eligible are:
-A widow or widower 60 or older (50 if disabled)
-A widow, widower, or surviving divorced mother if caring for the worker’s child who is under 16 (or disabled) and who is receiving benefits based on the deceased worker’s earnings
-Unmarried children under 18, or under 19 if full-time students at a secondary school
-Unmarried children who were severely disabled before 22 and who remain disabled
-Dependent parents 62 or older
-If the marriage lasted ten years or more, checks can go to a surviving divorced spouse of 60 or a disabled surviving divorced spouse of 50.
Medicare
Medicare provides hospital and medical insurance to Social Security recipients. If you’re eligible, coverage takes effect automatically when you reach age 65. Part A, which covers bills for hospitals (within limits) and similar institutions (nursing homes and hospices, for example) is automatic. Part B of Medicare, which covers doctors’ bills, outpatient treatment at hospitals, prescription drugs, and some other costs, isn’t automatic. If you want it, you have to pay for it via monthly premiums deducted from your Social Security checks.
How — and when — to contact Social Security
It’s especially important to contact the Social Security Administration if you’re unable to work because of an illness or injury that’s expected to incapacitate you for a year or longer, or if you’re 62 or older and plan to retire soon.
If you’re nearing retirement and wonder what your benefits will be, call the SSA at 800-772-1213 and ask for a “Request for Social Security Statement.” About two to four weeks after returning the completed form to the SSA, you’ll receive your estimate in the mail. You can also request the statement on the SSA’s Web site at www.ssa.gov, where you’ll find a wealth of helpful information, plus a directory to local SSA offices.
Even if you intend to keep working after 65, you should check in with the Social Security people three months before your 65th birthday to enroll in Medicare, which will become available to you at 65 whether or not you retire.
What is a charitable remainder trust?
Posted on August 20, 2008
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An arrangement in which property or money is donated to a charity, but the donor (called the grantor) continues to use the property and/or receive income from it while living. The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned. In addition, the asset is removed from the estate, reducing subsequent estate taxes. While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it’s still a qualified charitable organization). CRTs come in three types: charitable remainder annuity trust (which pays a fixed dollar amount annually), a charitable remainder unitrust (which pays a fixed percentage of the trust’s value annually), and a charitable pooled income fund (which is set up by the charity, enabling many donors to contribute).
Six Sensible Tips to Conserve Your Gas
Posted on July 2, 2008
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1. Drive Smart
Aggressive driving is not only a dangerous and ticketable offense, but it’s also a waste of gas. Excessive speeding, rapid acceleration and braking all significantly lower your gas mileage. In fact, it can lower your highway gas mileage by as much as 33% and 5% in the city.
2. Obey the Speed Limit
Again, not only is obeying the speed limit the safer choice, but also a more fuel efficient one. Most vehicles all achieve their optimal fuel economy at a different range of speeds. However, it’s vital to be aware of the fact that for most vehicles, at any speed over 60 mph, it’s typical for gas mileage to quickly decrease. In reality, you can presume that for every 5 mph you drive over 60 mph, you are paying an additional 30 cents per gallon at the pump.
3. Eliminate Extra Weight
Did you know that for every 100 pounds of weight placed in your car that your MPG could be reduced by up to 2%? If you have any excessive items in your trunk, backseat, or the bed of your truck, now is the time to remove them.
4. Idle in Moderation
In case you didn’t realize, idling gets a whopping ZERO miles per gallon. Its one thing to be idling at a red light – but, don’t waste your precious gas idling when you’re waiting for a train or if there is a traffic jam.
5. Use Your Cruise Control
If you’re going to be traveling on the highway/interstate for awhile, you should consider utilizing your cruise control. The more you maintain a constant speed, the more gas you will conserve.
6. Use Your Overdrive Gear
When your vehicle is in overdrive, the engine speed actually slows down – this is a good thing as you are not only conserving gas, but you are also reducing crucial engine wear.
Your Keys to Financial Security
Posted on June 27, 2008
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It can feel like an overwhelming task to look at the big picture of your future financial security. While you probably already know the basic principles of financial security, we’ve taken the task of financial planning and broken it down into three simple keys. Follow these steps and you will be well on your way to meeting your day-to-day future financial security.
1. “Hope for the Best, Plan for the Worst”
These words from my immigrant grandparents still resonate, even more so today. In planning your present financial condition, don’t wait for money to be left over at the end of the month to sock away for your rainy day — pay yourself first (10% is a good rule of thumb, but if you can’t scrape that together, start saving what you can). Setting up automatic contributions into your savings makes the task even easier.
If your goal is for the short term — say less than three years — put it in a high-interest online savings account. For longer-term goals, consider a mutual fund.
2. Stay Prepared
It pays to be prepared for the “what ifs” in life. For most young adults, that means having:
-An emergency fund
-Health insurance
-Homeowner’s or renter’s insurance
-Auto insurance
Plus, if you have children, life insurance is your fifth MUST. If the unthinkable were to happen, you would want to make sure your kids would be secure. For example, I have an account in which I save regularly toward annual and bi-annual insurance premiums so the bills won’t blow my budget when they come due.
3. Thinking Long-Term
It is easy for our immediate and short-term needs to get all our attention, as the long-term future and our retirement can seem like a far-away land. However, any and almost all financial planners will tell you to start saving for your retirement… yesterday.
Don’t be one of those on the wrong-side of these alarming statistics –
-Of adults age 25 and under, only 19% contribute to a traditional or Roth IRA, according to a study by CCH, a provider of tax analysis.
-Only 28% participates in a 401(k) plan, and of those only 4%, contribute the maximum amount allowed.
If you’re a young adult, you have time on your side. Use it! The sooner you start investing toward your retirement, the easier it is to turn even small amounts of money into big bucks.
Where to start? Investing in mutual funds within tax-favored accounts such as the aforementioned Roth IRA and 401(k) are your first stops.
The Big Picture
I hope breaking things down into these three keys helps you unlock the puzzle that is your future financial picture. The importance of these financial fundamentals is that it doesn’t matter how much money you make. Whether you bring home $20,000 or $200,000 a year, you can ensure you are making sound and responsible financial decisions that will help you sail even the roughest of seas, and most probably offer you the type of security that will enable you to retire to your own yacht someday.
Four Rules Every Home Buyer Must Know
Posted on June 10, 2008
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With the unstable state of the housing market and no end in sight, here are a few quick tips you need to know before your next real estate purchase.
Rule 1: Don’t try to time the bottom.
Whether you choose to accept this fact or not, if you buy a house today, it will likely be worth less next year. This fact can lead you into trying to time the bottom of this housing pit. Don’t give into temptation as trying to time the bottom will be pointless - it’s a lot harder to accomplish than you think.
Instead, you should simply take your time when searching for a new home. Two key rules of thumb to remember are: 1) Disregard the asking price – make a bid that is 10% below what comparable homes in the area are selling for. 2) Always sell before you buy – you don’t want to be in the predicament of making two mortgage payments.
Rule 2: Know all you can about mortgage rates.
In the not-too-distant future, financing a new home is expected to become very expensive. Never mind the Federal Reserve’s slashing of interest rates – we are speaking of fixed mortgages, which don’t completely follow the Fed, as they are a direct correlation of the bond market’s expectation about inflation – a huge concern.
In fact, according to Celia Chen of Moody’s Economy.com, the 30-year mortgage, now at 6.1%, will likely reach mid-6% by December and 7% in 2009. Essentially, this means that even if you wait longer to buy a home while the prices are falling, you could still be penalized by your interest rate. If you secured a $250K mortgage today, you are facing a $1,500 per month mortgage payment. In 2009, at 7%, your hefty $1,500 a month payment will only get you a $225K mortgage.
Mortgages in amounts greater than $417,000 - the limit for buying by federally sponsored mortgage agencies - usually run a fifth of a percentage point above conventional products. According to HSH Associates, investors are avoiding jumbos, which now average 7.2% with no clear sign of dropping.
There is a small glimmer of hope for jumbo borrowers. A new law allows Freddie Mac and Fannie Mae to buy loans as large as $729,750 in 71 high-priced areas. So far, these “jumbo conforming” loans average 6.6%.
Rule 3: Don’t buy cheap.
In this housing crisis, you are bound to have heard from someone who knows someone who got a great deal on a foreclosure. While it has undoubtedly occurred, be wary of foreclosed homes. When you buy a house, you are also buying into the neighborhood. When foreclosures tend to be bunched in certain areas, the quality of life and prices could continue to decline.
A trade secret to keeping your quality of life and the price of your home high is to purchase in an area with highly rated schools. Trulia.com states that these neighborhoods fare better during downturns and that pattern is holding today.
Rule 4: Make sure your agent has your best interest at heart
Jon Boyd, the past president of a buyer’s agent trade group, suggests that you need to ensure you’re not being guided to a house that’s better for your agent than it is for you. He states that you need to agree on his/her commission up front – typically 3% - and that any extra payments will go directly to you.
Learning From The Oracle Warren Buffett
Posted on June 4, 2008
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Like the protagonist of the Matrix trilogy, Neo makes his pilgrimage to the Oracle to find his way into his own destiny. In examining your own financial destiny, there is no denying that for many, that pilgrimage causes the most very powerful and influential to look to the heartland of America - to Omaha, Nebraska. According to Forbes magazine, it is here where the wealthiest man in the world, the Oracle of Omaha, Warren Buffett, has held the markets in his palm for almost a half-century.
As the largest stockholder, Chairman and CEO of Berkshire-Hathaway, Buffett is probably most notable in his investment style as a proponent of being a common-sense, longer-term investor. Schooled in the sound intellectual investment framework of Benjamin Graham (of whom Buffet included in the name of his first son), he has constantly outpaced the S&P 500 year in and year out. Of note also, in his golden years (Buffett is now 77) he has become the largest philanthropist in history. Buffett once commented, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”
Following are the principles that have driven his investing success:
Warren Buffett is a value investor. Buffet’s noted style as a value investor can be summed up by his quote – “Never buy IPO’s on days that end in ‘y’.” That means he doesn’t participate in wildly running growth stocks—in fact, he was ridiculed for staying out of the tech boom in the late ’90s. Of course, we all know how right he was just after the year 2000, when everything DotCom collapsed. This is how Buffett defines his criteria as a value investor.
Brand Recognition – One of his key criteria… Is the company well known? Does it have a stronghold in its core products with consumers? Is it a company that does not depend on the whims of Wall Street, but on the needs of the consumers as a whole? The company has to be a recognized brand in its industry for Warren Buffett to consider it as part of his holdings. He likes to comment that he only invests within his “circle of competence”.
Earnings Consistency – Rule number one for Buffett is “Don’t lose money”. Rule number two is “Always remember rule number one”. Warren looks for a growing company with no negative years of earnings growth in the past 5 years. If the company has had at least one year of negative earnings growth in the last 5 years, then it will not be considered. By the way, Long-term Earnings Per Share (EPS) growth indicates that the company is growing over time. The EPS of a company must be continually growing.
Long-term debt – This is the company’s current long-term or multi-year debt structure. This could include mortgages, long-term bank notes, etc. In order to pass the Warren Buffett test, long-term debt must not be greater than 2 times net income. This is a liquidity measure which ensures that the company has not taken on too much risk through its borrowings.
Return On Equity – Return on Equity (ROE) measures the return on shareholders funds or shareholders equity. ROE is calculated by dividing the net profit by shareholder equity and multiplying it by 100 to express the result as a percentage. The higher the ROE, the better. Buffett requires a return on equity of 15% or more.
Capital Expenditure – Free cash flow per share is the amount of money that is free to be spent. It is cash flow minus all expenses. Buffett likes free cash flow per share to be positive.
Utilization of Returned Earnings – This is all about seeing if management is using retained earnings to increase shareholder value. In order to be increasing shareholder value, according to Buffett’s methodology, retained earnings should provide a return that is 15% or better, but he will accept if a company has a return that is better than 12%.
Considered the greatest stock market investor of all-time, Buffett offers his values beyond the bottom-line. While he stresses that in order to be a strong investor, one must have a thorough understanding of the language of accounting, he has also stated that “We have plenty of money that we can lose, but one thing we can not lose one iota of, is our reputation.”
Short Selling Your House
Posted on May 27, 2008
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In the event that you find yourself with an overwhelming housing debt, you may find yourself unable to keep up with your mortgage payment after a dramatic life change (i.e. divorce, layoff). One option more people are exploring is selling their homes for less than they owe on the mortgages, known as a “short sale.”
A short sale, or “selling short”, is definitely favorable to a foreclosure, which stays on your credit record for ten years.
Consult A Tax Advisor
If you decide to pursue putting your home on the market for a short sale, it is recommended to seek out the expertise of a tax advisor. The IRS will possibly consider the difference between the value at which you sell your home and the mortgage balance as “income”. This income would be subject to taxation.
An exception to this rule is if you can prove that you were “insolvent” - that your debts were larger than your assets - before your mortgage lender agreed to a short sale of your property. A tax advisor will be able to tell you for sure whether you’d be considered insolvent by IRS standards.
Dealing With The Real Estate Agent
Real estate agents typically take a much lower commission on short sales, and it often takes much longer to actually close the sale once the seller accepts an offer. You will need to find a real estate agent who sympathizes with your situation. There are agents that understand that financial problems brought on by unexpected circumstances are a fact of life, and will want to help.
The Mortgage Lender
Your Lending Institution will have to be convinced that you deserve to be approved for a short sale. You will need to tell your lender about your financial hardships, including layoffs, divorce or medical issues. It may also be necessary to provide the lender, either directly or through the buyer or buyer’s agent, documentation of your financial issues, such as pay-stubs, bank statements and so forth.
Steer clear of making any purchases of luxury items. These debts will appear on your credit report and your lender will be less inclined to take you seriously as a candidate for a short sale.
Short sales take much longer to close than more conventional sales, so prepare accordingly. If it works, you’ve avoided bankruptcy and an ugly mark on your credit report.
Banks vs. Mortgage Brokers
Posted on May 19, 2008
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When you are shopping for a home loan, you should be aware of the differences, both pros and cons, of using either a traditional lending institution loan officer, or using an independent mortgage broker to help obtain your loan. Depending on your credit needs, the differences can be substantial and relevant.
Bank Loan Officers
The loan officers at a bank, credit union or other lending company are employees who work to sell and process mortgages and other loans originated by their employer. They often have a variety of loan types to offer, but all loans originate from one lending institution. After evaluating a prospective application, they work to find the best loan offered by their employer to fit the applicant’s needs in relationship to the risk presented by their credit rating and history.
Mortgage Brokers
Mortgage brokers are agents who earn their fees by bringing together lenders and borrowers. They market, recruit, and evaluate home buyers, analyzing each person’s credit situation to determine which lender is the best fit for that person’s needs. A good mortgage broker should be able to find a lender for just about any type of credit.
Don’t be too eager to offer the interest rate that you are willing to accept to your mortgage broker. Let them tell you what terms they can obtain. Remember, the better deal the mortgage broker can achieve for the lender, the more they are paid. It’s smart to shop around and make sure the terms are in line with the marketplace.
Most of the mortgage companies that you see advertising online are mortgage brokers.
Pros and Cons
While a local or online mortgage broker may have the advantage of extending the scope of the marketplace competition by finding you a lender in another part of the country, an online bank might not have a local office where employees can help you one-on-one.
A local bank can offer you not only one-on-one service, but also offer experience in the specific issues presented by the present area locality. A distant lender who doesn’t have knowledge of the local dynamics and issues can delay closing until questions are answered.
Mortgage broker’s strengths are in finding a lender who will make loans that a bank refuses. People with problem credit cases are often forced to turn to a mortgage brokerage. Also loans for unique or commercial properties might be easier to secure through a mortgage broker.
Make your choice of a loan and a lender based on the best terms you can receive. Ask questions about the expected time-frame your order will be processed in. Seek out your friends, family, or co-workers who have recently bought a home for lender and broker referrals.
Credit Reports – Do It Yourself
Order your credit reports and scores from all three major credit reporting agencies before you begin the loan shopping process. Personal copies of current reports should provide enough details for a loan officer or mortgage broker to give you an opinion of the types of loans they can offer you.
The lender you decide to use will access your credit files, but taking your personal copies to the initial interview avoids multiple credit pulls that can lower your scores. Requesting your own credit reports does not affect your scores.
Seven Helpful Tips to Audit-Proof Your Tax Return
Posted on April 14, 2008
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An audit can occur to anyone at anyone. And, unfortunately, there are no sure-fire ways to completely avoid the dreaded audit. But, there are some things you can do to decrease your chances of an audit.
1. Be neat and tidy.
Nothing says “I couldn’t care less!” than a sloppy tax return. Don’t turn in a tax return written with a bright red marker covered with cross-outs and smudges. If you do, you are begging the IRS to audit you. Not only is it unprofessional, but it throws up a red flag to the IRS classifier that you are a disorganized person, who probably didn’t complete the return properly and, therefore, in need of an audit.
If you don’t want a pro doing your taxes, there are many websites that allow you to complete your return via your computer. A nice, typed computer-generated return is much more pleasant for the staffer to see. Heck, if you don’t have a computer, then the local public library surely has a typewriter you could use.
2. Be accurate.
Don’t rely on your head to do all the math for you. At the very least, invest in a calculator. When you submit your return, you need to ensure that all of your numbers add and subtract accurately. This is a prime example of why you should prepare your return by computer – they do the math for you!
3. Schedule C.
Steer clear from filing a return where Schedule C (Profit or Loss for Business) reports to the IRS a net loss from a small business venture – particularly if your main source of income is W-2 wages. Why is this so important? Well, if you do this, your business losses must pass the “passive loss” and “hobby loss” IRS guidelines. Oh, you don’t know what those rules are? Exactly. And the IRS knows it.
4. Document, document, document.
It’s better to turn in too much paperwork than not enough. If you claim sizeable deductions for atypical items such as earthquake, fire, or flood loss, attach as much documentary proof as you can. These include, but are not limited to: copies of checks, insurance reports, pictures, and repair receipts.
More than likely, because of these unusual deductions, your return will be flagged by the IRS computer. However, when the IRS classifier sees your overwhelming documentation, s/he may deem it reasonable and pass you by.
5. Don’t round numbers.
It’s rare that numbers on your tax return are even, regular numbers such as $8,000 or $16,000. If your total is $11,587.49 – put it! Estimated numbers tell the IRS that you are not keeping proper records and your booking may be slapdash.
6. File late.
If you have reasons to file a valid extension, do it – all the way to the Oct. 15th deadline. This strategy often gets your return out of the audit processing cycle and usually works best for those who aren’t expecting a return. Remember: if you owe the IRS money, filing an extension does not mean you get to put off paying them, it only means that you have an extended deadline for filing the paperwork.
7. Live smart.
Did you know that taxpayers who live in Nevada are four times more likely to get audited than those who live in Wisconsin? Living in a low-audit area limits your exposure. If you travel extensively, have several homes and/or in other ways have elasticity in choosing your tax-reporting address, think about choosing one with the lowest average audit rate.