Archive for October, 2008

A Guide To Credit Card Debt

October 30th, 2008 Biz Man

When talking about credit card debt, the effects of debt depend upon such factors as the sources of loan funds, the purpose for which borrowing is done, the terms and conditions under which the debt is floated, the volume of the existing debt, the interest rates, the types of loan employed and the general economic condition of the community.

The individual may borrow from individual investors, financial institutions and commercial banks. The effects of domestic borrowing are quite different from those of foreign borrowing. In internal borrowing, there is no increase in the total quantity of resources available for the use. Rather, it is a method to enable the individual to command more domestic resources. Borrowing from financial institutions is simply a transfer of resources from private to government use. Individuals purchase government securities by diverting their current or previously accumulated savings, after reducing their cash balances. So the above transfer of resources from individuals or institutions does not create any expansionary effects on the economy.

The effects of debt also depend on the purpose for which the debt is created. If the borrowed funds are used for wasteful expenditures which will not create any assets, then borrowing is indefensible. Further, the interest rates have a bearing on the cost of borrowing and consequently upon the banking system and economic conditions in general. The higher the interest rate for borrowing funds, the stronger the pull on funds from competing investments.

A serious diversion of funds from marginal enterprises would tend to cause the latter’s failure and this, in turn, would affect production and other economic processes, like market prices and interest rates. If the financial institutions get tax exemptions for their loans, this will tend to encourage the purchase of their securities.

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401k Retirement Plans Explained

October 20th, 2008 Biz Man

401k retirement plans are special types of accounts, financed through pre-tax payroll deductions. The funds in your account are invested in various ways. Your funds can be invested through any number of stocks, mutual funds, and other ways, and it is not taxed on any capital gains or interest until the money is pulled out or withdrawn. Congress approved this retirement savings plan in 1981, and its name was rooted from the section of the Internal Revenue Code that contains it, which is obviously, section 401k. One great advantage of this retirement plan is that the tax treatment is complimentary. Moreover, capital gains, interest and dividends are not levied until they are pulled out or withdrawn.

In terms of its investment customization and flexibility, 401k retirement plans offer employees and workers an extensive array of options and preferences as to how their property and assets are invested through time. Moreover, many businesses and companies permit employees to obtain company stock for their 401k retirement plan at a cut rate. However, many pecuniary consultants and counselors are not in favor of holding a significant percentage of your 401k plan in the shares of your boss or manager.

So what are 401k plans? If you are like most people, you probably have questions about your 401k retirement plan. You may be wondering how a 401k actually takes place, precisely what a 401k retirement plan is, or how you can be capable of stimulating the diminishing balance in your 401k plan. So how does a 401k plan actually work? If your company offers a 401k retirement plan, you can agree to join. You can also have the selection option of choosing the amount of funds you wish to put in from an inventory of funds presented in the 401k plan. Your payment will routinely be deducted from your pay check before taxes.

Every worker can invest up to a defined proportion of his wage into a 401k plan. Your involvement, along with any coordinated contributions from your employer, are then endowed into your chosen funds. These funds will produce interest before being taxed, and can be withdrawn when you reach 60 years of age. At this point in time, you must pay the income tax on the withdrawn funds. Furthermore, there are methods and means wherein you can pull out your funds before age 60. However, these early withdrawals frequently call for a penalty in conjunction with the payment of taxes.

A 401k retirement plan is an employer-subsidized retirement plan, and it is categorized into two groups: defined benefit and defined contribution. With this defined benefit plan, the employer pledges to give a distinct sum to those who want to retire and those who meet specified eligibility standards and measures.

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401(k)

October 19th, 2008 Biz Man

A 401(k) plan is an employer sponsored plan. The employer makes direct contributions to the account that are deducted from the employee’s paycheck. Most companies will match the paycheck contribution up to a certain percentage. In general, the contributions are before tax dollars and grow tax deferred until they are withdrawn. After-tax contributions are also allowed.

You should contribute as much as you can to your 401(k). Don’t overextend yourself, but you don’t want to waste the opportunity to deposit tax free, tax deferred money and have it matched. The amount the company matches you for is free money. Don’t let it go.

In 2005, the maximum before tax annual contribution that an employee can make is $14,000. If the employee is over 50 years of age, he or she can contribute $16,000. The limit is set to increase by $1,000 in 2006.

Your 401(k) is simply an account; you chose the investments within the account. There is usually an array of mutual funds presented to you, but you must decide the allocations. There is no one to advice you when it comes to role fees and expenses that will affect your overall returns.

First, decide how much risk you are willing to assume. How much volatility within the portfolio can you stand?

If you are in your 20′s and early 30′s you have the time to be aggressive with your investments. The time factor allows you to recover from slumps in the stock market. As you age, your investments should become more conservative to protect your earnings.

Many 401(k) plans have tools, such as online calculators and worksheets, which help you in determining how much risk you should accept. The best tool is often to seek the advice of a competent financial planner. It is worth it to hire a planner to evaluate your assets and earning ability if the end result is a comfortable retirement.

If you find that you are in need of money, most plans will allow you to borrow up to 50% of your vested balance, but not over $50,000. You usually have to repay the money with interest within five years. The interest payments go into your account, so you are paying yourself the interest. There are downsides, though.

The money you have withdrawn as a loan isn’t appreciating. The original contributions were made with pre-tax dollars, but the money you payback is after-tax. If you don’t pay back the money it will be considered a normal distribution, and taxed and penalized.

If you leave the company, in most cases you will want to take your 401(k) with you. You can role it over into another company’s 401(k) plan program or into your own IRA at a brokerage. With an IRA, you will have more control over your account, and better investment options.

Whatever you do with your IRA, make sure that you follow all procedures to the point. You don’t want to accidentally withdraw your money and have to pay the taxes and penalties. This is a very costly mistake.

If you are an entrepreneur, you can open an individual 401(k). This gives you the option of investing thousands of dollars more than in other kinds of self-employment retirement accounts. An individual, or solo, 401(k) is available to businesses that only have the owner and spouse as employees. This means that if you work for someone else and have a business on the side, you can open an individual 401(k).

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A Structured Settlement Annuity: Comparatively Speaking

October 8th, 2008 Biz Man

In earlier articles, we’ve seen the benefits of structured settlement annuities over lump sum payments. For some, this protects them from the temptation of spending the bulk of their payment on unsound or unwise investments. Protection and incoming cash flow over the long haul are what structured settlement annuities provide. However, not every person faced with a lump sum payment necessarily will be tempted to spend the money rashly. Obviously, there are people who are savvy investors and think that given the opportunity with a lump sum payment over a structured settlement annuity, they will be able to make more money investing on their own.

With that in mind, let’s take a look how a structured settlement annuity compares with one of the most popular investment vehicles, the equity income mutual fund.

First, let’s look at who issues the annuity and the mutual fund.
A structured settlement annuity is issued by a life insurance company. An equity mutual fund is issued by and investment company that pools the assets of multiple investors in equity securities.

Next, let’s look at the long term capabilities of each to provide a lifetime income.
An annuity payment plan is created up front and is a predictable and dependable source of income that can not be outlived. A mutual fund can be a high paying investment. However it can also be highly volatile and unpredictable based on market conditions and can actually lose money and stop your earnings if the fund performs poorly.

What about guaranteeing the payouts?
An annuity is guaranteed by the issuer of the annuity based on the terms of the structured settlement. A mutual fund is solely dependent on market activity and thus can not be guaranteed.

What about costs?
The annuity has no cost associated with it. A mutual fund can be subject to a number of fees, like a sales load, yearly management fee, and marketing expenses. Even the lowest cost index funds have some costs associated with them.

What about keeping up with inflation?
A structured settlement annuity can have a cost of living adjustment incorporated into the annuity at the time it is designed. An equity mutual fund can outperform inflation based on how the underlying securities perform. However it is difficult to predict what the return will be and remember “past performance is not and indicator of future results.”

But what about the dreaded T-word….Taxes??
A structured settlement annuity is tax free as long as the money received is the result of personal physical injury or physical illness. As income is earned from an equity mutual fund taxes, capital gains, income etc, must be paid.

What about flexibility?
A structured settlement annuity payment amount and schedule may not be altered at any time. Conversely, money can be moved in and out of mutual funds. However, taxes, sales loads etc may be applicable with each transaction.

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