Your Money Matters - Archive - January - June, 2011

Your Money Matters - Archive - July - December, 2010

Your Money Matters - Archive - January - June, 2010

Your Money Matters - Archive - July - December, 2009

Your Money Matters - Archive - January - June, 2009

Your Money Matters
A Consumer Financial Column

Boosting your retirement plan contributions
December 26, 2011

 

By Jason Alderman

 

For the first time since 2009, the IRS has increased the amount people can contribute to their 401(k) and other defined contribution plans. Effective January 1, 2012, the maximum annual contribution grows by $500 to $17,000, thanks to an increase in the Department of Labor’s Consumer Price Index for Urban Consumers (CPI-U), a common measure of inflation the IRS uses to determine whether or not to increase dozens of tax-related numbers from year to year.

That’s good news for people who want to boost their tax-advantaged retirement savings. Here’s an overview of what will and won’t change in 2012 with the more common retirement savings plans:

Defined contribution plans. In addition to increasing the maximum allowable annual contribution to 401(k), 403(b), 457(b) and federal Thrift Savings plans to $17,000, these additional factors apply:

• People over 50 can also make an additional $5,500 in catch-up contributions (unchanged from 2011).

• The annual limit for combined employee and employer contributions increased by $1,000 to $50,000.
• Because your plan may limit the percentage of pay you can contribute, your maximum contribution may actually be less. (For example, if the maximum contribution is 10 percent of pay and you earn $50,000, you could only contribute $5,000.)
• Company-matching contributions do not count toward your maximum contribution.

 

Individual Retirement Accounts (IRAs). The maximum annual contribution to IRAs remains unchanged at $5,000 (plus an additional $1,000 if 50 or older). Maximum contributions to traditional IRAs are not impacted by personal income, but if your modified adjusted gross income (AGI) exceeds certain limits, the maximum you can contribute to a Roth IRA gradually phases out:

• For singles/heads of households the phase-out range is $110,000 to $125,000 (up from $107,000 to $122,000 in 2011). Above $125,000, you cannot contribute to a Roth.
• For married couples filing jointly, it’s $173,000 to $183,000 (up from $169,000 to $179,000 in 2011).

 

Keep in mind these rules for deducting IRA contributions on your federal tax return:

• If you’re single, a head of household, a qualifying widow(er) or married and neither spouse is covered by an employer-provided retirement plan you can deduct the full IRA contribution, regardless of income.
• If you are covered by an employer plan and are single or a head of household, the tax deduction phases out for AGI between $58,000 and $68,000 (up from $56,000 to $66,000 in 2011); if married and filing jointly, the phase-out range is $92,000 to $112,000 (up from $90,000 to $110,000 in 2011).
• If you’re married and aren’t covered by an employer plan but your spouse is, the IRA deduction is phased out if your combined AGI is between $173,000 and $183,000 (up from $169,000 to $179,000 in 2011).
• For more details, read IRS Publication 590 at www.irs.gov.

 

Retirement Saver’ Tax Credit: As an incentive to help low- and moderate-income workers save for retirement through an IRA or company-sponsored plan, many are eligible for a Retirement Savers’ Tax Credit of up to $1,000 ($2,000 if filing jointly). This credit lowers your tax bill, dollar for dollar, in addition to any other tax deduction you already receive for your contribution.

Qualifying income ceiling limits for the Retirement Savers’ Tax Credit increased in 2011 to $57,500 for joint filers, $43,125 for heads of household, and $28,750 for singles or married persons filing separately. Consult IRS Form 8880 for more information.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Credit card stolen? Here’s what you do
December 19, 2011

 

By Jason Alderman

Despite high-profile media attention, the odds of having your credit or debit card number stolen by crooks remains at historically low levels. That said, it’s always good to know what to do in case lightening does strike and someone fraudulently uses your card. Left unchecked, they might try to run up bills, drain your checking account or worse – steal your identity.

Here are actions to take if this happens to you:

First, contact the bank or credit union that issued your card. You’ll find a toll-free number on the back of your card, on your billing statement or at the company’s website. Close the compromised account and open a new one with a different account number. Change related passwords or PIN numbers and notify companies that have automatic payments tied to the closed account to make sure you don’t miss a payment. Also log all calls, letters and emails you have with your card issuer about the fraud – this will be helpful if you need to file a claim or police report.

Contact one of the three major credit bureaus, Equifax (888-766-0008), Experian (888-397-3742) or TransUnion (800-680-7289), and place an Initial Fraud Alert on your credit file if you suspect you have been, or are about to be, a victim of identity theft. Whichever bureau you contact will notify the other two to do the same. If you wish, you can renew these fraud alerts each quarter, free of charge. If you determine that you actually have suffered identity theft, you can also file an Extended Fraud Alert, which will stay on your reports for seven years.

Placing a fraud alert entitles you to one free credit report from each bureau. Although the alert makes it harder for someone to open new credit accounts in your name, it won’t necessarily prevent them from using existing accounts. That’s why it’s important to close compromised accounts and to carefully review your credit reports for errors, fraudulent activity, or suspicious credit inquiries from an unfamiliar source. Also be aware that posting a fraud alert could delay your own ability to obtain new credit.

If you determine someone has stolen from your account or your identity has otherwise been compromised, file an identity theft report with the police. The Federal Trade Commission’s “Defend: Recover From Identity Theft” website contains step-by-step instructions for completing and filing the report with local, state and federal law-enforcement agencies (www.ftc.gov/consumer).

Also send copies of the report – by certified mail, return requested – to the credit bureaus and companies whose accounts were impacted. You can also file a complaint with the FTC, which will enter the information into a secure online database shared by thousands of civil and criminal law-enforcement authorities worldwide (https://www.ftccomplaintassistant.gov).

Most card issuers provide “zero liability” coverage for unauthorized credit and debit card use when you promptly report the loss. Rules vary, so ask your bank or credit union for its policies.

Going forward, carefully monitor your monthly credit card and bank statements for fraudulent charges. To learn other good tips for protecting your personal and account information and preventing fraud, visit:

• The National Cyber Security Alliance’s www.StaySafeOnline.org.
• The FBI’s “Be Crime Smart” page (www.fbi.gov/scams-safety/be_crime_smart). 
• Visa Inc.’s VisaSecuritySense (www.visasecuritysense.com), which contains tips on preventing fraud online, in stores and at ATMs, spotting deceptive marketing practices, and more.

 

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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How to undo a Roth IRA conversion
December 12, 2011

 

By Jason Alderman

We’ve all suffered buyer’s remorse – say you buy something you really can’t afford or the item’s sudden drop in value make it seem, in retrospect, a poor investment. That’s what has happened to some people who’ve taken advantage of IRS rules that allow them to convert a regular IRA or 401(k) into a Roth IRA, only to discover later it may not have been the right strategy.

In this particular situation, however, the IRS graciously allows for a do-over, called a Roth IRA “recharacterization.” Read on to learn how recharacterizations work, and whether you may be a good candidate.

First, a brief primer on IRAs. With regular IRAs you contribute pretax dollars, which lowers your current taxable income so you pay less tax now. Your account grows, tax-free, until you withdraw the money at retirement, when you pay income tax on withdrawals at your tax rate at the time. By contrast, with Roth IRAs, you’re taxed on your contributions during the current year, but all withdrawals, including investment earnings, are tax-free at retirement.

The IRS allows taxpayers at any income level to convert part or all of their regular IRAs or 401(k) plans to Roth IRAs. (Prior to 2010, higher-income people were excluded.) Although such conversions can provide long-term tax advantages – especially for younger people – they can be expensive in the short term, as I experienced first-hand when I did the conversion in 2010.

The cardinal rule of Roth IRA conversions is to make sure you have money outside your IRA to pay the tax bill – borrowing from your IRA will not only lessen the amount of money available to  grow tax-free, but you’ll also be subject to a 10 percent early withdrawal penalty if you’re under age 59 ½.

So what about that buyer’s remorse? There are several reasons someone might want to recharacterize their converted Roth IRA:

• You decide you can’t afford to pay the additional taxes owed after all – perhaps you become unemployed for a few months or other pressing expenses arise.
• Adding income from the conversion puts you into a higher marginal tax bracket or subjects you to the alternative minimum tax.
• The value of your converted Roth IRA has dropped significantly, so in effect you’re paying taxes on phantom money.

 

There are a few rules to keep in mind if you decide to recharacterize:

• You have until October 15 of the year following the conversion to recharacterize, provided you’ve filed your tax return – or filed for an extension – on time.
• You can recharacterize all or part of the converted amount.
• The amount you recharacterize will be adjusted for any gains or losses while it was invested in the Roth IRA.
• To initiate a recharacterization, contact the financial institution that has your Roth IRA for instructions.
• You’ll need to file an amended tax return (IRS Form 1040X) along with IRS Form 8606.
• You can later reconvert the recharacterized IRA back to a Roth, but you must wait until 30 days after the recharacterization or one year after the initial conversion, whichever is later.

 

Clearly, these are complicated transactions, so it’s probably a good idea to work with a tax professional or financial planner to guide you through the process. If you don’t have financial planner, the Financial Planning Association (www.fpanet.org) is a good place to search.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Financial planning for later-life marriages
December 5, 2011

 

By Jason Alderman

 

Couples who marry as young adults usually don’t bring a lot of financial baggage to the table. But what if you’re getting married in your 40s, 50s or later – after divorce, children and years of building assets have complicated your economic situation? Do you and your spouse-to-be have a game plan for how to comingle your finances?

There are many reasons to seek legal and financial advice before tying the knot. But before you bring in the professionals, there are a few steps you can take to better know where you stand:

First, catalog each person’s preexisting assets and debts. Include assets like income from paychecks, Social Security, investment accounts, bank account balances, retirement benefits and equity in homes, cars and other major purchases. Debts might include ongoing expenses such as child support, insurance premiums, rent or mortgage payments, credit card balances, outstanding car loans and medical bills.

Use this information to launch discussions about:

• What are your plans for sharing expenses and living arrangements?
• Whose medical insurance will you opt for – your own employer’s plan vs. spousal coverage?
• How long until each of you qualifies for Medicare, and how will you pay for coverage until then?
• How do you want your estates to be distributed? For example, how much of your pre-marriage assets should go to children from previous marriages?

 

You’ll probably want to amend your wills, financial and medical powers of attorney, life insurance policies, retirement accounts, investment funds and any other accounts where beneficiaries or people who control your health or finances are named.

You also might want to draft a prenuptial agreement (prenup) – a written contract that basically outlines who gets what if you divorce or one of you dies. Having a prenup might prevent your spouse from challenging terms of your will or preexisting trusts after you die (it happens).

Other financial considerations:

• By federal law, you can bequeath an IRA to anyone you like, but spouses are entitled to inherit other non-IRA retirement benefits such as 401(k) and pension plans unless they sign away their rights.
• Amounts accumulated in 401(k) plans during a marriage typically are considered marital property, so if you were previously divorced, the court should have divided your accounts through a qualified domestic relations order as part of the divorce settlement.
• Division of pension benefits can be even more complicated, so make sure your attorney reviews prior divorce settlements very carefully when drafting your prenup.
• If you were widowed, or married at least 10 years before divorcing, you can draw Social Security benefits based on your dead or former spouse’s earnings if that’s more favorable than your own accumulated benefit. However, if you remarry before age 60 (50, if disabled), that option goes away.
• Prenups don’t supersede Medicaid rules. The government considers your combined income when determining eligibility to receive Medicaid benefits, including long-term nursing home care.
• Alimony payments from ex-spouses will almost certainly end when you remarry, so factor that into your new budget.
• Widowed spouses of public employees often lose some or all of their survivor benefits upon remarriage, so research survivor annuity or health insurance policies carefully.

 

Congratulations on finding love later in life. Don’t be put off by all the important financial decisions you’ll need to make together, but do get sound legal and financial advice.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Finding your lost money
November 28, 2011

 

By Jason Alderman

 

You may not know it, but millions of Americans are owed money from long-forgotten government payments, stock sales, bank accounts and other lost accounts. When the entities holding these funds can’t find the rightful recipients, they turn over the money to individual states, which hold it in escrow until claimed.

State treasuries and other government agencies are sitting on more than $33 billion in unclaimed assets. And that doesn’t include billions of dollars in unredeemed U.S. savings and treasury bonds, unclaimed pensions and income tax refunds returned to the IRS as undeliverable.

Here’s a guide to locating unclaimed assets that may belong to you:

Money winds up in government lost-and-found agencies for many reasons, including:

• People move and don’t leave accurate forwarding addresses; or, they forget to update companies where they do business, hold investments or have earned retirement benefits.
• Dying without a will leaves it up to the court to assign assets.
• You could unknowingly be named as beneficiary of an insurance policy or other account.
• Forgotten utility deposits, bank accounts or product rebates.
• Overpaid mortgage payments after a home sale.
• Name changes after marriage or divorce.

 

Start your search with the nonprofit National Association of Property Administrators (NAUPA), which provides tips on finding your money, as well as links to unclaimed property programs maintained by each state (www.unclaimed.org). Many individual state programs also participate in MissingMoney.com (www.missingmoney.com), a free, centralized database endorsed by NAUPA.

Companies are required to surrender balances from accounts that have been inactive for one year or longer to the state government of your last known address; also check with other states where you’ve lived or done business, just in case. To improve your chances, search using different variations of your name (such as first name and middle initial, first and middle initials, last name first, etc.), as well as common misspellings.

NAUPA also provides a handy round-up of links to other sources for unclaimed property such as unclaimed veteran’s benefits, refunds from HUD/FHA-insured mortgages and unclaimed foreign bank accounts.

Other helpful sites include:

• The IRS’ “Where’s My Refund?” page, where you can track down an expected federal tax refund you never received – or check the status of your current filing (www.irs.gov).
• The Treasury Department’s “Treasury Hunt” search engine can help you find and redeem matured, uncashed Series E savings bonds issued since 1974 (www.treasurydirect.gov).
• The Public Benefit Guaranty Corporation (www.pbgc.gov) can help you track down forgotten pension benefits you’ve earned. Other helpful sites include PensionHelp America (www.pensionhelp.org), and the Department of Labor’s Employee Benefits Security Administration (www.dol.gov/ebsa).
• The National Registry of Unclaimed Retirement Benefits can help you find an unclaimed defined contribution plan, such as a 401(k) or profit-sharing plan (https://www.unclaimedretirementbenefits.com).

 

Many legitimate companies use states’ freedom of information acts to obtain owner information for unclaimed accounts. They contact individuals and offer to help find lost property for a fee (often a percentage of the total). This is the same information you can find yourself, for free.

Also, beware of emails or letters purporting to be from the state treasurer asking you to supply personal information – either by mail or by logging into a link provided. This is how many cases of identity theft begin. If in doubt, contact your state treasurer or controller’s office to ensure the contact was legitimate.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Consumer Alert! Avoid Holiday Scams
November 21, 2011

You're getting ready for company, preparing a huge Thanksgiving meal, finalizing Christmas lists and Black Friday, the biggest shopping day of the year, is right around the corner. The last thing you want to worry about right now is your money. In short, your guard is down and scammers may try to take advantage. What can you do to avoid becoming a victim of a holiday scam?

Scams occur year-round, often done by contacting unsuspecting consumers and requesting specific account information (pin numbers, account numbers, etc.). If successful, the scammer gains access to the victim's bank accounts, credit cards and other financial assets. There are three basic steps to prevent scammer disaster:

STOP - Do not respond immediately to voicemails, e-mails or text messages requesting your information. If you're on the phone with a human being (rather than a machine voice), request the caller's name and contact information. Do not give out any of your personal information.

THINK - Ask yourself, why would my bank need this information when they already have it? A legitimate financial institution will never request specific account information via phone, e-mail or text message. They can simply look that information up in their records.

CALL - Call the number for your bank that appears on your bank statement, not the number in the voice message or e-mail soliciting your information. Contact local law enforcement if you think you've been a victim of a scam.

What do these steps look like in a real scenario? One of the most common tactics used during the holidays, which is also peak shopping season, is a message notifying the consumer that their bank account has been frozen and they must call an 800 number or respond to an email with their account information in order to have it reinstated.

Stop: Even though the temptation to respond immediately is pressing, because this time of year everyone needs access to their money, resist giving out any personal information. Think: If your account had truly been frozen, your bank would ask you to visit your local branch or office, not give out your information. Call: Call your bank (using the number on your statement) and verify your account's status. They will be able to help you sort out the situation.

So, as you gear up for the holidays, remember that scammers are doing the same. Just remember "Stop, Think, Call" and you'll be free to enjoy the festivities!

Deadline approaches for mandatory IRA withdrawals
November 21, 2011

By Jason Alderman

Reaching your 70th birthday is cause for celebration. But thanks to our quirky tax code, a potentially more important milestone arrives six months later. IRS rules say that you must begin taking required minimum distributions (RMDs) from your IRAs and other tax-deferred retirement accounts beginning in the year you reach age 70 ½.

Failure to make these mandatory withdrawals by December 31 each year can result in severe penalties, so if you or someone you know are approaching that threshold, read on:

Congress devised IRAs, 401(k) plans and other tax-deferred retirement accounts to encourage people to save for their own retirement. You generally contribute “pretax” dollars to these accounts (except for Roth plans), which means the money and its investment earnings are not subject to income tax until withdrawn. 

In return, Congress decreed that RMDs must be withdrawn – and taxed – each year after you reach 70 ½. Furthermore, unless you meet certain narrow conditions, you’ll have to pay an excess accumulation tax equal to 50 percent of the RMD you should have taken – plus take the distribution and pay taxes on it.

In a few cases you can delay or avoid paying an RMD:

• If still employed at 70 ½, you may delay RMDs from your 401(k) or other work-based account until you actually retire, without penalty; however, regular IRAs are subject to the rule, regardless of work status.
• Roth IRAs are exempt from the RMD rule; however Roth 401(k) plans are not.
• You can also transfer up to $100,000 directly from your IRA to an IRS-approved charity. Although the RMD itself isn’t tax-deductible, it won’t be included in your taxable income and lowers your overall IRA balance, thus reducing the size of future RMDs.

 

Another way to circumvent the RMD is to convert your tax-deferred accounts into a Roth IRA. You’ll still have to pay taxes on pretax contributions and earnings; and, if you’re over age 70 ½, you must first take your minimum distribution (and pay taxes on it) before the conversion can take place.

Ordinarily, RMDs must be taken by December 31 to avoid the penalty. However, if it’s your first distribution you may wait until April 1 the year after turning 70 ½ – although you still must take a second distribution by December 31 that same year.

Generally, you must calculate an RMD for each IRA or other tax-deferred retirement account you own by dividing its balance at the end of the previous year by a life expectancy factor found in one of the three tables in Appendix C of IRS Publication 590:

• Use the Uniform Lifetime Table if your spouse isn’t more than 10 years younger than you, your spouse isn’t the sole beneficiary, or you’re single.
• Use the Joint and Last Survivor Table when your spouse is the sole beneficiary and he/she is more than 10 years younger than you.

• The Single Life Expectancy Table is for beneficiaries of accounts whose owner has died.

 

Although you must calculate the RMD separately for each IRA you own, you may withdraw the combined amount from one or more of them. The same goes for owners of one or more 403(b) accounts. However, RMDs required from 401(k) or 457(b) plans must be taken separately from each account.

To learn more about RMDs, read IRS Publication 590 at www.irs.gov.

 

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Tax deadline looms for charitable contributions
November 14, 2011

 

By Jason Alderman

Each year, roughly one-third of American households itemize deductions on their federal income taxes. If you’re among that group, there are a several important actions you need to take by year’s end in order to take full advantage of available deductions.

For example, by December 31 you must pay for any uninsured medical expenses, state and local income and property taxes, and unreimbursed employee expenses you want to deduct from your 2011 taxes. You also need to decide how much to contribute to charitable organizations and either charge your credit/debit card or postmark a check by midnight on the final day of the year.

Here are a few issues to keep in mind when choosing how you’ll make – and report – your charitable contributions:

Confirm the organization’s tax-exempt status. The IRS revoked the tax-exempt status of approximately 275,000 nonprofit organizations because they hadn’t filed annual reports for three consecutive years, as required by law. Although donations you may have made to those organizations prior to their being disqualified still count as tax-deductible, going forward, such organizations are no longer eligible to receive tax-deductible contributions unless they’re reinstated by the IRS. Go to www.irs.gov/charities to see if your donations are affected. 

Charitable auction purchases and donations. If you buy an item at a charitable auction, you’re only allowed to claim a deduction for the amount you pay that’s above its fair market value, so be sure to get documentation from the organization (e.g., a catalog showing a good-faith estimate). On the other hand, if you donate an item for a charitable auction, you’re only allowed to claim your “tax basis” in the item – that is, the amount you originally paid for it, vs. its current fair market value.

IRA distributions. For many, one of our tax code’s downfalls is that unless you itemize deductions you cannot reap tax advantages from your charitable contributions. However, an important exception is made for senior citizens, many of whom no longer carry a mortgage and thus don’t itemize deductions: People age 70½ or older may contribute up to $100,000 from their IRAs directly to charity and have it count toward their 2011 Required Minimum Distribution (RMD).

Although the RMD contribution itself isn’t tax-deductible, the amount won’t be included in your adjusted gross income (AGI), thereby providing several potential tax benefits:

• A lower AGI could reduce taxes on your Social Security benefits.
• It could make you eligible for tax breaks that are tied to AGI.
• The contribution will lower your overall IRA balance, which in turn reduces the size of future mandatory distributions.

 

Choose wisely. Before making a donation or volunteering your time, make sure the non-profit organization is well-run. Ideally the organization applies at least 75 percent of contributions to programs that serve its beneficiaries, as opposed to spending them on salaries, advertising, fund-raising and other administrative expenses.

The IRS’ Tax Information for Contributors website (www.irs.gov/charities/contributors) website features a search engine for eligible organizations, information on reporting and substantiating charitable deductions and other helpful tips. Also, GuideStar’s website (www2.guidestar.org) features helpful questions to ask potential recipients and tips for choosing a charity.

The personal rewards that come from donating your time and money to worthy causes certainly far exceed mere tax breaks, but still, it pays to know how the rules work in case you do qualify.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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Life Insurance 101
November 7, 2011

 

By Jason Alderman

Life insurance has no one-size-fits-all option. Singles with no dependents often need little or no coverage. But it can be an important purchase for people whose families depend on their income to cover daily living costs, mortgage repayment, college, retirement or other major expenses.

According to Larry Davidman, owner of online insurance brokerage TermWorks.com, life insurance needs often change as family circumstances evolve. “Once you start a family, you’ll probably want to beef up coverage,” he said. “But after the kids are on their own, your house is paid-off and your retirement is well-funded, you may feel comfortable amending your coverage.”

In my family’s case, we bought term life insurance shortly after our son was born and added supplementary policies when our daughter arrived. Our goal was twofold: Provide my wife at least 10 times my income if I should die; and help me cover childcare expenses should she go first.

Because our initial 10-year policies expire soon, we’ve been reexamining our needs with Davidman’s help. If you’re also looking, here’s a brief overview of common life insurance options:

There are two broad categories of life insurance: term and cash value (permanent). Costs are based on such factors as your age, gender, overall health, family history, driving record, hazardous activities (like skydiving) and foreign travel habits.

Term life is the simplest and least expensive type, since it pays your beneficiaries only if you die while the policy is in force. Term periods usually range from 5 to 30 years. Premiums increase according to your age and overall health, but several other features can also affect the cost and benefits received.

Cash value products let you build cash value that grows tax-free and that you can potentially borrow against (also tax free), subject to certain limitations and based on product and design. The cost is significantly higher than a term policy with the same death benefits. Common varieties include:

• Whole Life, which provides lifetime protection with locked-in, guaranteed premiums, death benefit and cash values. It’s usually the most expensive type.
• Universal life offers the same fixed investment performance as whole life but greater flexibility in terms of premium payment schedules, duration of guaranteed death benefit and accumulation of cash value.

• Variable universal life (adjustable life) lets you invest the cash-value portion in securities (stock funds, bond funds, money market, etc.), which have greater growth potential but also carry greater investment risk than fixed accounts. Poor fund performance can reduce the cash value and/or death benefit.

 

A few additional considerations:

• If your term insurance is expiring and you’re in poor health, ask about converting to permanent life. Premiums will be higher, but you won’t have to pass a medical exam.
• Interview several insurance agents to gauge their experience and ability to explain complex products. Then compare recommendations they give for your particular circumstances.
• Ask your broker for a breakdown of commissions and administrative fees and ask your tax advisor about any tax implications.
• Don’t buy life insurance solely as an investment tool.
• Be completely truthful on your application. Lying about an underlying condition could cause the insurance company to alter your death benefit or rescind the entire policy.

 

To learn more about the different types of life insurance available, read the Buyer’s Guide posted on the National Association of Insurance Commissioners’ website, www.naic.org.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Budget Now for Holiday Spending
October 31, 2011

By Jason Alderman      

It’s tough sticking to your budget any time of year, but the holiday season presents special challenges with so many unexpected expenses and temptations. If you sometimes fall prey to holiday overspending, you might want to look for year-round small spending cuts in other areas of your life that, when added together, can result in big savings.

Here are a few suggestions:

 

Personal finances:

• If you have low-deductible homeowners, renters or auto insurance, ask how much your premiums would drop by raising the deductible to $500 or $1,000 – it could be 15 to 30 percent or more.
• Cancel underutilized phone and cable services, magazine subscriptions, gym memberships and other “extras” you’re not using.
• Before shopping at chain stores, check with online gift card resellers like Plastic Jungle and CardWoo where you can buy gift cards at a discount. Combine the gift card with a coupon or discount code to save even more.
• Kick bad habits. Smoking one $6 pack of cigarettes a day costs about $2,200 a year, not to mention additional medical and lost-work costs.

 

In the home:

• By lowering your thermostat 10°–15° for eight hours you can reduce your home heating bill by 10 percent or more. For a $400 monthly bill, that’s $40 in savings.
• Insulate your water heater and outgoing pipes to reduce heat loss and save 4 to 9 percent in water-heating costs. Also, try lowering the temperature to 120° for additional savings.
• Beginning January 1, 2012, traditional incandescent light bulbs will begin phasing out (starting with 100 watt bulbs) in favor of more efficient models that use 25 to 80 percent less energy. By upgrading 15 bulbs, you could save about $50 a year on utilities.

 

In the car:

• Aggressive driving (speeding, rapid acceleration and braking) wastes gas and can lower gas mileage by 33 percent on the highway. By driving sensibly, you could save about $1.20 for each $3.65 gallon of gas.
• Fuel economy drops rapidly at higher speeds. For each 5 mph you exceed 60 mph, it’s like paying an additional $0.29 per gallon of gas.
• Avoid keeping unnecessary heavy items in your car – each extra 100 pounds reduces your mpg by up to 2 percent.
• Use websites like GasBuddy.com (which has free smartphone apps) and GasPriceWatch.com, where motorists share up-to-the-minute tips on where to find low-priced fuel.

 

Health care tips:

• Consider generic vs. brand-name drugs; copayments are usually much lower. Medtipster.com lets you search for generics by cost, by local zip code.
• Ask whether your insurance offers quantity discounts for mail-order prescriptions. Often, the copayment for a 60- or 90-day supply is the same as a 30-day supply at a regular pharmacy.
• Ask your doctor about pill-splitting. Many drugs come in double-dosage tablets that cost the same as a lower dosage. (Caution: Some pills should never be split, so always ask your doctor or pharmacist first.)

 

For more cost-saving ideas, check out AARP’s “Save Money on Everything” site (www.aarp.org/money/budgeting-saving), www.americasaves.org, and Practical Money Skills for Life (www.practicalmoneyskills.com), a free personal financial management program run by Visa Inc. that offers savings and budgeting tools, including a Holiday Budgeting Center.

By trimming a few dollars here and there you’re suddenly saving hundreds or thousands of dollars a year – enough to tide you through the holidays and start a vacation fund for next summer.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Beware of fake check scams
October 24, 2011

By Jason Alderman

The other day I got one of those annoying emails from a supposed Nigerian prince promising rich rewards for helping to move money out of his country. It’s hard to believe those kinds of scams are still thriving, but they are. In fact, according to a recent survey conducted by the Consumer Federation of America, fraud (including fake checks, bogus sweepstakes and work-at-home schemes) is now among the top 10 consumer complaints received by consumer protection agencies.

Endless variations on fake check swindles are being perpetrated by phone, letter and email, including these gems:

• You’ve won a foreign lottery and are sent a check that’s the first installment of your winnings. To get the rest, you must deposit and cash the check, then wire the money to someone who will pay facilitate the transaction and pay taxes on your behalf.
• Someone responds to your classified ad or online auction posting for a valuable item. They have a logical-sounding reason why you‘re receiving a check above the purchase price: For example, they live overseas and asked someone in the U.S. who owes them money send you a check for more than your sales price; then, you’ll keep your share and wire the buyer the difference.
• You’re hired as a secret shopper to help evaluate a money-transfer service. You’re sent a check to deposit, minus your “pay,” and are then asked to wire out the remainder using the service being tested.

 

What these scams have in common is that the checks themselves are fraudulent. Thieves count on the fact that your bank generally must make deposited funds available to you within a few days. However, weeks may pass before the bank ultimately discovers the fraud, at which point they bounce the check. You must then repay your bank the money or have your account frozen or closed and be sued – possibly even face criminal charges.

Today’s sophisticated scanners, printers and software programs make it easy to create checks that sometimes even fool authorities. A few warning signs:

• Fake checks are often printed on lighter, slippery paper and lack at least one perforated or rough edge.
• Missing or faded bank logo, suggesting it may have been copied.
• No street address or a P.O. Box only, or an inaccurate ZIP code.
• Check number at the upper right corner doesn’t match the number on the check’s bottom line.
• Usually drawn for less than $5,000 because by law, deposits under that amount must be made available to you within five days. Crooks count on your completing their transaction before the check has actually been cleared by the issuing bank.
• Stains or gaps around signatures, a digitized appearance, or odd pen strokes, suggesting a scanned or forged signature.
• The first nine digits in the check’s bottom line typically identify the routing number of the issuing bank. Having fewer or more than nine digits means it’s fake. Verify correct routing numbers at www.fededirectory.frb.org/reserve.cfm.

Many good resources exist where you can learn more about fake check scams and how to avoid them, including the FBI (www.fbi.gov/scams-safety), the Federal Trade Commission (www.ftc.gov), the Consumer Federation of America (www.consumerfed.org), and the National Consumers League (www.fakechecks.org/index2.html).

To paraphrase P.T. Barnum, there’s a new scam born every minute. Just make sure you’re not one of the poor suckers who falls for it.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Energy-Efficiency Tax Credits Expire Soon
October 19, 2011

By Jason Alderman

If you haven’t already jumped on the home energy-efficiency bandwagon, the good news is that several federal energy tax credits originally slated to end in 2010 were extended through December 31, 2011; but the not-so-good news is that these credits are worth significantly less and are more restrictive than before. All is not lost, however, since several additional credits (outlined below) remain in effect through 2016.

Here’s how the soon-to-expire energy tax credits work:

You may claim a credit for 10 percent of the total cost of various home energy-efficiency products for your existing primary residence, including: insulation; heating, ventilation and air conditioning systems; metal and asphalt roofs; energy-efficient windows, doors and skylights; biomass stoves and non-solar water heaters. There are a few restrictions, however:

• The maximum combined credit is $500 (10 percent of $5,000 in total cost) for all allowable products purchased between 2006 and 2011. Thus, if you’ve already claimed credits over $500 in previous years when limits were higher, you cannot file.
• Certain items have lower allowable tax credit maximums. For example: windows are capped at $200 in total credits; furnaces and boilers – $150 maximum (must have an annual fuel utilization rate of 95 or greater); central air conditioner – $300 maximum; water heater – $300 (within certain efficiency limits); and biomass stoves – $300.
• You cannot claim a credit for labor costs.
• Energy tax credits are nonrefundable, which means you can only claim a credit to offset taxes you owe for the year.
• Tax credits may only be claimed once and are limited to the year in which you purchased the item.                                                                                                                                                                                                                                                          

 

Energy tax credits will continue to be available for geothermal heat pumps, solar energy systems and wind energy systems installed at new or existing principal or second homes by December 31, 2016, for 30 percent of cost, with no upper limit. In addition, a credit continues for fuel cells at 30 percent of cost up to $500 per kW of power capacity (for primary residences only). And tax credits are still available on certain fuel-efficient vehicles. Visit www.fueleconomy.gov/feg/taxcenter.shtml for details. For full details on available tax credits, visit www.energystar.gov.                                                                                                                                                                                                                                                

If you’re a low-income household and can’t afford to weatherproof your home, you may be eligible for the Department of Energy’s Weatherization Assistance Program (WAP). If you’re accepted, a professional weatherization crew will conduct a home energy audit where they’ll analyze your utility bills, test for infiltration of outside air, inspect your home and equipment for safety and determine the most cost-effective energy conservation measures for your home

Depending on what they find, the agency will then conduct needed repairs and equipment installation, which might include: installing wall, floor and attic insulation; sealing and repairing ducts; reducing air infiltration and pressure imbalances; and tuning, repairing or replacing heating and cooling systems, as needed. To learn how WAP works, visit www.eere.energy.gov/wip/wap.html. Also, you may qualify for short-term utility bill assistance through the Low-Income Energy Assistance Program (www.acf.hhs.gov/programs/ocs/liheap).

Other great ways to cut energy costs include turning your thermostat back 10°–15° for eight hours, while asleep or at work, using Energy Star appliances and compact fluorescent lights and lowering your hot water heater temperature to 120º F or lower.

Bottom line: Take advantage of financial incentives available to make your home more energy efficient – just in time for winter’s chill.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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Medicare Open Enrollment Comes Early
October 10, 2011

By Jason Alderman

If you’re enrolled in Medicare, mark these dates on your calendar: October 15, 2011 – December 7, 2011. That’s Medicare’s 2012 Open Enrollment period – and you should note that it occurs a month earlier this year than in the past. Aside from exceptions made for a few special circumstances, this is the only period when current enrollees can make coverage changes for the coming calendar year.

Medicare provides health care benefits to people age 65 and older and those under 65 with certain disabilities or end-stage renal disease. For most people, the initial enrollment period is the seven-month period that begins three months before the month they turn 65. If you miss that window, you may enroll between January 1 and March 31 each year, although your coverage won’t begin until July 1.

Medicare offers several plans and coverage options, including:

• Medicare Part A, which covers in-patient hospital, skilled nursing facility and hospice services, as well as home health care. People are usually enrolled automatically upon turning 65 or after having received Social Security disability benefits for 24 months. There’s usually no monthly premium.
• Medicare Part B, which covers doctor’s services, outpatient care and some preventive services. It’s optional and has a monthly premium. Most people are automatically enrolled at the same time they begin Part A coverage, but you can opt out by following instructions accompanying your Medicare card (mailed about three months before your 65th birthday).
• Medicare Part C (Medicare Advantage) plans, which are privately run alternatives to traditional Parts A and B. Structured like HMO or PPO plans, they often include additional benefits such as prescription drugs, dental, vision and wellness programs. Monthly premiums may be higher than regular Part B, but they usually have lower deductibles and copayments; also, they require that you use the plan’s provider network.
• Medicare Part D, which covers prescription drugs. It’s optional and carries a monthly premium. These privately run plans vary widely in terms of cost, copayments and deductibles and medications covered.

 

During Medicare Open Enrollment you can:

• Switch from original Medicare Parts A, B and D to a Medicare Advantage plan, or vice versa.
• Switch from one Advantage plan to another.
• Switch from an Advantage plan that offers prescription coverage to one that doesn’t, and vice versa.
• Join a Part D plan, switch from one plan to another, or drop Part D coverage altogether.

 

People currently enrolled in Medicare Advantage have another opportunity to make changes during a second period called Medicare Advantage Disenrollment. Between January 1, 2012, and February 14, 2012, you can switch back to original Medicare Parts A and B coverage, with the option to join Part D as well. However, during this period you cannot:

• Switch from original Medicare to Medicare Advantage.
• Switch from one Medicare Advantage plan to another.
• Switch from one Part D plan to another.

Understanding and choosing the right Medicare options can be complicated and time-consuming. For assistance, call 1-800-633-4227 or visit Medicare’s website, www.medicare.gov, where you’ll find:

• Helpful publications, including Medicare & Your 2011, a highly detailed guide that explains Medicare in easy-to-understand language.
• Tools to compare prescription plans, hospitals, nursing homes, home health agencies and Medigap plans in your area.
• Resources to find local doctors and other practitioners who participate in Medicare.
• Services covered by various Medicare plans.

 

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Surviving Life’s Financial Emergencies
October 3, 2011

Planning for anticipated expenses, like paying for your child’s college education or saving for retirement, is something that most people already do. But what about the unexpected financial emergencies? Tornadoes, earthquakes, house fires and other disasters rarely give advance warning and can happen anytime. Fortunately, there are steps you can be doing right now.

First, what qualifies as a financial emergency can fall into the following categories: job loss, partner/spouse passes away, you or spouse/partner becomes disabled and being a victim of a natural disaster.

Here are a few steps to take to prepare financially for the unexpected.

Build an emergency fund by setting money aside each month to establish a cash reserve equal to nine to twelve months of living expenses. Regardless of how much you are able to set aside, the funds should be easy to access. Money market or savings accounts are good options for this.

Periodically review your insurance coverage to determine what is and is not covered by your medical, car, and homeowner’s insurance as well as your disability and personal liability insurance.

Keep accurate financial records by collecting and organizing information that you may need in the event of death, fire, theft or other emergency. Make sure other family members know where to find bank account and PIN numbers, safe deposit box keys, insurance policies and contact information for your attorney, CPA and other professional advisors.

Educate yourself on how to access your accounts via the Internet so you can manage your funds from anywhere.

Meet with a certified public account who can work with you to review your plan and ensure that you are well protected in the event of a financial emergency.

Additionally, here are a few items that you should have ready in case of a financial emergency:

• Identification and other key documents that may be needed to restore your financial records.  
• Copies of driver’s license (or state identification cards for non-drivers), social security cards, passports, birth certificates, insurance cards and your inventory of personal property.
• ATM/debit cards and credit cards – front and back.
• Phone numbers and account information at your financial services providers.
• Bank, credit card companies, insurance companies that you business with will be helpful if you need to replace lost cards or documents or need assistance.

We cannot control all things, meaning natural disasters, so being prepared financially for the unexpected and having an emergency savings fund set up is one way we can control how we recover and get back on our feet.

 

Flexible Spending Accounts Slash Your Taxes
October 3, 2011

By Jason Alderman

Admit it: You probably spend more time comparison shopping online than reviewing your annual benefits enrollment materials. That’s a big mistake because the money you could save by choosing the right employee benefits package probably far exceeds any savings you could get on a big-screen TV.

For example, many people don’t sign up for an extremely valuable benefit – flexible spending accounts (FSAs). If your employer offers them, FSAs let you pay for eligible out-of-pocket health care and/or dependent care expenses on a pre-tax basis – that is, before federal, state and Social Security taxes are deducted from your paycheck. Using an FSA to cover expenses you would have paid for anyway reduces your taxable income by that amount, which in turn lowers your taxes.

Here’s how it works: Say you earn $40,000 a year and are in a 25 percent tax bracket. If you contribute $1,000 to the health care FSA and $3,000 for dependent care, your taxable income would be $36,000 – about a $1,000 reduction in federal taxes alone, depending on your marital status, withholding deductions and other factors. (Use the calculator at www.dinkytown.net/java/Payroll125.html  to evaluate your situation.)

Health Care FSAs let you pay for IRS-allowed medical expenses not covered by medical, dental or vision insurance, including deductibles, copayments, orthodontia, glasses and contact lenses, prescriptions, chiropractic, smoking cessation programs and many more. Check IRS Publication 502 at www.irs.gov for a list of allowable expenses.

Dependent Care FSAs let you use pre-tax dollars to pay for expenses related to care for your children, disabled spouse, parent, or other dependent incapable of self-care, including:

• Licensed day care or adult care facility fees.
• Services provided in or outside your home (including babysitter, nursery school or summer day camp) so that you and your spouse can work, look for work, or attend school full-time.
• Before- and after-school programs for dependents under age 13.
• Babysitting by relatives over age 19 who aren’t your dependent.

 

For some lower-income families, using the federal income tax dependent care tax credit is more advantageous than an FSA so crunch the numbers or ask a tax expert which alternative is better for you. Just be aware that you cannot claim the same expenses under both tax breaks.

Your FSA contributions are deducted from paychecks throughout the year. As you incur eligible expenses, you submit receipts to the plan administrator for reimbursement. Also, many employers now offer prepaid health care cards, which let you draw on your account at the point of service to pay for qualified medical expenses, thereby eliminating the need to pay cash up front and submit reimbursement forms.

Keep in mind these FSA restrictions:

• Maximum contribution amounts vary by employer, but commonly are $2,000 to $5,000 a year for health care and $5,000 for dependent care FSAs.
• Health care and dependent care account contributions are not interchangeable.
• Estimate planned expenses carefully because you must forfeit unused account balances. Some employers offer a grace period of up to 2 ½ months after the end of the plan year to incur expenses; but that’s not mandatory, so review your enrollment materials.
• You must re-enroll in FSAs each year – amounts don’t carry over from year to year.

 

To learn more about how FSAs work, visit Practical Money Skills for Life, a free personal financial management program run by Visa Inc. (www.practicalmoneyskills.com/benefits).   

 

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

Start your student loan search now
September 26, 2011

 

By Jason Alderman

 

If you’ve got a high school senior, your household is probably knee-deep in senior-year activities – and expenses. Not to elevate your stress level, but this is probably a good time for you and your kid to start investigating how you’re going to finance college next fall. Seriously.

Loan application deadlines are right around the corner and you’ve got many decisions to make and documents to fill out.

Your first step is start filling out the Free Application for Federal Student Aid (FAFSA) form. The FAFSA is required by virtually all colleges, universities and career schools for federal student aid, as well as for most aid from states and colleges. Although you can’t yet finalize 2011 income-related information, once you start the process you can log-in anytime to update your file.

Get a FAFSA from your school’s guidance counselor or financial aid office, at www.fafsa.ed.gov, or by calling 1-800-4-FED-AID. The FAFSA filing deadline for federal loans for the 2011-2012 school year isn’t until June 30, 2012, but many state and individual school deadlines fall months earlier.

Many types of aid are available to help cover costs at four-year colleges and universities, community colleges, and trade, career or technical schools, including:

• Hundreds of thousands of free scholarships are awarded each year. Visit www.finaid.org/scholarships for details.
• Federal Pell Grants are needs-based grants given to low-income students to pursue post-secondary education. The maximum annual Pell Grant amount is $5,500. They need not be repaid.

• Federal Supplemental Education Opportunity Grants for up to $4,000 a year are awarded to undergraduates with exceptional financial need.
• The Federal Work-Study Program provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses.
• Direct Stafford Loans are low-interest federal loans that have no origination fee and come in two varieties: “Subsidized,” which are needs-based and the government pays the yearly interest while students are enrolled; “Unsubsidized,” which are not needs-based and students are responsible for interest that accrues while enrolled.
• Low-interest Federal Perkins Loans are for students who demonstrate exceptional financial need. They are subsidized and have no origination or default fees.
• Private education loans are offered by banks and other lenders to bridge the gap between government loans and actual education costs. They aren’t government-guaranteed or subsidized and typically carry higher interest rates, although you can borrow greater amounts. Details and rates vary widely.
• Some colleges sponsor their own loans, often with lower interest rates than federal loans. Check each college’s aid materials to see if they are available.
• Federal Direct PLUS loans (Parent Loan for Undergraduate Students) allow parents to borrow for their children’s college expenses. Interest rates are fixed (although higher than Stafford loans) and there is an origination fee.
• Private parent loans are offered by banks and other lenders, usually at higher interest rates than PLUS loans. They may also have an origination fee.
• Some colleges also offer their own loans to parents, usually at rates below PLUS loans. Check each college’s aid materials to see if they’re available.

 

Check out www.federalstudentaid.ed.gov and www.finaid.org for complete explanations of the different types of grants/loans, calculators and many other tools.

Bottom line: Better start boning up on college financing now to avoid panic next winter.

Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.

 

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The 411 on prepaid cards
September 19, 2011

By Jason Alderman

 

According to Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, we live in a credit-dominated society. “Without a checking or savings account,” she says, “it’s difficult to cash payroll, Social Security and unemployment checks; you need a credit or debit card to shop online, book a flight or rent a car; and you may be forced to carry large amounts of cash to pay bills.”

One increasingly common money management tool for people in this situation is prepaid cards. These cards look and work much like regular debit cards except that instead of funding them through a checking or savings account, you load money on the card by cash, check, funds transfer or direct deposit by an employer or government entity.

Common prepaid card features include:

• You don’t need a bank account or solid credit rating to obtain one.
• They start out with a zero balance until you add money. Purchases or ATM withdrawals will diminish the card’s balance until it reaches zero and you discard it (as with gift cards) or you reload the card.
• Spending is limited to the amount loaded on the card, so you can’t buy more than you have.
• Cards can offer “Zero Liability” protection if you promptly report loss, theft or fraudulent charges.
• Most allow ATM cash withdrawals and online or phone purchases.
• They’re safer to carry than large amounts of cash.

 

Common types of prepaid cards include:

• Reloadable cards – to which more money can later be added.

• Gift cards – used until their balance is depleted; they’re not reloadable.
• Teen cards – where parents can reload the cards and monitor purchases online or by phone (allowing teens a chance to manage spending and budgeting in a controlled environment).
• Travel cards – a safe alternative to cash and travelers checks.
• Payroll cards – wages are loaded into the card’s account for immediate access (similar to checking account direct deposit).
• Government agency-provided cards – benefits such as Social Security and unemployment are loaded into your card account.
• Healthcare cards – allow point-of-service access to funds in your Flexible Spending Account or Health Savings Account to pay for qualified medical expenses.

 

Prepaid cards may come with fees and restrictions, so it’s important to read the card’s terms and conditions carefully and to shop around for the best deals. Good comparison sites include www.bankrate.com and www.creditcards.com.

Here are a few questions to ask when comparing cards:

• What identification do I need to buy this card?
• Where can I use it? (Certain retailers only? Online? Phone?)
• Can I later add funds to it? For example, will it accept direct deposit of payroll or Social Security checks?
• Is there an expiration date?
• Will I receive monthly statements?
• Can I check balances by phone or online?
• What fees apply? Common fees include those for card activation, reloading funds, balance inquiries, ATM or bank withdrawals and declined transactions.
• What happens if it’s lost or stolen?

 

To learn more about how prepaid cards work, you can order a free “Prepaid Card Basics” brochure at Practical Money Skills for Life (www.practicalmoneyskills.com), a free personal financial management program run by Visa Inc.

Bottom line: Always make sure you fully understand the terms and conditions of any financial product or account before signing up.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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The power of compounding
September 12, 2011

By Jason Alderman

I wish I had learned about the power of compounding a long time ago. As a kid I walked dogs in the neighborhood, earning $5 a week. If I’d started investing that weekly $5 from age nine until 65, it would have grown to $254,000, assuming an 8 percent return.

Unfortunately, I didn’t catch compounding fever until much later. I missed out on maximizing my first few years of 401(k) contributions, which would have made a huge difference at retirement.

But on a positive note, my 11-year-old son learned from my mistakes and socks away his $10 weekly newspaper delivery salary, which he earns in addition to his allowance. My wife and I sweeten the pot by matching his savings in a Roth IRA we opened for him.

So what is compounding? Basically, it’s where you put aside money – whether in savings, a retirement account or the stock market – and then essentially leave it alone. As your account earns interest or dividends, you continually reinvest those profits, thereby generating (compounding) additional earnings at an accelerated rate.

Numerous interactive calculators are available online to help you estimate potential savings under different scenarios. I used several from the website Dinkytown (www.dinkytown.net) in the following examples:

Using Dinkytown’s “Compound Interest and Your Return” calculator, you can estimate how quickly a one-time investment will grow at varying interest rates and periods of time. For example, a $10,000 investment earning 8 percent compounded quarterly would be worth $22,080 after 10 years; $48,754 after 20 years; and $107,652 after 30 years.

If you can set money aside every month, your savings will grow even faster. According to Dinkytown’s “Cool Million” calculator, if you began saving $100 a month at age 21 and earned 8 percent interest, by 65 your account would be worth about $447,000. Increasing the monthly contribution to $200 would double that to about $893,000.

The riskier the investment, the greater your potential gains – and losses. For example, regular savings accounts typically offer very low interest rates in exchange for very low risk of loss. On the other hand, investing in the stock market can potentially earn double-digit investment rates over long periods of time. (Of course, stocks can be a risky short-term investment.)

So why not simply park your money in a safe haven? Simple: inflation. If your money is earning 2 percent interest but the inflation rate is 3 percent, you’ll actually net a 1 percent loss.

Using the “Cool Million” $100-a-month example above, if you expect to earn 8 percent interest but factor in a 3.1 percent expected annual inflation rate (the overall average rate since 1925), your account balance at age 65 would be worth more like $117,000 in today’s dollars, versus $447,000 unadjusted for inflation.

The longer you delay saving, the harder it is to catch up. According to Dinkytown’s “Don’t Delay Your Savings!” calculator, if you save $200 a month at 8 percent interest, after 30 years your account would be worth $283,522. But wait only two years to begin saving and that balance would shrink to only $238,612 – that’s $44,910 less. A five-year delay would knock it down to only $182,968.

Bottom line: Don’t procrastinate on starting to save. And get your kids on the compounding bandwagon as well; they’ll thank you once they reach your age.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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Financial planners not just for the wealthy
September 6, 2011

By Jason Alderman

It’s not uncommon to feel overwhelmed by the sheer number of important decisions we need to make concerning retirement accounts, investments, college savings and other complicated financial issues. That’s one reason more and more people turn to professional financial advisors to help them navigate an increasingly complex economic world. And it’s not just the wealthy who require these services; many middle-class families are turning to outside financial advice as well.

Some people simply require a one-time, objective opinion about whether their current financial plan will meet their future needs, whether for saving for retirement, buying a home or building a sufficient emergency fund. Others haven’t even started a plan and don’t know where to begin.

Here are a few suggestions for finding the right financial advisor:

When searching for a financial advisor, look for someone well-qualified in their field, whose ethics and professional behavior are above reproach and with whom you can be comfortable discussing intimate financial details. Seek someone who asks probing questions, listens to your needs and concerns, won’t try to sell you unneeded products or services, and can explain in plain English the potential risks and rewards of every recommended action.

Ask for referrals from trusted friends, relatives, coworkers and professionals like accountants and lawyers. Find out what factors they used to choose their financial planners and how satisfied they are with the results.

Interview at least three candidates. Most professionals will provide a free or low-cost initial consultation and may ask you to fill out a detailed questionnaire beforehand to help guide the discussion. And be prepared with your own questions, including:

• Work experience – how long practicing, types of clients, areas of specialization, etc.
• Qualifications, including education, licenses, credentials and other certifications.
• Fee structure – are they paid an hourly rate, a flat fee per task, by commission, or a combination of fees and commissions.
• Services and products offered – some people believe it’s a conflict of interest for advisors to earn commissions for products they recommend, so ask for full disclosure if they aren’t “fee-only.”
• References from current and past clients.
• For additional questions to ask, visit the Securities and Exchange Commission (www.sec.gov/investor/brokers.htm) and the Certified Financial Planner Board of Standards (www.cfp.net).

 

Many types of professionals call themselves financial planners, but training and specialization vary widely – some are essentially salespeople. Common designations include: Certified Financial Planner, Certified Financial Consultant, Certified Public Accountant/Personal Financial Specialist and NAPFA-Registered Financial Advisor, but the list goes on.

Most groups that certify financial planners have their own credentialing requirements, regulators and ethical guidelines, but education and experience requirements vary. Good resources for learning more about the different types of financial planners, as well as locating local professionals, include the Financial Planning Association (www.fpanet.org), the National Association of Personal Financial Advisors (www.napfa.org), and the Certified Financial Planner Board of Standards (www.cfp.net).

Before hiring a financial advisor, investigate his or her background and disciplinary history, as well as that of their firm. The CFP Board of Standards provides links to the appropriate regulatory agencies (www.cfp.net/learn/knowledgebase.asp?id=7).

Many considerations come into play when hiring a financial planner, but it’s worth the effort. You wouldn’t entrust your health to a doctor in whom you don’t have complete confidence, and the same should apply to the expert giving advice on handling your hard-earned money.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Improving your credit score
August 29, 2011

By Jason Alderman

Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits or, more seriously, experienced a home foreclosure or even bankruptcy. Is this a big deal? Absolutely.

If your credit score drops significantly, you’ll likely be charged higher loan and credit card interest rates and offered lower credit limits – or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or get a cell phone.

Fortunately, taking these few steps will begin improving your credit score almost immediately:

First, review your credit reports from the three major credit bureaus (Equifax, Experian and Transunion) to see which negative actions your creditors have reported and look for errors or fraudulent activity. You can order one free report per year from each at www.annualreport.com. You can also order a FICO credit score (the score most commonly used by lenders) for $19.95 from www.myfico.com to know exactly where you stand.

“It definitely pays to have a good FICO Score,” says Greg Pelling, vice president of Scoring and Analytics at FICO. “Based on today’s rates, you could save $30,000 in interest on a $100,000 home loan over 30 years, if your score is above 740 rather than below 620. Lenders base their decision on many factors but your FICO score plays a major role.”

Never exceed individual credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you’re using), the better. Try to keep your overall utilization ratio – and ratios on individual cards and lines of credit – below 30 percent.

Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score. A few suggestions:

• Spread purchases among multiple cards to keep individual balances lower.
• Make extra payments midway through billing cycles so your outstanding balances appear lower.
• Ask lenders to reinstate higher limits if your payment history has been solid.

 

Transferring balances to a new credit card to get a lower rate dings your credit score by a few points – although it won’t take long to recover. But, say you move a $2,000 balance from a card with a $10,000 limit to one with a $4,000 limit; you’ve immediately gone from a 20 percent utilization ratio to 50 percent on the new card.

A few other credit score-improvement tips:

• Make sure that credit card limits reported to credit bureaus are accurate.
• Don’t automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, occasionally make small charges on existing accounts to make sure lenders don’t close them out.
• Each time you open a new account there’s a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car.
• Pay off medical bills and parking, traffic or library fines. Once old, unpaid bills go into collection, they can damage your credit.

 

There are many good resources for learning what you can do to repair and protect your credit scores, including the Credit Education Center  at www.myfico.com/CreditEducation, the Credits and Loans page at www.ftc.gov/bcp/menus/consumer/credit.shtm, and What’s My Score (www.whatsmyscore.org), a financial literacy program run by Visa Inc.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Back-to-school budgeting tips

August 15, 2011

By Jason Alderman

The days when you could send your kids off to the first day of school with a lunchbox and a hug are long gone. Today’s back-to-school preparations likely include filing out piles of pre-enrollment paperwork, lining up carpools and, of course, the dreaded shopping excursions for clothes and school supplies.

If you’re new to this game or simply need a refresher course, here are a few suggestions that can help you save time, money and sanity:

Get organized. Keep a file with letters, emails and notes sent home from your kid’s school for registration requirements, report cards, permission slips, required vaccinations, school policies, teacher and parent contact information, etc. See if the school has a website, online calendar or email list you can sign up for. Also, create a family master calendar.

Back-to-school shopping. By the time they’ve bought new clothes, classroom supplies and paid for extracurricular activities, many parents will end up spending several hundred dollars per child. Unless you’ve been setting money aside all year, you’ll need to determine what you can afford to spend on school-related expenses without blowing your overall budget. Scoring bargains won’t help your bottom line if you end up paying interest on unpaid balances.

Here are a few budgeting tips:

• Before you shop, make a comprehensive list for each child. Use previous years’ expenses as a guide and compare notes with other parents.
• Be transparent with your kids about the budgeting process, including how much money is available to spend. Get them involved in prioritizing expenses between “must-haves” and “nice-to-haves.”
• As an added inducement to save money, agree that if you come in under budget, you’ll split the savings with them.
• Spread clothing purchases throughout the year so your kids don’t outgrow everything at once.
• Although shopping online can save money, time and gas, don’t forget shipping and return costs, which could undo any net savings.

• Review the school’s dress code so you don’t waste money on inappropriate clothing.

• Ask which school supplies you’re expected to buy. Go in with other families to take advantage of volume discounts and sales.
• Find out how much extracurricular activities (athletics, music, art) cost. Account for uniforms, membership dues, private lessons, field trips, snacks, etc.
• Rent or buy used sporting equipment or musical instruments until you’re sure they’ll stick with an activity.
• Factor in public transportation, school bus or carpool expenses.
• Find out your school’s policy on immunizations and see what’s covered by your insurance – or which ones you can access free at health fairs or community clinics.
• Before buying new clothing or accessories, look for “gently used” items in the closets of your older kids, friends and neighbors, at garage sales, thrift and consignment stores and at online sites like Craig’s List.

• Clip newspaper and online coupons. Many stores will match competitors’ prices even if their own items aren’t on sale. In addition, numerous consolidation websites post downloadable coupons and sale codes for online retailers, including CouponCabin.com, CouponCode.com, DailyDeals.com, DealCoupon.com and many more.
• Mobile shopping applications take online shopping to a whole new level by allowing in-store smartphone and mobile browser users to scan product barcodes and make on-the-spot price comparisons, read reviews, download coupons, buy products and more.

 

Bottom line: Plan ahead for back-to-school season and you’ll save money, time and aggravation.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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Protect Your Kids from Identity Thieves
August 8, 2011

By Jason Alderman

You’re probably weary of being reminded to take precautions against identity theft, but here’s a wrinkle you may not have considered: Identity thieves have broadened their reach by harvesting children’s dormant Social Security numbers (SSNs) and using them to illegally obtain jobs, credit accounts, mortgages or car loans and much worse.

Many victims have no inkling anything is amiss until they later apply for a student loan, bank account, job or apartment and are turned down because of poor credit history. Some families have even been hounded by collection agencies or served with arrest warrants because the debts or criminal activities thieves executed were so extreme.

There’s no completely foolproof way to protect your child’s identity, but here are some precautions you can take:

Although it’s tempting to simply not register your kids for SSNs until they turn 18, that’s not practical in today’s world. For one thing, children need one if you want to claim them as dependents on your taxes. They also may need one if you want to obtain medical coverage or government services for them or open bank accounts or savings bonds in their name.

Most parents register their children for SSNs at the same time they apply for birth certificates at the hospital. If you wait until later to apply, you must provide proof of your child’s U.S. citizenship, age and identity, as well as proof of your own identity.

Because each person’s SSN is unique, it’s not uncommon for schools, healthcare providers, insurance companies and others to require that parents provide one as an identification tool. However, don’t be afraid to ask:

• Why do they need an SSN – is there a legal requirement and if so, what is it?
• Will they accept alternative identification?
• What will happen if you don’t disclose it?
• What security precautions do they take with personal information?
• Will they agree not to use the SSN as your child’s personal identification number on correspondence, account statements or ID cards?

Warning signs your child’s personal data might have been compromised include:

• Preapproved credit account offers.
• Calls from collection agencies, creditors or government agencies.
• You’re denied opening a bank account in their name because one already exists with the same SSN.
• They are denied credit, employment, a driver’s license or college enrollment for unknown or credit-related reasons.

There may be legitimate reasons why your child is receiving credit offers. For example, if you opened a college fund or they enrolled in a frequent flyer program.

However, if you strongly suspect an identity theft has been committed, you can:

• File a police report and keep a copy as proof of the crime.
• Contact the fraud units at the three major credit bureaus for instructions: Equifax (800-525-6285), Experian (888-397-3742) and TransUnion (800-680-7289).
• Notify the Federal Trade Commission (877-438-4338). Their Identity Theft site at www.ftc.gov contains information on fraud alerts, credit freezes, working with police and much more.
• Ask Social Security (800-772-1213) whether anyone has reported income using your child’s SSN. Search “Identity Theft” at www.ssa.gov for information.
• Contact the IRS’ Identity Protection Unit (800-980-4490).

Bottom line: Use the same precautions with your child’s personal information as you do with your own and make sure you know the warning signs and what to do if it’s compromised.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

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Should You Put Retirement on Hold?
August 1, 2011

By Jason Alderman

 

One indicator our economy is still hurting is that more and more people are postponing retirement. According to the Department of Labor, those over 55 and still working have increased steadily since the recession began – 28.9 million at last count – and some surveys show more than a third of employees expect to work past age 70 or never retire.

Would-be retirees have faced a perfect storm of negative situations:

• Having to tap retirement savings early to cover bills or tide them through unemployment.
• Plunging home values diminished or erased the equity many had hoped to draw on in retirement.
• Unable to afford – or qualify for – health insurance they’ll need until Medicare kicks in.
• And many boomer parents have put their own savings on hold while helping their kids struggle through the recession.

 

If you’re hoping to retire in the next few years, consider the following:

How much will you need? Financial planners often suggest people may need 70 percent or more of pre-retirement income to maintain their current lifestyle, but it’s difficult to generalize. For example, some people downsize housing or retire to less expensive areas and thus need less. Others can expect increased medical, utility and other bills to outpace earnings on their savings.

Start estimating your retirement needs by using online calculators:

• The Retirement Estimator at www.ssa.gov/estimator automatically enters your earnings information to estimate your projected Social Security benefits under different scenarios, such as age at retirement, future earnings projections, etc. You can also download a more detailed calculator to make more precise estimates.
• Check whether your 401(k) plan administrator’s website has a calculator to estimate how much you will accumulate under various contribution and investment scenarios. If not, try the various retirement calculators at www.bankrate.com.
• AARP offers a retirement calculator to help determine your current financial status and what you’ll need to save to meet your retirement needs.

 

After you’ve explored various retirement scenarios, consider paying a financial planner to help work out an investment and savings game plan. If you don’t have a personal referral, good resources include www.cfp.net, www.napfa.org and www.fpanet.org.

Social Security issues. To make ends meet, many people begin drawing reduced benefits from Social Security before reaching full retirement (65 for those born before 1938 and gradually increasing to 67 thereafter). This can have several financial consequences:

• Your monthly benefit will be reduced by up to 30 percent. (Conversely, if you postpone benefits until after reaching full retirement age, your benefit increases by 7 to 8 percent per year, up to age 70.)
• Although many states don’t tax Social Security benefits, they are counted as taxable income by the federal government. So, depending on your overall income, you could owe federal tax on a portion of your benefit. IRS Publication 915 at www.irs.gov has full details.
• If you begin drawing Social Security while still working, your benefit could be significantly reduced depending on your income. Read “How Work Affects Your Benefits” at www.ssa.gov for details. (Rest assured, however: Those reductions aren’t truly lost since your benefit will be recalculated upward at full retirement age.)

 

One last suggestion: Once you’ve settled on what you think will be a sufficient retirement budget, try living on it for a few months first before retiring to make sure it actually works.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Financial costs of caring for your parents

July 25, 2011

By Jason Alderman

 

Kudos to the millions of “sandwich-generation” Americans. These exhausted souls spend their time and money caring for and supporting not only their own children (and sometimes, grandchildren), but their parents as well. It’s no wonder that so many people caught in this situation have trouble paying their bills and saving for retirement.

If you are primary caregiver for one or both parents or support them financially, these ideas may help you keep your own finances on track:

You may be able to claim your parents as dependents for tax purposes if:

• You provide more than half their financial support. If they live in your home, you can count the fair-market rental value of their lodging, including utilities, in that calculation.

• Their gross income (excluding Social Security payments and other tax-exempt income), is less than $3,700 a year.
• They did not file a joint tax return – unless it was to claim a refund.
• The rules are complicated, so consult a tax professional or review IRS Publication 503 at www.irs.gov to see if you qualify.

 

Even if you can’t claim your parents as dependents because of the gross income limit, if you itemize deductions you still may be able to deduct their medical expenses you paid for provided you supply over half their financial support. The deduction applies only to medical expenses that exceed 7.5 percent of your adjusted gross income, so paying for their expenses just may help put you over that threshold. For a complete list of qualifying expenses see IRS Publication 502 at www.irs.gov.

Another way to lower your tax bite is to participate in employer-provided flexible spending accounts (FSAs), where you pay for eligible health and dependent care expenses (including those for dependent parents) on a pretax basis – that is, before federal, state and Social Security taxes have been deducted. This lowers your taxable income and therefore, your taxes. To learn more about FSAs, visit Practical Money Skills for Life, a free personal financial management program sponsored by Visa Inc. (www.practicalmoneyskills.com/benefits).

A broad range of federal, state and private assistance programs are available to help low-income seniors (and others) pay their bills, including:

• Medical coverage through Medicaid and Medicare. For a good overview of these programs, see “Get Financial Help” at www.medicare.gov. 

• Most pharmaceutical companies offer patient assistance programs that provide uninsured and low-income people access to prescription drugs they couldn’t otherwise afford. Ask your doctor or pharmacist for details.

• The Low-Income Home Energy Assistance Program provides grants to help pay utility bills. To see if your parents qualify, go to www.acf.hhs.gov/programs/ocs/liheap.

• The Supplemental Nutrition Assistance Program helps lower-income Americans buy nutritious food. Visit www.fns.usda.gov/snap for qualification requirements.
• Rental assistance for low-income people is available from several Department of Housing and Urban Development programs as well as other state and local agencies (see “Find Rental Assistance” at www.hud.gov for details).
• AARP has an excellent guide to finding public benefit programs in your area at www.aarpkb.benefitscheckup.org. They also have a robust Caregiving Resource Center at www.aarp.org/caregiving.

 

And finally, if your parents live far away, consider hiring a local geriatric care manager to help develop a game plan. It’s not cheap, but you’ll appreciate the peace of mind. A good resource is the National Association of Professional Geriatric Care Managers (www.caremanager.org).

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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With budgeting, slow and steady wins the race

July 18, 2011

By Jason Alderman

Budgets are like diets: No single approach works for everyone; overly complicated plans rarely work for long; and sometimes it takes a few tries before you get it right.

One common stumbling block is thinking of budgets as punishment rather than a means to achieve your life’s goals. Say you dream of buying a house: A budget shouldn’t serve as a constant reminder that you can’t afford a down payment; but rather, as a tool to help identify where the money goes each month so you can adjust spending – and saving – accordingly.

If you’re new to budgeting or you haven’t been successful in the past, start slowly. First, for a few months write down every cent you spend: mortgage/rent, utilities, food, gas, medical copayments, birthday presents, credit card interest, allowances – the works. Don’t forget annual expenses like insurance and income tax. It sounds tedious, but I guarantee you’ll be amazed by the bottom line.

At the same time, track your income. Comparing money coming in versus money going out can be quite enlightening. Breaking even or losing money each month may mean you need to find additional income sources and/or aggressively alter your spending habits.

Budgeting tools. You can go the pencil-and-paper route by downloading a budget template (Google “Budget Worksheet”). Interactive, online budgeting calculators to help plan for expenses also are widely available. Practical Money Skills for Life, a free personal financial management program run by Visa Inc., includes budgeting calculators for everything from back-to-school costs to holiday expenses to retirement (www.practicalmoneyskills.com/calculators).

Once you’re ready for the next level, many software packages and online account management services are available – some are free, while others charge a one-time or monthly fee. Popular products include Quicken, Mint.com, Yodlee and Mvelopes.  Commonly available features include:

• Account aggregation – import transaction information and balances from bank, credit card and investment and other accounts into one common database. 
• Transfer money between accounts; some also allow online bill payment.
• Track, categorize and annotate transactions – also helpful when calculating income taxes.
• Interactive charts and graphs to help visualize changes in spending and savings habits.

                                           

Start jotting down your short- and long-term financial goals – buying a new car or house, saving for retirement and vacations, paying off debt, financing college, building an emergency fund, etc. You won’t solve all these financial challenges at once, but start whittling away at them; over time you’ll notice gradual improvements and be encouraged to up the ante.

Here are a few suggestions:

• Look for items that stand out as extravagances you can trim or eliminate, at least temporarily.
• Reduce insurance premiums by raising deductibles.
• Always pay at least minimum loan and credit card balances to avoid late charges.
• List accounts by interest rate and pay off those with the highest rates first.
• Create separate savings accounts for different long-term goals and have contributions automatically deducted from your paycheck or checking account – even if it’s only a small amount each month. Don’t borrow from one to pay expenses in another, especially your retirement accounts – the tax implications alone are daunting.

 

For more budgeting tips, visit www.mymoney.gov, the National Foundation for Credit Counseling (www.nfcc.org) and Practical Money Skills for Life (www.practicalmoneyskills.com).

When budgeting – like dieting – remember the tortoise and the hare: Slow and steady wins the race.

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

 

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Financial Survival Tips for College Grads

If you’re a recent college graduate and just landed your first job in the real world, you need to be conscious about your spending – and if you’re like a lot of other recent college grads and haven’t landed any kind of job, you need to be even more vigilant with your money.

Sometimes college graduates get caught up in the idea of landing their dream job and making the big bucks – getting that first “real” job which leads to the first big paycheck. But more and more that’s just not realistic. So be sure to keep the following six tips in mind, so you can set sensible expectations and avoid incurring more debt:

• Be realistic about your pay. The average salary of a recent college graduate is $46,000, which means a lot of college grads are making considerably less. And that amount is your gross salary – before taxes, insurance, benefits, living expenses and student loan payments are deducted. What you actually take home could amount to less than half of your income.
• Prepare for the unexpected. If you have an apartment, make sure you invest in renter’s insurance. It is a relatively inexpensive way to protect your possessions. Does your new employer offer health insurance? If not, many adult children are eligible to stay on their parents’ insurance plans until they’re 26 years old, if their employer does not offer comparable insurance coverage.
• Credit scores matter. Whether you want to get an apartment, mortgage or new car, your credit score says a lot about you. This three-digit number is based on the information in your credit report. The higher the number, the better. Examine your credit report regularly for accuracy, and pay off any existing credit card debt as soon as possible. Free credit reports are available at www.annualcreditreport.com.
• Set aside money year round. Consider directly depositing a certain amount from your paycheck into a savings account for a “me fund,” “vacation fund” or “car fund.” Even consider setting money aside year round to cover the expenses for holiday or birthday gifts.
• Take advantage of “free money.” Many employers offer pretax savings through their retirement accounts. Because your retirement contributions come out before taxes, your taxable income is decreased, saving you money. If your employer matches a percentage of your retirement contributions, it is wise to contribute the maximum amount of their match so you don’t pass up on “free money.”

Start investing now. It may seem crazy to begin planning for retirement now, especially if you’re not making a lot of money. But successful investors understand that the longer your assets remain invested, the greater their potential for growth.