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How Do Savings Bonds Work – And Do They Belong in Your Portfolio?

March 4, 2013 by Karl Leave a Comment

A common question asked by novice investors is “How do savings bonds work?” Most likely, your only existing exposure to savings bonds lies in your childhood. You probably received one as a birthday gift from your least favorite Aunt – when you really wanted that awesome new Teenage Mutant Ninja Turtle action figure, or a Polly Pocket play set.

You were soured on US savings bonds at that point, and probably never looked into them again.

How Do United States Savings Bonds Work?

There are four different types of savings bonds, discussed below. Each one works slightly differently, but the concept is generally the same for all of them. You purchase a savings bond with a fixed amount of cash – $25, $50, $75, $100, $200, $500, $1000, $5000, or $10,000. You then collect interest on the bond until you cash it out. Like most other investments, cashing out early will result in penalties, reducing the total amount that you earn on the investment.

It’s very difficult to pinpoint an average rate of return of savings bonds, as the interest rates vary depending on when they were purchased. If you own an I bond, your interest rate fluctuates annually based on the rate of inflation, which makes it even more difficult to pinpoint an average rate of return.

The biggest benefit to purchasing US Savings Bonds is the fact that they’re backed by the government. As long as the US Government doesn’t go bankrupt and you allow the bond to mature, you’re guaranteed to get your money back.

One thing to consider is what these bonds really are – a form of savings. The rates of return tend to be relatively insignificant when compared to other investments, and at times, traditional savings accounts may even outpace their rate of return.

As a long-term system for wealth preservation, they’re not that great. If, however, you’re hoping to add a very safe item to your portfolio (or hoping to help a kid learn the basics of investing) they’re a great option.

Finally, they’re “not marketable,” meaning only the United States Treasury department can sell them. It used to be that you would go to your local bank to buy them, and you’d get a “paper” bond (basically, a certificate showing the details of your investment). Now, they’re all sold digitally.

savings bond

 

Different Types of Savings Bonds

Let’s start by cutting out the two types of savings bonds that just don’t matter, anymore:

  • Series HH/H Bonds – They haven’t been issued since 2004, and there’s no way to purchase them. They earned as much as 4.00% annually, and interest was paid directly to your bank account. They were taxable on the federal level, but not by your local state government. If you own any of these, you can cash them out right now, without penalty – the minimum time to maturation was six months, meaning that they’ve all matured long ago.
  • Patriot Bonds – These bonds were issued at your local bank and differed from EE bonds only because they had the phrase “Patriot Bonds” printed between your Social Security Number and date of issue.

I Savings Bonds

The I Savings Bond collect interest that gets compounded semi-annually, on the six month anniversary of their issuance. The interest is added to the bond’s principal value, meaning that they are enchanted by the magic of compounding interest. The interest rate is determined by a combination of:

  1. A fixed interest rate
  2. An inflation-based interest rate

In the late nineties and early 2000’s, the fixed interest rates were pretty good – ranging from a high of 3.6% in May of 2000 to a low of 2.00% in May of 2002. In November of 2002, the fixed interest rate dropped to 1.6%, continued sliding towards zero until November of 2010, and that’s where the rate has rested ever since. We could see a fixed interest rate that’s greater than zero in May of 2013, but with the state of the global economy that’s just not likely.

The inflation-based interest rate varies every six months, and it applies to your bond regardless of when it was purchased. It is possible for this rate to be negative (if we were to have deflation), but that’s only ever happened once, in May of 2009.

The interest paid is based on the sum of both rates – so if you have a 0% fixed rate and a 1.5% inflation rate, you’ll earn 1.5%. If the sum of the two were to cause your interest rate to be less than zero (as was the case for most I bond holders in May of 2009) you won’t lose money – your rate will simply be zero.

EE Savings Bonds

These bonds are assigned a fixed interest rate at the time of purchase and that rate will never change for as long as you own the bond. Rates for newly purchased bonds are set on May 1st and November 1st of each year. This doesn’t apply to EE bonds purchased before May 1st, 1997, though – they had variable interest rates, and that stays the same.

You can continue earning interest on an EE bond for a total of 30 years. At that point, the gravy train stops, and you’d be wise to cash out. Otherwise, your money is just sitting there, like a lazy slob (instead of working for you). You can cash your bond out at any time after owning it for one year, but if you haven’t owned it for at least five years, you’ll lose the last three months of interest.

Buying US Savings Bonds

All US Savings Bonds are currently sold through the TreasuryDirect.com website. They’re also tracked and managed digitally, too. There are no more “paper savings bonds.” I guess if you want something like that, you could always print up the details on your own fancy certificate.

Do Savings Bonds Have a Place in Your Portfolio?

This is a highly debatable question! Savings bonds definitely provide a secure investment, but the rate of return is usually negligible. They’re designed to be long-term investments, and if you pull your cash out too early, you won’t gain what you otherwise could have.

If you want to keep your funds liquid, you can earn similar interest rates with basic savings accounts (such as the Ally Bank High Yield Savings Account, which is earning 0.9% at the date of writing this article). The advantage, here, is that you have access to that cash as soon as you need it. It’s also backed by the FDIC, so it’s unlikely that you’ll lose your investment.

Savings bonds are a good way to help show kids how investing works, to an extent. If that’s your goal, you’re probably better off helping them set up a fantasy trading account and stashing their cash in a high-yield savings account.

I’m not a big fan of savings bonds, if you can’t tell. But I do realize that they have a place in some investor’s portfolios. Since they’re guaranteed and provide can provide a fixed-rate of return, they can help diversify your investments with a guaranteed rate of return for up to thirty years, and that’s definitely worth something.

Filed Under: Uncategorized

How to Buy and Sell Timeshares

February 27, 2013 by Karl Leave a Comment

timesharesWant to know how to buy and sell timeshares? Take your time, then. As you’re about to find out, the world of timeshare ownership is fraught with peril – including negative equity, high interest rates, scams galore, and never-ending maintenance fees.

But, a timeshare can be a really attractive option for anyone looking to have a home away from home. With the right homework and diligence, you can get involved in buying and selling timeshares without all of the headaches.

Timeshare Options

Buying a timeshare isn’t like buying a traditional piece of real estate. There are two different types of ownership:

  1. Deeded ownership – you actually receive a deed that dictates your ownership in the timeshare property. Along with this deed comes a monthly mortgage, property taxes, and maintenance responsibilities. It’s like owning a condo, except you only use it occasionally.
  2. Rights to Use – with this type of ownership, you’re given the right to use the property for a set amount of time for each year of your agreement. You don’t own a specific unit – the developer does. You may or may not find yourself in the same property during each vacation.

There are plenty of different options when it comes to both deeded ownership and rights to use, but you’ll be better off digging into the Federal Trade Commission’s information on time shares if you decide to proceed with ownership.

Timeshare Troubles

A timeshare is an investment – but not one that provides any sort of respectable return. A timeshare is a lot more like owning a car or boat. It has never-ending maintenance requirements, and you’ll have to keep throwing money into it month after month. When it’s time to sell, you’ll rarely get your initial investment back. If you’re not ready to take a hit like that, then you should avoid timeshares all together.

Buying a timeshare the right way can help you minimize this loss, drastically. Instead of working directly with a developer, find an existing owner of a timeshare that’s ready to sell. You’ll be able to pick the property up for a fraction of its original cost. One man’s loss is another man’s gain – just make sure you’re not the one losing.

Just like buying a car, it’s also wise to pay in cash. This will help you avoid the absolutely insane interest rates that typically come with timeshare investments – they can range as high as eighteen percent!

How to Sell a Timeshare

If you’ve bought a timeshare and are ready to get out, you might have trouble selling it – the economy isn’t exactly in the best shape, after all. Follow these tips to smooth the process and leave that money pit behind:

  1. Sell it back to the developer – again, you’ll take a huge hit, here, but the timeshare company is probably interested in scooping up your timeshare at a low cost and flipping it for a nice profit. It provides a quick way out, but you’ll lose the most money.
  2. Sell your timeshare to other owners – if you can find out who owns the right to use the timeshare immediately before or after you, they may be interested in buying it. This will allow them to extend the duration of their visits. You’ll still take a huge hit, but it won’t be quite as bad as selling it directly to the developer.
  3. Sell it through a local broker – there are plenty of brokers that are experienced with selling timeshares, and plenty who aren’t. If you’re going to work with a broker, take the time to learn about their experience, fees, and marketing plan before you dive in. Whatever you do, don’t pay a broker a commission for doing something you could do on your own – like posting an ad online.
  4. Check out sites like RedWeek or TransAction Realty – these sites exist primarily to help owners of timeshares sell to interested parties. There are some fees involved, but it’s a cheaper approach for anyone with real estate savvy and a DIY mentality.

Timeshare Scams

If you own a timeshare, you’ve probably been contacted by third parties that promise to have a “ready and capable buyer” on stand-by. If you weren’t in the market to sell when that call came, you might have just ignored it. But since you’re here, reading this article right now – you probably are interested in selling.

There are numerous scams, and some are respectably ingenious. The most common, though, is for the scammer to contact you and promise that they have a buyer ready. They’ll even mail you a letter of intent. All you need to do is send a small fee (a few hundred dollars) and they’ll take care of the rest…

…except you’ll never hear from them again. Your money is gone, and you’ve been scammed. If you’re learning how to sell your time share, avoid companies that contact you, first. If someone does contact you, though, and you’re interested in doing business with them, be sure to check into their ratings with the better business bureau, and do some research online to make sure that scams aren’t being reported.

Ultimately, a timeshare is not an investment – it’s an expense. Avoiding them entirely is one of the smartest investment decisions you could ever make.

Filed Under: Alternative Investing

10 Alternative Investments You May Not Have Considered

February 21, 2013 by Karl Leave a Comment

The stock market is where most people consider investing their money, but in an uncertain and shaky market you feel squeamish about putting your money there. If this sounds like you, don’t worry. There are plenty of things you can do with your money to invest it apart from stocks. Just remember, anything you invest in will have some level of risk. Make sure that you are comfortable with your investment before you go committing your money to it. Here are 10 alternative investments that may not have crossed your mind.

  • Buy or Trade Currencies – The Forex, or foreign exchange, market has exploded in the last few years, with day traders getting involved and profits going through the roof for those who do well. This is similar to stock trading, but with global geopolitical conditions the way they are, there is plenty of volatility if you want some excitement in your trading.  Etoro is a broker that lets you trade currencies.

  • Buy Items to Resell – There are tons of people making money on sites like Ebay by buying things when they are being cleared from stores or on websites and reselling them at higher prices. You can use Ebay or other auction or sales sites, or if you are really enterprising you could start your own site or store to do the same thing.

  • Buy Precious Metals– This has also become popular in recent years with the price of gold skyrocketing. You can set up a retirement fund that invests in gold and silver bullion or other commodities, and some mutual funds will do the same. Precious metal prices tend to move independently from other financial markets, making it an attractive investment for many.  Precious metals can be bought via the futures market by using a broker like OptionsXpress or by purchasing physical gold and bars from a website such as apmex.com.

  • Rental Properties – With mortgage rates being at historic lows, buying property is a good investment. Rental properties do come with downsides, however. Your cash is not very liquid at all, and the maintenance can take up a lot of your time and energy. You may want to look into a property management company to take care of the maintenance for you, just make sure that the cost is worth it. There’s no point in spending all of the income you get on maintaining the building. If done right, this can be a very profitable long-term investment. About.com has a good section going into this in more detail.

  • Non-publicly Traded REITs – These tend to be more stable than publicly traded real estate investment trusts, because they don’t move with the stock market. They pay dividends based on rents paid by the tenant to the building owner, or REIT companies. Changes in interest rates also don’t affect these, since the rent amounts are set by the lease agreements and don’t change due to market fluctuations or actions from the Fed.

  • Invest in Oil or Gas – This type of investment offers good tax benefits, letting you deduct a part of the
    expenses of private, independent projects like drilling costs, depreciation, and depletion allowances. This will be a major investment opportunity to watch in the coming election year, as many are pushing for more lenient regulations on drilling. Depending on the results of the elections, there may be the possibility for an explosion of new drilling in the coming years, providing you with an unprecedented opportunity. Oil can be bought using futures contracts. OptionsXpress offers these contracts.

  • Invest in Your Career – Taking continuing education courses or learning new skills to help in your career is a great investment in your future. You can make yourself more marketable to employers and deserving of increased pay. You can also branch out into new areas of opportunity either within your current career or in a related field.
  • Start or Buy a Small Business – There are many options to consider in this area. You could start an online business, which would be the least expensive way to go but require some learning or expertise to make it profitable. Starting a small brick and mortar business could also be viable. A great option is buying an existing small business from someone who is retiring or leaving the business, particularly if it is barely profitable now but you think that you could increase that profitability. A final option could be to invest in someone else’s idea for a small business in return for a share of the company.

  • Buy Antiques or Collectibles – Antiques go up in value over time because of rarity. You could use the antiques as decorations until you decide to sell. You can also find deals through estate sales. This would require a little research to know what is actually considered “antique” and what is just old. Art is another investment that will increase in value over time. Stamps and cars are also collectibles that traditionally increase their value due to scarcity and demand. All of these will demand some homework from you to make them profitable.

  • Pay Down Your Debt – If no other investment opportunity stands out to you as appealing, paying your debt down or off is a fantastic investment in your peace of mind and future. Debt and financial problems are the biggest causes of stress in the majority of Americans, and relieving yourself of this pressure is an investment you will be glad you made. I wrote a post on discussing whether you should pay down debt or invest here.

Whether you choose to invest in the market, one of the alternatives mentioned here, or in some other venture, make sure that you have carefully considered your options. Do you know of any other alternative investments that could produce good returns without too much risk?

Filed Under: Alternative Investing

How to Buy Structured Settlements

February 20, 2013 by Karl Leave a Comment

Cash on LineThere are many ways to create an income. Investing in dividend stocks is one option, buying treasuries for the yield, or perhaps purchasing a single premium immediate annuity are others. And then there is the possibility of buying a structured settlement.

What is a structured settlement?

When a person brings a lawsuit against another, say, for example, for an injury at work that has caused a permanent physical impairment, and wins his case, the judge is likely to award the plaintiff a settlement from the defendant. This settlement is most commonly a lump sum.

Let’s imagine that you have been awarded $1 million from a lawsuit against your ex-employer for an accident at work that has left without feeling in your left arm. You could, of course, take the million bucks and have done with it.

But you could also thrash out a deal to have your award paid in installments over a period of time. It’s possible to have a smaller lump sum followed by a series of regular payments, or a deferred payment, or maybe certain special provisions, such as payment for healthcare when needed. This is called a structured settlement.

Why opt for a structured settlement?

Plaintiffs choose to have a structured settlement rather than payment in one hit for a number of reasons:

First, a source of income could be guaranteed for life.

Second, the instalments of a structured settlement could be timed to coincide with an advantageous tax position, or to reduce taxes payable on any income created by investing the lump sum.

Third, if the plaintiff is a ‘spender’ the settlement could be paid in installments to stop the plaintiff from blowing his money.

Apart from these benefits, however, structured settlements do have certain disadvantages to the plaintiff. The main one is that, although they are flexible while they are being negotiated between lawyers, once they are have been signed off by all parties they are deemed to have been carved in stone. They can’t be broken, undone, or altered in any way. And this is where the investment opportunity presents itself.

You see, very often the recipient of a structured settlement decides that he wants a lump sum rather than the periodic payments under the settlement. It may be that he wants to buy or build a new house but is unable to borrow against the structured settlement. In such a case it may be possible for the structured settlement to be sold for a lump sum.

How to buy structured settlements

If you want to create a regular income, a structured settlement may be a better option than an annuity or other investment. The terms of the settlement may be favorable, and the yield paid better than can be received on other investments. It may be that the terms of the structured settlement coincide with your tax bracket moving down. Whatever the reason for investing in a structured settlement, there are some things that you must consider.  Doing so will help you to make a successful investment rather than one that causes you loss and heartache.

1)      Always work with an established broker. Make sure that he has experience of structured settlements, how they work and who to buy from.

2)      The broker, or you if going direct, should only deal with a structured finance settlement company that is a member of the National Structured Settlements Trade Association, and that also places settlements with private investors.

3)      Get several quotes, to ensure that you get the best deal

4)      Ensure you use the services of an attorney to protect your interests

This last point is particularly important. A good number of states have put in place laws that restrict the sale of structured settlements. This is because many lawmakers consider that once a structured settlement has been agreed for the benefit of the plaintiff and with the clauses that are acceptable to him, knowing that it cannot be altered in the future, then it should not be able to be sold, either: if the plaintiff wanted future flexibility, then his attorney should have advised him to accept the lump sum settlement.

On top of these restrictions, tax free structured settlements are restricted by federal law as to sale to a third party – the tax status cannot be freely transferred.

When a structured settlement is sold, it has to be assigned to the third party by the insurance companies that are paying any underlying annuities (most structured settlements are funded in this way). Many companies refuse to reassign structured settlements annuities.

If you want to purchase structured settlements, then an attorney will be able to ensure that such laws will not affect the legal status of your investments. The possibility of buying structured settlements and benefiting from their periodic payments may depend upon where you live and the terms of the underlying annuities.

Summary

If you adhere to the simple rules of buying structured settlements as outlined above, then the process of investing and benefiting from the regular periodic payments should be straightforward. As a way of creating income, structured settlements also enable you to diversify your income streams as well as benefiting from the spread of annuity providers often used to provide structured settlements payments.

The major risk is the legal risk: ensuring this is covered is the biggest step toward a successful, income producing investment.

Filed Under: Education

What is Considered Middle Class in the United States?

February 12, 2013 by Karl Leave a Comment

The phrase “middle class” sure gets thrown around a lot. Last year’s presidential campaigns have most of us baffled, too – both Romney and Obama report that the income of the middle class hovers right around $250,000 a year. What country do they live in?

Depending on where you turn, you’ll find annual earnings figures from $25,000 to $100,000. So, who’s right?

middleclassIdentifying what truly defines the middle class in American is rather difficult. It really all depends on where you live. For instance, if you live in Reading, Pennsylvania or Camden, New Jersey (both fierce competitors for the title of “poorest city in America”) you’ll live like a king on with a third of Romney and Obama’s middle class income.

If you live in San Diego, or New York City, though, you’ll find that it’s hard to get by even with a $50,000 salary. At $250,000 a year, you’ll get by well enough, but you certainly won’t be investing in property and breaking free of “wage slavery.”

So where do we draw the line? What should be considered middle class in America?

What Income is Considered Middle Class in Different Cities

Let’s turn to some common rules of thumb for those thinking about buying a home.

  • Traditional suggestions indicate you can afford a home worth three times your annual salary
  • CNN’s Money Blog says you can afford a home that has a value of 2.5 times your annual salary
  • Various banks and national home buyer’s assistance programs will provide loans on home worth as much as three times the value of your annual salary.

Now, all of these program requirements and “rules of thumb” assume a sizable down payment (usually about 20%). Of course, the amount of money you’re able to save and put down will have a large impact on the cost of your monthly mortgage payment (and therefore, the home you can afford). But, for simplicities sake, we’ll just assume no money down.

So, what is the average price of real estate in various cities? We’ll examine five different cities with vastly different economies and populations:

  1. Camden, New Jersey – $55,000
  2. Reading, Pennsylvania – $116,000
  3. Alexandria, Virginia – $400,000
  4. San Diego, California – $367,500
  5. New York City – $1,025,000

This data comes from Trulia.com’s median sales price data for each city. It’s important to note that in all of these areas, there are different neighborhoods and homes that are both much more expensive, and much cheaper than those selling at the median price. But, since the median price is what most of the home’s in that region are going for, we’ll use that as our baseline.

What Salary is Considered Middle Class?

So, what does this mean for your earnings and how they correlate to the middle class? Well, in each of these areas, we’ll need to divide the median selling price of homes by three to determine what middle class would be.

  1. Camden, New Jersey Middle Class Salary – $18,333
  2. Reading, Pennsylvania Middle Class Salary – $38,666
  3. Alexandria, Virginia Middle Class Salary – $133,333
  4. San Diego, California Middle Class Salary – $122,500
  5. New York City Middle Class Salary – $341,666

But, take the standards of living into account, and you’ll get a very interesting picture. Give someone in Camden the middle class salary of someone living in Alexandria, and they’ll be living like a king. Give the Camden salary to someone living in San Diego, and you’ll leave them destitute.

So far, it’s proving to be rather difficult to determine the salary of a middle class wage earner. But, things are about to get a bit trickier. Don’t worry, though, because by the time you’ve finished reading this, you’ll have a really good idea of what defines the middle class.

Cost of Living Considerations

While it’s great to try and define the middle class by looking through the costs of home ownership, it really is more involved than that. Someone living in a million dollar home in New York City won’t be living a very luxurious life if she’s only earning $350,000 a year.

Most of her monthly earnings would be put towards the mortgage and insurance. Just about everything she buys or does will also cost a lot more than it would in Reading.

But, a person only earning $75,000 a year living in Reading would be a bit ahead of the game. He’ll be able to start saving towards retirement, and maybe even purchasing some investment properties. In short, he’ll have a lot of excess cash to throw around.

This is exactly what makes it so difficult to define middle class in America. There are just too many factors that differ from one location to another. So, the bigger question isn’t defining middle class in America. It’s defining middle class for you.

Your Own Definition

You live your life every single day. You know what kind of money you’re earning, and you (hopefully) know what kind of expenses you have. When you compare what you bring in to what you send out, how much is left over?

It’s important to figure this out, because it really does determine how an individual defines middle class. If you were to swap salaries between someone living in Camden with their middle class counterpart in Reading, they’ll feel like they just hit the jackpot. It would literally be equivalent to doubling their salary.

But that woman mentioned earlier, living in New York in a million dollar home with a $350,000 salary probably feels rather poor. She probably struggles to make ends meet and has very little left for retirement planning. She’s not breaking free of the 9-5 grind and securing an early retirement. She’s actually prolonging it.

“Middle class” is a phrase that virtually defies definition. It’s nearly impossible to pin it down, because there are far too many factors that contribute to what middle class means to different people. That’s why those of us who are living on a $50,000 salary scoff when we hear Romney or Obama mention that $250,000 defines middle class.

Sure, we could gather a bunch of numbers and simply average them out to determine the average earnings of a middle class American, but as you’ve seen – that just doesn’t paint the right picture.

So what is considered middle class in a broader, more generic sense of the phrase? Well, you should consider yourself middle class if you’re earning enough money to pay all of your bills, max out your 401k/IRA, and have a bit left over for some fun stuff – like going out to eat regularly, or taking vacations to exotic locations.

If you’re able to do all of that, and you still have some money left over for larger investments – such as rental properties (or anything else that allows you to start leveraging the income of others) – you’re probably more in-line with the upper class individuals in your area.

What’s important to take away from all of this, though, is that “middle class” isn’t something that we really should be concerned with. Instead, we should focus on moving closer to our own financial goals.

Filed Under: Making Money

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