Compliments of FEDweek.com and ArmedForcesNews.com
The following special report can save you money, make you money and keep you from making serious financial mistakes. Please print this report out and pass it around. Everyone will benefit from it.

The 10 Greatest Financial Planning Errors…
And How to Avoid Them!

1. Misusing Credit
Today, lenders send out mass mailings of "pre-approved" credit cards. Many people find it very tempting to buy everything with plastic and plan to pay later. Unfortunately, some people overspend and run up enormous balances on their credit cards. Forced to pay nondeductible interest at 18% or more per year, consumers can find themselves in a huge hole. How can you avoid this catastrophe?

• Cut down on your spending. Do you really need to spend as much as you do on clothes and restaurant meals and vacation souvenirs?
• Cut up your cards. If you don't have your credit cards, you can't keep on charging. Paying with cash will prevent any problems with overspending and excess debt.
• Make timely payments. If you're not willing to forego the use of credit cards, pay as much as you can, well before the due date. If you don't pay on time your credit rating will suffer and you may find it hard to qualify for a mortgage when you want to buy a house.
• Use a debit card. Today, many bank ATM cards double as debit cards. You can use such cards, just as you'd use a credit card, and the money will come right out of a designated bank account. There are no checks to write later, no worries about debt buildup, and no hassles about credit ratings. (You lose the float, it's true, but bank checking accounts aren't paying much interest these days.)
• Pay off credit card first, before any investments are made. If you're running a balance on a credit card where the interest is 18% per year, every dollar that you use to pay down the balance earns 18%, after tax, risk-free. Why invest in anything else while that option is available? Indeed, before you do anything else, pay down your credit card debt. Use money you have sitting in the bank; if you can effectively earn 18%, after tax, with no risk, by paying off debt, that's better than the return on any bank account. If you own a home, refinance credit card debt with housing-related debt, such as a home equity line of credit. Such interest is probably tax-deductible, no matter how you spend the proceeds, as long as the credit line is secured by a first or second home.

2. Picking the Wrong Mortgage
The mortgage industry has gone through a quiet revolution, introducing many types of loans and consumer services. Today, mortgages are widely available but you have to know how to choose among the various selections:

• 30-year fixed-rate mortgages. They give you security along with the highest interest rates: currently, about 8.3%. A fixed-rate mortgage is a form of insurance against future interest-rate increases so you shouldn't pay for it if you don't need it.
• 15-year fixed-rate mortgages. These are fast-payoff mortgages so each monthly payment is higher than the payment under a 30-year mortgage. However, you'll avoid 15 years of interest payments while you pay a lower rate: currently, around 8%.

Insight: You can take out a 30-year mortgage and pay it off at the same rate as a 15-year mortgage. That way, you can cut back to the 30-year payment, if you have cash flow problems, and not jeopardize your credit rating or your home ownership.

• Adjustable-rate mortgages (ARMs). Such mortgages have a low initial rate but they adjust each year, to reflect the current mortgage environment. Currently, the national average is under 7%. The low initial rate may enable you to qualify for a larger loan. With a good ARM, the interest rate can go up no more than 1% per year and 5% over the life of the loan. If you think you'll be moving in a few years, take an ARM. Why lock yourself into an 8% rate for 15 or 30 years if you can pay 7% initially and then move to another house?
• Hybrid mortgages. They offer a fixed rate for three, five, seven, or 10 years, after which the rate adjusts every year. Thus, you have some security, knowing that your monthly payment won't increase for a certain number of years, as well as a somewhat lower rate. Choosing a three- or a five-year hybrid mortgage (the most popular forms) probably will shave 0.5% to 0.65% from the 30-year fixed mortgage rate.

No matter which type of mortgage you prefer, approach a lender about pre-qualification or pre-approval. When you have such a certificate you'll know how much you can afford to pay for a house-and sellers will know that you're good for the purchase price. Your chances of getting the house you want will be greatly enhanced.

Once you have your mortgage, don't forget about it. If rates drop, you can refinance and take out a new loan at a lower rate. Insight: When you get a mortgage, insist that the loan be structured so that you can refinance easily. That means no credit check will be necessary; all that will need to be done is to re-confirm the value of the house.

• If you want to refinance a loan, spend some time on the Internet. Many financial sites will help you get an idea of the lowest interest rate. For starters, visit www.hsh.com.

3. Investing Without Saving
The returns produced by the stock market in the 1980s and 1990s have led many people to invest heavily. That's fine, but most financial professionals advise individuals to keep a cash reserve of at least three months' worth of living expenses. With a reserve, you won't have to sell stocks in case an emergency arises and you need cash.

Fortunately, recent Federal Reserve efforts to cool the economy have boosted the yields on cash equivalents. Three-month Treasury bill yield around 5.75%, money market funds average nearly 5.5%, and three-month bank CDs pay an average of 4.65%; all of these yields are the highest in several years.

• Money market funds. They offer decent yields, penalty-free access to your money, and safety. Only one small money fund has ever stuck investors with a loss of principal, back in 1994, and investors still wound up with 96 cents on the dollar. For current data on money market funds you can visit www.ibcdata.com. If you do most of your investing with one broker or mutual fund company, you might as well use that company's money fund, for convenient investing. Another option is to ask your bank if it offers a money market fund, because keeping your money there may lower fees on your other accounts or allow you to build a valuable relationship.
• Bank certificates of deposit (CDs). These are easy to acquire and virtually risk-free, with the Federal Deposit Insurance Corp. (FDIC) covering bank accounts up to $100,000. If you have bank accounts over$100,000 you might want to spread your money among two or more banks because that's the upper limit for federal deposit insurance. However, if you're going to place a sizable amount of money in CDs, you should put some into one-year certificates, some into two-year certificates, etc. That way, you'll have CDs maturing each year in case you need cash; when a CD matures you can put cash in your pocket without paying an early-withdrawal penalty, which can be substantial. If you don't need the cash you'll have the opportunity to reinvest at the highest rates available then.
• Treasury bills. In addition to relatively high yields, T-bills are backed by the federal government so they're extremely safe. The market is liquid so you can sell your T-bills at any time, without an early-withdrawal penalty. (You may take a slight loss of principal if you sell before maturity, though, if interest rates have risen since your purchase.) As an added bonus, the interest you earn is exempt from state and local income tax.

Under a "Buy Direct" program, you can purchase Treasury securities with a toll-free phone call (800/943-6864) or at the Bureau of Public Debt Web site (www.publicdebt.treas.gov). Your investment will be deducted from a designated bank account so you don't have to bother mailing in forms or checks.

With the Buy Direct program you pay no fees, other than a $25annual charge if your account exceeds $100,000. The minimum purchase is$1,000; until recently, minimums were $10,000 for short-term Treasury bills.

4. Saving for College in the Wrong Name
A college education is just as expensive as it is essential so saving for college is a prime financial goal for most parents. However, problems arise when deciding whether college savings should be done in the child's or a parent's name. Here are some of the issues:

• Tax savings. Putting the money in a child's name seems to make sense because investment income may be taxed to the low-bracket student rather than the high-bracket parent. If you keep money in the name of a child under age 14, there will be no tax due on up to $700 in investment income, in 2000, and only 15% due on the next $700. After age 14 the "kiddie tax" no longer applies so the child can have over $25,000 in taxable income yet still be in the 15% tax bracket.
• Control. Investing in a child's name means that money will belong to the child, perhaps as early as age 18. Today, a family with young children will have to put away a huge amount in order to send those children to big-name schools 10 or 15 years from now. Many people don't want to turn over that much money to their kids. Rather than turn over money to children, parents can invest in their own name, giving up some tax savings but retaining control over the funds.
• Financial aid. Investing college money in a parent's name may have another advantage: the way college financial aid forms are set up, money in a child's name counts more than money in a parent's name when it comes to calculating the "expected family contribution." Thus, saving in the parent's name may result in more financial aid.
• Discipline. The benefits of saving in a child's name are psychological as well as financial; putting money into a child's account is very satisfying to a parent. The parent thinks, "That money is for college." Money that's saved in the parent's own name is more likely to be used for other purposes.

If you prefer to invest for college in your children's name, for tax savings and emotional satisfaction, how can you keep your children from buying a Harley and "doing the Grand Canyon," when they come into their money? Some parents don't tell their kids how much is in those accounts. When the time comes to pay for college a letter can be typed, saying something like, "Please take $10,000 from my account to pay for my college bills." The parent might indicate that the child could sign the letter, in order to get money for college.

5. Being Too Aggressive in Stocks
The stock market's advance to lofty levels raises inevitable comparisons with the early 1970s, when the "Nifty Fifty" (including Avon, Kodak, and Xerox) dominated the market and eventually fell from favor, causing a 45% drop in the Dow during 1973 and 1974. Will we see a similar stock market swoon? No one can say for sure but prudent investors may want to rein in their exuberance and cut their exposure to future stock shocks.

• Monitor the market. Wary investors need to go beyond the usual indicators such as inflation, interest rates, and price-to-earnings ratios. In addition, study technical as well as fundamental indicators. For example, when the daily newspapers report that the number of stocks reaching their lowest price for the previous 12 months far outnumbers the stocks reaching their highest price, investors should turn cautious.
• Cash in. If the signs point to a correction, one basic move you can make is to sell stocks and park the proceeds in cash equivalents such as bank accounts, money market funds and Treasury bills. You'll receive a positive return, albeit a modest one, and you'll reduce stock market risks.
• Boost your bond holdings. You also can seek a balance between bonds and stocks. The bonds could be weighted towards short-term, high-quality issues (such as Treasuries and investment-grade corporate bonds), which have less risk of losing value due to increasing inflation or economic weakness.
• Select safe stocks. If you decide to trim your equity stake, to protect against a slump in stocks, you still have to decide which stocks to retain and which ones to buy with any new money you're committing to the market. Generally, you should emphasize domestic large-capitalization issues, which are more liquid and thus easier to sell in times of market distress.
• Walk, don't run. One risk reduction strategy that should not be overlooked is an old favorite: dollar-cost averaging. That is, if you get $100,000 from an inheritance or the sale of your home you should not commit the entire amount to the stock market immediately. You could invest when the Dow is at 11,000 only to find the Dow at 10,000 or even 9,000 a month later.

Instead, park the cash in a money market fund and invest gradually, perhaps each month or each quarter. You might give up some gains if the market keeps rising but you'll be able to buy in at lower prices if the market falls. Thus, dollar-cost averaging sacrifices possible upside in return for downside protection. Playing some defense today may help you survive any near-term stock market losses and increase your score when the market resumes its winning ways.

6. Paying Too Much for Insurance
You definitely need insurance to protect yourself and your family. However, if you buy all the coverage that agents try to sell you, you may see a huge chunk of your disposable income going for insurance premiums. Here's how to cut back on costs while maintaining necessary protection:

• Self-insure to the greatest degree possible. Bear everyday risks yourself, in order to lower insurance premiums. By raising deductibles and extending waiting periods, you can lower your costs yet still have coverage for true catastrophes. Instead of a $100 or $250 deductible on your auto and your homeowner's insurance, specify a $1,000 deductible. Yes, you'll pay out-of-pocket for broken widows and minor dents but you'll also save 30%-40% every year on your premiums. Moreover, you'll be covered in case of a disaster, which is the real reason for buying insurance. (Don't forget to ask your agent about any discounts available on auto and homeowner's insurance.) Similarly, you might buy a disability insurance policy with a 90-day waiting period instead of a 30-day period. Here, you'll assume responsibility for an extra 60 days of lost income but you'll still be protected in case you're out of work for years. Again, you might save 30% or more in premiums, year after year.
• Think term. When it comes to life insurance, the way to cut costs is to buy term insurance, which is pure insurance protection. For the vast majority of people, term insurance is the best choice. Today, because of competition in the market, you can buy 10-, 15- and 20-year term policies at reasonable prices, especially if you're in good health.
• Take care early. At that point in your life, start to consider long-term care (LTC) insurance. The younger you are when you buy this insurance, the lower the premiums--the late 50s are a good age to buy this coverage. Married couples may want two policies, so some insurers will offer a marital discount of around 10%.

Even if you buy while in your late 50s, LTC insurance can be pricey, especially for a couple buying two policies. One way to reduce your premiums is through "cost sharing." Suppose a nursing home costs $150 per day in your area. You might decide to buy a policy that pays $120 per day; if you need care you'll pay the balance from other funds. Again, you can save money on LTC insurance by extending the waiting period from 30 days to 90 days, for example, and thus agreeing to cover an additional 60 days of care out of your own pocket.

7. Overpaying Your Taxes
A few basic tax planning pointers can yield sizable savings, year after year: Make your investments less taxing. Rearrange your portfolio to emphasize potential capital gains (which will be untaxed until you take your profits) rather than interest and dividends (which will be taxed immediately.) If you've been paying substantial taxes because of large capital gains distributions from mutual funds, consider switching funds. Many funds with good records also boast of tax-efficiency, meaning that they seldom make sizable capital gains distributions to shareholders.

• "Roth-ify" your IRA. Contribute to a Roth IRA rather than a regular IRA. You and your spouse can each have a Roth IRA if your AGI is below $160,000. If it's below $150,000, you can each contribute the maximum $2,000. Children can contribute as much as they earn to a Roth IRA, up to $2,000 per year. Generally, Roth IRAs are better than deductible IRAs. With a Roth IRA, you may be able to receive tax-free payouts. With a deductible IRA you'll save a modest amount of tax upfront and owe income tax on every penny withdrawn in the future.
• Beat the deadline. Checks that you write in December (or items that you charge on a credit card) may be deductible on the return you file the following April.
• Mortgage payments. Get your January check in the mail before Christmas so that it will arrive in time for you to get credit for the interest payment this year.
• Property taxes. Finish paying off any taxes due for the first half of the next calendar year.
• Charitable contributions. You can be especially generous knowing that Uncle Sam is picking up part of the tab. Give away appreciated securities rather than cash in order to escape paying tax on capital gains.
• State and local income taxes. If you must pay these taxes by January 15 you might as well pay three weeks early and get a deduction for the prior year. Check with your tax pro first, though, to see if you are at risk of owing the alternative minimum tax.
• Earn tax-free rental income. The "Masters" tax break, supposedly passed to benefit homeowners in Augusta, Georgia, allows you to rent a home for up to 14 days per year without having to declare any taxable income. This chance for tax-free income may be especially appealing if you own a primary residence or a vacation home in a resort area, near a major sporting event, or in a city where college graduation attracts many celebrants.

Another option: if you run a sideline business (or if your spouse is a business owner) your home can be rented to the company for a retreat or a management meeting. The company can deduct the payment, as long as it's reasonable for the length of the meeting and the time of the year, while you pick up no taxable income.

8. Neglecting to Anticipate Retirement
Many people are eager to retire but there's a flip side: when you're no longer working you're no longer earning a living. Nevertheless, you probably intend to maintain a comfortable lifestyle in retirement, so the money has to come from somewhere.

Indeed, one of the main reasons for hiring a financial planner is to find out when it's prudent to retire and how much you should save during your working career. If you plan to spend $40,000 per year, for example, you might be told that a retirement fund of $800,000 will be necessary.

Once the target has been set, the question is how do you get there from here. That is, if you have $150,000 saved up at age 40 and you want to retire with $800,000 at age 58, how much should you invest each year and how do you allocate your investments?

• Avoid a "siege mentality" as you approach retirement age. Some people develop a short-term outlook so they want to convert everything to cash or "safe" investments.
• In truth, few young retirees will live for a short time. According to the IRS, a 60-year-old couple has a joint life expectancy of nearly 30 years-you could be retired longer than you worked.
• Think long term. With a paid-off mortgage, the kids out of college, a retirement plan, Medicare, and Social Security, you may have less need for liquidity during retirement than during your working years. After you stop working your investments will have to work even harder, and that means maintaining a strong commitment to stocks in your portfolio.
• Include inflation in your projections. Savvy pros use a 2.5%-3% inflation rate for forecasting future spending because that's the rate prices climbed during the 1990s. In other words, a retiree who spends $40,000 in 2000 will be spending $80,000 in 2025, to maintain the same lifestyle.
• Plan for windfalls. If you expect to sell a big house in the Northeast and retire to a smaller place in Arizona, you may free up a considerable amount of capital that can be used for retirement expenses. You or your spouse may expect an inheritance, which also should be factored into your retirement plans.
• Project a possible need for long-term care. This can be a real wild card: you or your spouse may suffer a stroke and have to spend years in a nursing home. Therefore, you should plan to pay premiums for long-term care insurance or to pay for care out of the money you've accumulated.
• Work with a competent advisor so that you truly understand your options. Such an advisor will develop a plan that's calculated to meet your goals, then revise that plan periodically to reflect the results you've achieved in the intervening years.

9. Ignoring the Threat of Incapacity
Death and taxes may be life's only certainties but gradual deterioration rates a high probability. At some stage in your life you might lose the ability to manage your own affairs. Some bills won't get paid while others get paid twice; you may make unnecessary purchases or fall victim to shady schemes. (Even if you're a long way from such actions, your elderly parents may be susceptible.)

Taken to extremes, incapacity could leave you or your parents without heat, light, phone service, or money in the bank. Fortunately, there are steps you can--and should--take now, to help protect against competency.

• Execute a durable power of attorney, empowering a loved one to sign legal documents on your behalf. The power of attorney should be "durable," meaning that it will remain in force even if you become incompetent. In case you're reluctant to give someone else such authority, the power of attorney can be a "springing" power, meaning it will take effect only if you are unable to act on your own behalf.
• Create a revocable trust as a further protection against possible incapacity. Generally, the creator of such a trust (you) acts as trustee, remaining in control of the assets that have been placed in the trust. In case you lose competency, a backup trustee can take over, with no need for a court hearing to appoint a guardian. You should name several backup trustees, in case someone can't serve.
• Arrange for most of your income to be deposited directly into a bank account. In addition, you can arrange for recurring bills to be paid automatically. Such steps can reduce the risk of the electricity being turned off for nonpayment, for example. However, it's not possible for every bill to be paid automatically, so other measures may be necessary, such as arranging for some bills to come to a younger relative.
• Move assets into joint ownership. Put your name onto a joint bank account with a grown son or daughter; he or she can write checks if you become incapacitated. Such a tactic is common because it's inexpensive and easy to implement but there also may be negative aspects to joint ownership. In such arrangements, the surviving co-owner always inherits. That is, if you change your brokerage account to joint name, with your son as co-owner, he'll inherit all the securities in that account at your death. Your daughter and other loved ones will be excluded, no matter what it says in your will.

Thus, joint ownership reduces estate planning flexibility and may create gift tax problems. If you are going to use joint ownership, you may want to restrict it to a checking account that holds a relatively small amount of money.

10. Leaving Your Heirs Unprepared to Inherit
Chances are, you expect to leave a legacy of peace and prosperity. Unfortunately, the reality may be much different. Stories abound of siblings fighting over a parent's possessions, from great works of art to a few wooden spoons.

• Other problems may arise after your death. Your heirs may fall victim to predators or spend their inheritance foolishly. Valued property, such as real estate, may be mismanaged. In remarriage situations, there may be ill feeling between your surviving spouse and your own children. Such problems probably can't be avoided altogether but they can be alleviated, especially if you anticipate them. The time you take to help your heirs prepare for the future can pay off in a legacy of relative harmony.
• Give your children a reasonable idea of what they can expect to inherit. Go over the numbers with them. Let them know they'll have to build up their own retirement fund rather than rely upon a huge inheritance.
• Name an independent party as the estate's executor. A bank trust department or an independent trust company might be appropriate. Your heirs may not appreciate paying for an executor but if you name a surviving relative as executor the family pressure on that individual may be enormous. What's more, an executor assumes a fiduciary responsibility that may be better left to an institution. One of an executor's roles is to file an estate tax return, pay any estate tax due, and eventually distribute the estate's assets. What happens if the return is later audited and more estate tax is due? The executor is legally responsible and the other heirs may not be willing to give some of their money back to pay the tax. When you name an institution you shift that liability away from a family member.
• Prepare your heirs to handle the assets they'll inherit. Have them meet with your attorney and accountant for an explanation of the tax planning strategies that you're developing, so they can be carried on after your death. If you have a broker or financial planner, your heirs should all meet with this investment advisor for some educational sessions. Otherwise, a carefully constructed portfolio might be sold after your death, then reinvested in a few highly speculative issues or even a fraudulent scheme.
• Create a family limited partnership (FLP), then call a meeting of the partners. Such a meeting likely will be serious and businesslike because it serves the purpose of managing valuable assets held by various family members.
• Draw up a trust to hold your assets after your death. You can place whatever restrictions you think are appropriate on the trust funds. Some of the principal might be distributed when the beneficiaries reach a certain age, some more of the principal five or 10 years later, and so on, in hopes that the trust beneficiaries will become more capable of handling money as they grow older.

Note From the Publisher, Don Mace
We’ve written many publications specifically for federal employees, military members, and retirees helping them with their financial planning including our brand new Your Strategic Guide to Investment & Financial Planning. To learn more about our publications, simply go to: http://www.armedforcesnews.com/pub/index.php

Thanks.
Don