Making Cents | John P Napolitano

Saturday, September 22, 2012

MAKING CENTS: Will Fed’s move benefit you?

When Federal Reserve Chairman Ben Bernanke last week announced that the Fed will buy up to $40 billion per month in mortgaged back securities, markets rallied across the board. Speculating on the Fed’s moves is not a sound rational for investing in equity markets, but it may help you on the debt side of your balance sheet.

The moves also came with the Fed sending signals that it will intervene to keep interest rates low through 2015. In the past, moves like this gave optimism to borrowers about the possibilities of lowering their borrowing costs. But their dreams were shattered by underwriting standards that made it very difficult for many borrowers to qualify for a lower rate. While underwriting standards are still quite strict, loans are getting approved. Here are a few steps that you may take to dress yourself up for this rigorous process.

Know your credit score. Unfortunately, that little score, known as your FICO score is where it all starts. Lenders like to see a credit score above 700.

Get a copy of your credit report, and then take the steps that you can to improve that score. Clear up discrepancies, close out credit cards that you never use, and pay down your higher interest loans.

Begin pulling together all of your back up documentation.

You’ll need copies of tax returns, w-2’s or 1099’s, bank statements, investment statements, financial statements and tax returns of any businesses or entities that you own. Last year, we witnessed a client who had over $2.5 million in liquid assets, with a high FICO score get turned down for a mortgage on a vacation home because his business had losses for the last two years. The negative equity on the corporate balance sheet was enough for the lender to question the sustainability of the income he was taking from his closely held business, so he wrote a check for the vacation home.

Be prepared to discuss any loan guarantees. Your guaranty of a loan for a business or a child may make it more difficult to qualify. Attempt to get your guaranty released for that loan or it may become the impediment this time.

Start a discussion with a lender.

It is tempting to simply dial around and rate shop, but that may cause more harm than good. Shopping for rates by the phone is like trying to buy a car by the phone. Each time you make a loan application, your credit report is affected negatively. You may be better off working closely with one lender who can understand your situation and tell you what it will take to qualify you for the loan. Of course, be aware of the market rates and make sure that your new loan is competitive with what is being advertised by others.

And the last point is to determine if debt is right for you at all. If you have all of your savings in certificates of deposit, earning 1% or less, then even a 3% interest rate on a mortgage is expensive.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth
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Saturday, September 15, 2012

MAKING CENTS: Paper or electronic? Tips for financial record-keeping

Paper or electronic? It all started in the supermarket. Paper or plastic? Now it has come to the financial services sector; paper or electronic?

How do you like to receive your financial information? You can choose the old-fashioned way with statements, confirmations and any other news about your accounts and allow them to arrive in the mail box. Or would you prefer to save a tree, and ask that mail about your accounts be suppressed with everything coming to you in the form of an email that directs you to a secure electronic portal where your information resides? I am not the most computer literate person in the world, but my preference is to eliminate mail and paper, and go paperless for this information.

A top concern of many is Internet security. Clients want to know how safe their information is in cyberspace. I’m not sure that anyone can answer that for sure, but understand that between government standards and the financial services firm integrity on the line, most major financial firms take Internet security very seriously.

Another issue for many is the difficult task of remembering too many passwords. This is especially true for the do-it-yourselfer with accounts all over the place. In this day of regularly changing passwords, this task is only getting more difficult. To alleviate this pain, consider storing all of your passwords in a protected place not accessible to anyone but you.

Frequently not considered is the possible danger of receiving paper information through the mail. The U.S. Mail in particular is quite secure and reliable, but once the information gets to your mail box, it is under your control and the vulnerability of the information contained in the envelope increases. While not prevalent, there are thieves out there whose primary targets are mailboxes. Their mission is to intercept as much confidential information about you as possible to either steal your identity or use your credit cards.

If you migrate to, or already are an electronic financial user, make sure that your Internet connection is secure and that your anti-virus protection is strong and current.

Saturday, September 8, 2012

MAKING CENTS: Financial tips for the college send-off

Are you sending kids off to college this fall? Whether this is your first trip with the car packed up or your child’s last year packing and taking herself off to college, consider these discussions and tips for helping them thrive in college.

Talk to them about income and expense budgets. Some kids are paying their own way and others have parents footing the bill for living and out-of-pocket expenses during the school year.

In either case, create a budget. It doesn’t have to be detailed expenditure by expenditure, but a general budget alerting junior just how much they can spend every week, month and semester is good training for real life. Create general categories such as entertainment, travel, school supplies and ask your child to monitor it under your supervision.

This is a far better alternative than learning during the winter break that your child has spent an entire year’s worth of money in one semester. Some of today’s over-leveraged economic problems in the U.S. may be because no one had the sense to drive this concept home into the minds of their children earlier in life.

Pay attention to health insurance. Make sure that your coverage will get your child access to the type of care that may be needed beyond what the school offers. This is more significant for children who travel abroad or those who require regular medical care. Travel abroad can be especially problematic with respect to health insurance, so learn about your options early.

The same may be true for the car that your child uses at school. Let the insurance company know that the car will be garaged at the school. It may also be a good time to talk to your child about granting permission to their friends regarding use of the car. We all want to be the good neighbor, and help a friend in need, but it may be a better policy to discourage allowing any college buddies from using the car.

For students living on campus, you should check to see that all of the in-dorm valuables are covered. This may be a simple call to your agent or a separate policy that you buy from the school or your insurance agent. For children living off campus, there is a good possibility that there is no coverage automatically. It could be as simple as notifying your insurance company or as complicated as adding a special rental policy or endorsement for the off campus housing.

Saturday, September 1, 2012

MAKING CENTS: There’s more to risk than losing money

When most people think about financial risk, losing money is what they think about. Memories of the real estate investment or stock investment that didn’t work out as hoped may still be stuck in your mind.

But risk is much broader than just losing money, and the more money you have, the more likely it is that these risks are a part of your life.

Let’s start with your home. Is your home a magnet for the kid’s friends? Do you have a pool, motorcycles, bicycles, trampolines, dogs. … You get it. The toys that people with money have are known as an attractive nuisance. They are certainly attractive, but their inherent danger makes them a nuisance, and a potential liability.

Dogs, of course, have nothing to do with money unless your dog goes and bites someone. And if you are not properly covered for this peril, it can cost you a pretty penny to defend yourself against even a frivolous lawsuit. Make sure your umbrella liability insurance is adequate and that it will provide you protection for all of the risks that you can identify in your life.

What about a second home? Many with wealth own a second home in the mountains, near the water or in the desert. They all pose additional risks that you may not be prepared for. If the home is ever rented, even casually to friends and family, be sure that your insurance agent is aware of the rentals. If you add a boat, Jet Ski or other water or recreational toys, the risk multiplies as you may be responsible for any problems that arise from use of the toys.

Another reality of real estate is it needs to be maintained, and that means there will be painters, landscapers and all sorts of contractors floating around the property from time to time. Some of these contractors are well insured, and some are not. If you lean towards looking for the best pricing on your home repairs or maintenance, make sure that you are working with someone who can show you their certificate of insurance. I’d also check to see that all subcontractors that they involve have proper coverage including workman’s compensation for their helpers.

And the last issue that can raise your risk profile seems really unfair because it may arise from your benevolent involvement with charitable or community organizations. Unfortunately, even when you are donating valuable time toward a not-for-profit organization, you are exposed to liability.

Saturday, August 25, 2012

MAKING CENTS: Unexpected financial treasures

We all eventually clean out a closet or basement, and find things that we forgot about and deem useful or valuable. From a financial perspective, the same process may also yield unexpected treasures. The living proof of this is your state’s unclaimed property list. In Massachusetts, it is estimated that one in 10 residents have unclaimed property.

There are two sides of cleaning out your financial closet. The first side is to find out if you have any unclaimed property. Do this by going to your state treasurer’s website and seeing if you’ve got property that you may have forgotten or never knew you had. An example of something you never knew you had could be from an old life policy, annuity, estate or retirement account from a deceased loved one who named you as a beneficiary.

The second side of cleaning out your financial closet goes beyond discovering the stuff that you may have forgotten or neglected. It is the prevention of things ending up on the unclaimed property list in the future.

The candidates for your ignored assets may include old bank accounts, old 401(k) accounts, old life policies or annuities.

Your annual tax filing should be your first reminder for any old bank accounts. Compare the interest from bank accounts from your last year’s tax return, account by account, to the 1099s received for the current year.

Beyond losing track of small accounts, remember to look closely at what type of bank account you hold. Is it possible that an older, higher-yielding certificate of deposit has matured, and rolled into a lower-yielding instrument? Update your inventory of accounts regularly, especially if you or your elder loved one is a “CD stacker” with many accounts spread around several institutions.

When people change jobs, there is a tendency to leave the old 401(k) assets in the old 401(k) plan. While this is far from a fatal error, not managing that old 401(k) plan may cause problems.

Older cash value life insurance policies and annuities are also candidates for being ignored or forgotten. These financial instruments are tax deferred, and will not generate a 1099 each year as a reminder. Check to see if these assets may be redeployed in better performing assets or to another type of insurance that may now be more desirable, such as long-term care coverage.

Saturday, August 18, 2012

Making Cents: Right answers usually aren’t easy ones

The most common answer delivered by financial professionals to their clients is “it depends". For some, it may be a quick way to skirt a direct answer. But in many financial situations, there is no black-and-white answer.

Let’s start with estate planning, an area where many feel that a set-it-and-forget-it approach is best. Nothing could be further from the truth. With the potential end to the Bush-era tax cuts looming, many wonder whether now is the time to engage in the $5 million substantial-gifting opportunity available under the current tax code.

Of course, much depends on what Congress does. But beyond the tax law, you may have concerns about your future ability to sustain your current lifestyle if you make such a large gift. You would also need to ask what can go wrong to make this gift look like a bad idea at some point in the future. These issues could include a long-term health issue that depletes funds faster than expected or, conversely, a much longer life than originally projected.

The “it depends” answer may also arise when planning for the funding of higher-educational expenses. The first side of this quandary deals with how you prioritize saving for your financial independence and other financial goals versus paying for four years of a private university. Then there are the realities of your future income, health and the earnings rate on your savings. Look at all contingencies and conceivable ways to fail before you charge ahead with your own ideas. Should you choose college funding as your first priority, it would be negligent to be underinsured to protect against the loss of life or income. Either possibility could cause failure of the funding plan. Diverting a small portion of your savings to possible contingencies for premature death or disability may be a prudent course of action.

If you choose to make financial decisions in a vacuum, then at least be aware of the possibilities of how your plan may become derailed. For example, holding on to an investment because you inherited it from your dad or because you’ve always owned it doesn’t mean that you should always own it. You’ll need to ponder the future of your current holding and weigh it against the alternatives you’re considering. Further conflict may arise if you ask whether capital gains taxes will be higher or lower next year.

There is a yin for every financial yang. Evaluating all of the possibilities with the help of a financial professional is the best you can do.

Wednesday, August 15, 2012

Making Cents: Right time for renters to begin buying?

Fears about property values and job security are deterrents

If you've looked for a nice apartment or home to rent, you've probably noticed that the monthly cost of renting has risen substantially over the past few years.

Even with low interest rates, borrowers are having a tough time qualifying for mortgages. Despite what you see and hear from lenders, underwriting decisions are still being made on very stringent criteria that many do not meet.

A second reason, however, is that of uncertainty –– uncertainty with respect to the pricing stability of owning versus renting, and uncertainty about job security. Too many prospective buyers are still reeling from prior real estate losses or are familiar with such losses endured by a friend or relative.

If you are a landlord, this is probably good news. Pricing power should remain in your hands for at least a few more years. And like all real estate, the more in demand your location is, the less pressure you'll receive regarding pricing.

I would also expect to see news of rising real estate values. Low rates are still an attractant, but more significant may be the declines in inventory. Inventories are down because buyers have, indeed, emerged in some of the hardest-hit areas, believing that they are buying at rock-bottom prices. Banks are slowly selling off their portfolios of real estate owned through the foreclosure process, and they are acting more swiftly to foreclose on loans in default, further reducing the inventory of available homes.

Does this mean that now is the time for some of the uncertain renters to change their stripes and begin to buy? Maybe. But that “maybe” is going to have to address all of their fears about employment stability and property values.

They must mentally commit to being in a specific location for a long time. They would also want to have a cash safety net to ride through any extended period of unemployment.

While we are seeing some price appreciation in certain locations at this very moment, a lot of it is neighborhood-specific based on demographics, supply and demand. For prices to rise across the board, inventory will have to drop substantially, and that may take a few more years.