The Money & Investing FAQ

[SteveMKIIDub]

Quote, originally posted by beng »

Here's my theory on the new class system that will result. Upper Class - Cambells Chunky Middle Class - Cambells Tomato Soup (not creamy) Lower Class - jnm's boot leather soup

No wonder the FAQ won't get stickied, mods don't want my (our?) ramblings about lighthouses, pajama pants, wenches, soups, leather boots, etc to confuse new members.

[ChrisMD]

Quote, originally posted by SteveMKIIDub »

No wonder the FAQ won't get stickied, mods don't want my (our?) ramblings about lighthouses, pajama pants, wenches, soups, leather boots, etc to confuse new members.

I resent your implication that those topics are somehow less important than whatever fear CNN is spreading today.

[jnm2.0t]

Quote, originally posted by beng »

Lower Class - jnm's boot leather soup

the secret is acorns for some nuttiness and and maple sap for some sweetness.

[beng]

Quote, originally posted by ChrisMD »

I resent your implication that those topics are somehow less important than whatever fear CNN is spreading today.

Touche Chris

[Tornado2dr]

Soooo back OT-

Looks like the good doctor has covered Credit Cards, Basic Loan Principles, and Retirement.

I'd say those are the most important basic starters. Anything else we should add?

I'd be reluctant to add anythign getting too specific about the market or real-estate investing...too many variables to really give general advice other than "don't mess with **** you don't understand".

[ChrisMD]

Health Insurance Basics

This section copied from my post in another thread. It was intended for someone who doesn't have health coverage through an employer but it translates to choosing between different plans your employer may offer.

There are two kinds of health insurance:

Indemnity - you pay the medical bills, submit your claims, and receive reimbursement for some amount of the claim. These are the most flexible plans because you can go anywhere and see any doctor of your choice but they're the least convenient because you have to manage the claims and front the money (which a lot of people don't have to front for major medical care) and typically the most expensive because the doctors have not agreed to managed care prices.

Managed care (PPO, POS, HMO) - you have a network of participating providers who have agreed to participate with the insurance company and accept their determined rates of what things should cost. As long as you stay in-network, you'll receive the highest coverage level and the providers will submit your claims for you, while all you do is pay your copay or coinsurance amount. HMO normally does not allow you to go out-of-network except in emergencies but POS and PPO may allow you to go out-of-network and receive covered care but you will usually pay more because the insurance will cover a smaller percentage. HMO and POS will require you to have a primary care doctor who coordinates all your care, including all specialists, tests, and procedures; PPO does not require this.

Of the two types, managed care plans are by far more common and more popular. Of the managed types, HMO and PPO are the most popular. HMOs are more affordable (and popular with employers) while PPOs are more flexible by not requiring a primary care doctor and by allowing you to go out-of-network if necessary, albeit at a higher cost to you.

Now, in each of those types, there are different coverage amounts. There are high premium plans that cost a lot each month but cover everything in full or with only small copay amounts. As mentioned in a previous post, there are high deductible plans that require you to pay a determined dollar amount of expenses before the insurance will cover anything; these come with much lower monthly premiums. And there are various levels in between the two. What level you should get depends on what medical expenses you expect to incur, how much you could or could not afford to pay out of pocket for an unexpected illness, and whether your existing doctors (assuming you want to stay with them) participate in managed plans you may be considering.

Personally, for young, healthy people, I love high deductible health plans (HDHP) that meet the Federal requirements for a Health Savings Account (HSA). An HSA is like an FSA (Flexible Spending Account) but so much better. Like an FSA, it allows you to set aside money on a pre-tax basis to be used for qualified medical expenses. It basically is to healthcare what a 401k is to retirement except you don't eventually pay taxes when you use the money. Unlike an FSA, which is use-it-or-lose-it during the plan year, the HSA allows you to roll over the balance to the next year. Also unlike an FSA, you do not have to mail in documentation for every expense; you must keep records of your qualified expenses but only need to prove eligibility in the event of an audit. As long as you can afford the deductible (which by law currently in 2009 is at least $1150/$3300 individual/family), it's a great way to keep your monthly premiums low for a health plan you may never or rarely use and use pre-tax money to pay for the small expenses you do have, which by the way includes dental, vision (including glasses and contacts), and many drug-store expenses (including OTC meds and even condoms).

Even if you aren't exactly 100% healthy and you do have regular medical expenses, the HDHP with HSA may still be a good way to go. I've seen situations where the annual premium total plus the annual deductible on the HDHP is still less than the annual premium total of an HMO or PPO with a lower or no deductible, plus you get the tax benefits of the HSA. However, it may cause a whopper of an expense (the deductible) to you early in the year with smaller expenses (lower premiums) in the following months instead of the higher premiums staying constant over 12 months. You'd have to add up expenses and compare costs of the plans to find out which one works best for your situation.

A good place to compare plans offered in your area from different insurers is http://www.ehealthinsurance.com.

What is group health insurance and what is individual health insurance?

This is simple and somewhat self-explanatory. Group insurance is obtained through a group of people, most commonly in the US through your employer, a union, or a professional organization. Individual insurance is obtained on your own for your benefit plus possibly your spouse and/or children.

The types of insurance (HMO, PPO, etc) are the same regardless of whether you obtain insurance through a group or on your own.

What do I do about my health insurance if I leave my job (for any reason, voluntary or not) where I have group health coverage?

There is a specific law called the Consolidated Omnibus Budget Reconciliation Act (COBRA) that gives you the ability, assuming certain conditions are met, to continue your group health insurance after your termination of employment for a period of up to 18 months. This applies even if you leave your job voluntarily. You will be responsible for paying up to 102% of the full cost of the insurance (this includes a small administrative fee). Note that if your employer previously subsidized the cost of the insurance, the full cost may be significantly more than you are used to paying. Although COBRA may be expensive, it is an easy way to make sure your health insurance needs are covered while you look for another job or while you're waiting for your eligibility for health insurance to begin at your new job. It is virtually a MUST HAVE for anyone with pre-existing conditions. If you reach the end of the 18-month period and your COBRA expires, you may be eligible for a guaranteed issue plan under HIPAA but these are usually even more expensive.

As I said, COBRA can be expensive so you may want to look around for other options in the individual insurance market. If you need time to research your options, you could always choose COBRA for the first month or two and then cancel it after you have a different plan in place. You really should not cancel an old plan or forgo COBRA before your new coverage takes effect because the day after your coverage ends and you have no insurance coverage is exactly the day when life will give you a big middle finger in the form of a medical emergency.

Again, you can compare individual health insurance options at http://www.ehealthinsurance.com. Whether you buy through them or not, at least you can quickly and easily see options side by side.

I was laid off in 2008 or 2009. What does the 2009 Stimulus Bill mean to me regarding my COBRA insurance?

If you were involuntarily terminated (laid-off, etc) after September 1, 2008 and before December 31, 2009, you may be eligible for a government subsidy of your COBRA insurance premiums. There are income limitations. If you qualify, the government will pay 65% of your premium for up to 9 months. You will be responsible for the other 35%. Also, if you initially declined COBRA due to the cost, you may be eligible to elect it now even though the original election period has passed. Furthermore, you normally may only continue under COBRA whatever health plan you had at the time you were laid off. The stimulus bill may also provide you with the option to switch to a different option offered by your former employer if it has a lower premium than your current plan.

Although COBRA is available to you if you quit your job voluntarily, the premium subsidy is only for those who were involuntarily terminated.

Your eligibility for the subsidy may end sooner than 9 months under several circumstances, including if you become eligible for Medicare or another group health plan.

If you qualify for any of these benefits, you should have been or should be notified by your former employer or Plan Administrator. If you think you may qualify and have not been notified, please contact your former employer's HR dept or your Plan Administrator.

[nap83]

chrismd as a banker, these are words of wisdom!

[ChrisMD]

How do I choose a financial advisor?

First you have to know how they get paid and how that might affect the advice they give. There are three basic ways that financial advisors get paid.

Fee-based - they charge you for the time they spend advising you, much like a lawyer or a plumber charges by the hour. They want you to be happy with their recommendations so that you, in turn, recommend the advisor to your friends and family members, but they do not stand to gain anything from the recommendations they make and thus they are the most impartial.

Asset-based - they collect an annual management fee based on the size of the portfolio they're managing, typically around 1%. They're not impartial but their pay is based on the performance of what they recommend so the better their recommendations perform, the more they make because your portfolio grows and so does their 1%. However, they may be biased against things not under their control. For example, if you have $100,000 to invest and $50,000 of debt, you may be best served by paying off the debt but the advisor makes more by convincing you to invest all $100,000 rather that just half of it. Also be sure that the advisor is on the same page as you regarding your needs and risk-tolerance, and not taking risks you don't want because they hope it will increase their paycheck. This option is most common for people who have large portfolios and want true asset management.

Commission-based - they are paid commissions for selling you financial products. These people are nothing but salespeople who should be avoided. Whether their recommendations perform well or poorly, they get paid all the same so their incentive lies in recommending whatever pays the highest commission, not what will perform the best for your needs. If that isn't a severe conflict of interest, I don't know what is. I will say, before anyone gets pissy, that there may be some commission-based salespeople who are reputable and would genuinely make recommendations based on your best interests; however, if you're seeking an advisor in the first place then you probably wouldn't be able to tell the difference so I don't recommend taking that chance.

Note that some advisors may actually "double dip" and earn money in a combination of those ways.

You want to choose an advisor definitely from one of the first two groups. A strict fee-based advisor is rarely a bad choice and is great for young people with small portfolios and who potentially need some financial advice beyond just what to invest in (i.e. many members of this forum). Asset-based advisors can be good for people who are more financially set in life and want more constant management.

That covers the type of advisor to choose. As far as choosing a specific individual, there are many other factors. You should ask about their certifications and experience, what they can offer, how much they charge, etc. You should also ask whether they'll be working with you or whether they'll pawn you off to a junior associate. Everyone starts somewhere and junior associates aren't evil but if you're asking about the advisor's experience then you want to know that that experience is what you're getting rather than the experience of someone who just started last month. Ask them to describe a typical client or their ideal client; if it's not you, move on (also, if it seems a little too EXACTLY you, they may just be feeding you a line). If you don't know at this point how they get paid (the three groups above) then ask. Any advisor who gets offended or refuses to answer any of these questions is not the advisor for you.

If you decide to go fee-based, you can find an advisor in your area at this website: http://www.napfa.org/ They are strictly fee-only and do not collect commissions or take a percentage of your assets.

[ChrisMD]

Should I use a debt reduction agency to reduce my credit card debt?

In a word: no.

There are different types of debt reduction/consolidation companies but none of them do anything for you that you can't do on your own while saving both the fees and your credit rating.

The worst ones collect money from you and hold it without paying your bills. Once you fall many months behind (because they aren't paying your bills) then they call up the creditors and say "Hey, this guy is clearly a deadbeat... just look at his payment record! We'll offer you $x to settle the account right now." Of course $x came from the payments you were making to the debt company, minus administrative fees of course. So the creditor looks at your payment record and thinks, "Crap, this guy is headed for bankruptcy. We better take this offer before we end up with nothing at all." So they take it. But here's the problem: in order to get this "deal" you trashed your credit with late payments and then settled for less than the amount owed on top of the late payments. Good luck getting any more credit for a while. If you really wanted to go that route, you could do it on your own without paying the company to do it for you but I definitely don't recommend it.

There are other kinds that are not quite as awful but still aren't good. The best of them won't completely trash your credit but the accounts do show up on your report as being part of debt counseling and many lenders, when evaluating a credit application, will consider that to be the same as if you had filed bankruptcy so it can still hurt you.

So then how do I get rid of my credit card debt?

Honestly, there is no "easy way" out of debt. You just have to work hard to pay it down. Obviously, the lower you can get your interest rates, the sooner the debt will go away because more money will be going to principal. Call and ask for lower rates. Investigate balance transfers to lower rates, if possible.

If you have great credit and aren't having problems paying the debt but your card issuers insist on charging you high interest rates, you can look into a personal loan from a bank to consolidate your cards into one loan. However, personal loans and lines of credit are generally the hardest kind of credit to get so this isn't an option for everyone.

If you can't do anything with the rates then you'll have to work with what you have. Line up your debt (figuratively) in order of highest interest rate to lowest and that's the order in which you want to pay them off. Send the minimum payments due to every card that isn't the highest rate and send every penny you can afford to send to the highest rate card. When you have paid off the highest rate debt, move on to the new highest rate debt and continue doing the same thing.

Although given the current economy and policies of the card companies at the time that I'm writing this, now may not be the best time to pay off a bunch of debt. If you do NOT have cash set aside for emergencies then you need to work on that first. In a normal economy, the prevailing wisdom is to pay off the cards and forego the savings because you could use your paid-off credit limits in an emergency. That does not apply today. Once you pay off or even just pay down a balance on a card today, you will probably find that the bank will slash your limit to very near your new balance. The result of that is that you have no cash and no available credit... and then along comes an emergency and what are you going to do? You have nothing to fall back on so save first then pay off debt at least until we get through these tough times and the credit markets open up a bit more.

[John Lee Pettimore]

Quote, originally posted by ChrisMD »

Honestly, there is no "easy way" out of debt.

fack.

[87REDROCC]

I LOVE THE WAY MODS ARE LOCKING I.M. MESSAGES WHEN THEY GET CALLED OUT ON BEIN AN ASS

[Mister MK4]

in light of recent threads, and ignoring the wtf above me...

Marginal tax rates should be next

[beng]

A raise plus more taxes = gets paid less ...right?

http://www.econlib.org/library....html

Quote, originally posted by econlib »

he marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned. In 2003, for example, the United States imposed a 35 percent tax on every dollar of taxable income above $155,975 earned by a married taxpayer filing separately. But that tax bracket applied only to earnings above that $155,975 threshold; income below that cutoff point would still be taxed at rates of 10 percent on the first $7,000, 15 percent on the next $14,400, and so on. Depending on deductions, a taxpayer might pay a relatively modest average tax on total earnings, yet nonetheless face a 28–35 percent marginal tax on any activities that could push income higher—such as extra effort, education, entrepreneurship, or investment. Marginal decisions (such as extra effort or investment) depend mainly on marginal incentives (extra income, after taxes).

Modified by beng at 9:36 AM 3-11-2010

[tjl]

Credit scores in the US are commonly used to determine creditworthiness.

However, there are two types of commonly seen credit scores, with overlapping score ranges.

FICO (Fair Issac COmpany): The type of score that is generally used by lenders, insurance companies, employers, utility companies, etc., although there are different variants for different purposes. Score range is 300 to 850 (higher is better).

Vantage: Created so that the credit reporting companies can sell credit scores without paying royalties to FICO. Scores range from 501 to 990 (higher is better).

Due to the different, but overlapping, score ranges, writing that you have, for example, a credit score of 750 does not tell the reader whether you have good or bad credit. A FICO score of 750 is generally considered good, but a Vantage score of 750 is generally considered mediocre. If you wish to discuss credit scores, be sure to specify what type of credit score to avoid confusion.

Either type of credit score can be inaccurate if the data going into it is inaccurate due to errors in your credit report.

[mad8vskillz]

wanted to mention http://www.getrichslowly.org/blog/
full of quite good tips and suggestions

[jnm2.0t]

A raise plus more taxes = gets paid less ...right?

Hah! Just poking around in here but I remember that thread... jesus that was almost a year ago? Sh!t.

[jnm2.0t]

I feel like talking about what I consider one of the most under-used but most important asset evaluation tools... the Sharpe Style Analysis.

Without being too math-y about it the Sharpe Style Analysis is a constrained regression model of an asset or group of assets against multiple factors (asset classes). Regressing the historical returns of the asset or group of assets against these model factors tells you how what you are analyzing acts. The classic example is a large cap mutual fund. Regressing it against a dozen or so asset classes will tell you how it actually acts. Almost without fail you will find that the fund does not in fact behave as if it is all large cap. You may, for example, find that it behaves like it is 60% LC, 10% MC, 5% SC, 10% bond, and 15% international.

Why is this important? For a number of reasons really. The two most important ones are that the mutual fund literature will often peg the fund against the S&P 500 and brag about how it beats the returns year after year. If the fund doesn't act like the S&P 500 then who cares really, it is an unrealistic and misleading analysis. What you should do is create a portfolio based on how the fund acts and compare the fund to that, it is often referred to as a real benchmark. That will tell you how well the manager is actually doing their job and if they are adding value or not. Secondly, you should know what you are buying. If you want a LC mutual fund you should at least know it only acts 60% like a LC fund. The manager will tell you that they have never bought MC, SC, Bond, etc. in their life, but that is irrelevant. They may as well have bought it they way their fund is acting. And it is not just mutual funds, often times ETFs and individual stocks don't necessarily behave the way you may think they do. Just because a company is considered a large cap company does not at all mean it acts like one in terms of its stock price.

Outside of a individual asstes it is important to know for your portfolio itself. Building a portfolio of mutual funds, ETFs, stocks, or any mix you could possibly think you have a great asset mix based on your accepted level of risk and volatility, but running a Sharpe analysis on your portfolio could yield very different results than you expect. It's all about correlations, something you think on the surface may be poorer performing could actually be a better pick because it behaves they way it is intended to. Sometimes adding in what you think may be a poorer performing stock or fund may actually be beneficial to your portfolio because of how it acts in relation to your other holdings. In short, it's not just about picking the best options, it is about picking the best set of options that together act the way you want them to act.

There are an infinite number of results you will come up with, and using different sets of data (such as 1, 3, 5, 10 year) or different points in time will yield different outcomes, that is important to keep in mind. The regressions need to constantly be updated and rerun which usually requires a lot of manual work, but the results can be very eye opening.

If you want to read an academic paper about it written by Sharpe go here: http://www.stanford.edu/~wfsharpe/art/sa/sa.htm

[vgrnt]

this is great. sub'd.

[Killer2010]

I invest money in the Necker Anlagen Fund not so long , but so far I am very happy, It’s safe, profits accrued in time, without any delay, the withdrawal is quick, usually during the day. Advise. I get the profit of about 10% a day. Unbelievable)

[SFsteve]

Hey guys can anyone recommend a good book to read on investing? I am just starting off and want something relatively short and hopefully interesting. Thanks!