Obama Won, Now What Do We Do?

My friends,

Our poor educational system has finally caught-up with us. We have managed to elect, as president, a man with no leadership or administrative experience, no experience running any kind of a company or payroll responsibility of any kind, questionable social and religious ties, and flawed ideas with regard to foreign policy and the economy. This is a real shame that we have let our country slide this far.

Here is what we can now expect:

• Surrender in Iraq and Afghanistan
• Nuclear proliferation in the Middle East
• Increased chance of terrorist attacks against US interests
• Higher Taxes
• Higher Unemployment
• Higher Interest Rates
• A stock market that will stall
• Prolonged real estate and mortgage crises
• Deficit and National Debt increases that we will never pay back
• Socialized Health Care
• An exodus of capital and jobs from the United States to offshore locations

These are just if Obama keeps his promises! Imagine if he should have any new ideas, how much trouble we may find?

Unfortunately, McCain was unable to articulate his message as well as Obama was able to pander to the voting public. If you really think that we are going to transfer the rest of the income tax base to the Top 5% of earners in the country, you have not been paying attention.

For those of you who make over $100,000 per year (yes, I know Obama said $250K, but he wasn't being honest), you need to find a way to move your income and assets offshore. If you have a business, this can be simpler than you think. If you are employed, it is a little bit more difficult, but it can be done.

If you wish to protect you income and assets, then you need to act now! Put everything in place before the end of this calendar year, and take advantage of existing tax advantages before they go away.

Oh yeah, remember the Estate Tax break for 2010 (no estate tax, that year only). Unless you are confident that you will die in 2010, you had better start planning again, if you think that your total estate (including life insurance settlements) will exceed $3 million. We will go back to the old system, because Obama just loves to take our money.

I wish I had better news, but too many people do not understand that the real American Dream is BUSINESS OWNERSHIP, not home ownership! Taking from the rich to give to the poor only works in fairy tales.

Mr. Obama, I am perfectly capable of spreading my own wealth around. I don't need (or want) the government's help with this task. I also have no problem finding low-cost health insurance, so thanks for your efforts, which will only serve to destroy health care as we know it!

If you need assistance with protecting your wealth, whether assets or income, please post your contact information in reply to this post. Every post is moderated, so your personal information will not appear on this website.

Good luck, we will all need it!

Quoted in Bloomberg Article

Hey Friends: I have been quoted in an article written by Seth Lubove, Los Angeles Bureau Chief for Bloomberg. You may view the article at the following link: http://www.bloomberg.com/apps/news?pid=20601109&sid=a8N_74GdteOg&refer=home While I was mentioned only briefly, much of the information in the article came from me. Attribution was light, in order to protect me from any liability. Enjoy the read. See you next post! Randall Parker, MBA

Health Insurance

Health insurance is a topic often debated by two of the presidential candidates, with these two individuals each touting some form of Universal Health Care. This means that the government would provide health care to everyone, whether you feel like you need government "help" or not.

This is an inherently bad idea. Sure, it sounds good, but it just won't work here. Many other countries around the world have tried to provide universal care. Canada has created a dismal system that patients, doctors, and nurses all hate. It doesn't work there. The only example of a working universal health care system is in Australia. Australians seem to have a different view on consumption of medical services than Americans, so it seems to work just fine there.

I'm not writing this article to compare and contrast the two candidate's positions. Neither plan is workable, so let's just leave the argument right there. I want to discuss the benefits of having health insurance, and show you how to protect your family, if you are one of the many families who does not have health care.

You have three basic choices for health insurance: HMO, PPO, or 80/20. 80/20 is the coverage that most of us grew up with, but due to the high cost of health care, HMOs and PPOs are now proliferating.

HMO stands for "Health Maintenance Organization," and generally means that you must go to a certain facility and see your assigned doctor whenever you need healthcare. If you need more specialized attention, you must beg for it, and you may not be able to get all of the care you would like, because someone is making decisions based on the cost of care to the organization, rather than your health needs.

PPO means "Preferred Provider Organization." In this structure, an insurance company signs hospitals, doctors and specialists to agreements, which detail what each member provider may charge to the company's policyholders. As an insured, you are free to see any provider in the network, and you will pay a copay, deductible or both. If you need a specialist, just find one on the list and go. No other permission is required for basic office visits.

80/20 is the traditional type of health coverage. Generally, you will have a deductible that you will pay before obtaining benefits under the policy. You will then have a co-insurance corridor in which you will pay 20% of the cost and your insurance company will pay 80%. You will have a stop-loss point, after which the insurance company then pays 100% of your expenses.

You also have the choice of a traditional policy or an HSA (Health Savings Account), which can be used as a retirement tool and comes with some tax benefits. If this is something in which you would like to have more information, please contact me directly. HSA is an advanced financial concept and planning tool that is not appropriate for everyone, so I won't address it much here.

Depending on your age, health condition, financial status, and other issues, the best type of policy for you may vary. Usually, PPO policies have the lowest premiums, followed by HMOs, and then 80/20.

You can get an instant quote by visiting the following website:

https://www.sales.healthnet.com/Brokers/RandallParker_RANDALLLEEPARKER.asp

One key reason to have health insurance is for the negotiated rates that you will get from the insurance company. For example, I don't go to the doctor very often. Most men fall into this category. Unless I'm am bleeding profusely or I have a body part hanging off, I'm not likely to waste my time on an office visit. Judge me later, but you know a lot of other people like me.

For my own use, I purchased a PPO policy with a $1,500 deductible that also had $15 generic prescriptions. As a 42-year old male (I know, I don't look that old), my premium is $124 per month. I rarely go to the doctor, and I probably won't hit the deductible. However, if I do have to go to the doctor, I will save a lot of money as compared to going to the doctor without insurance.

I had two office visits last year, which included some blood work and a minor in-office procedure. The doctor billed me $200 for each visit. My insurance company had a negotiated rate of $80 per visit, so I saved $120 per visit, just because I had insurance. Even though the insurance company didn't pay out any money, because of the negotiated rate I saved almost enough to pay my monthly premium on each visit. i also saved 80% on my lab expenses, and my prescriptions were only $15 each.

If you plan carefully, you may be able to obtain health insurance for much less than you think. Covering children can also be inexpensive, especially if they are added to your plan. Use the link above, where you can get a quote and complete an application online, or give me a call with your questions.

Be healthy, stay healthy, get insured, and don't vote for anyone who thinks we need Universal Health Care. That is one policy we cannot afford!

Who Controls Gas Prices?

Gas prices are all over the news right now, and I'm sure that the amount of your budget dedicated to fuel has increased dramatically over the past year or you have made significant changes to the way you use fuel. Without taking a political stand in this blog, I would like to shed some light on the fuel price situation, because a lot of unsubstantiated information and claims are coming across the media, and you deserve to know the truth!

The gas price that you pay includes all of the following expenses:

• Crude Oil (72%)
• Marketing and Refining costs (18%) - Includes Port of Entry to Refinery to Local Gas Station
• State and Federal Taxes (12%)

With crude oil now topping $100 per barrel, and no end in sight, the proportional cost of crude oil will continue to increase. Now, you might be outraged to know that it only costs the Arabs $2.00 to get one barrel of crude oil out of the ground. That is not a misprint, IT ONLY COSTS TWO DOLLARS TO PULL ONE BARREL OF OIL OUT OF THE GROUND!

In case you don't know, one barrel of oil is 55 gallons, so at $110 per barrel, the cost of crude oil is $2 per gallon. For those who think that the US oil companies are taking advantage, get over it! It's not true. They keep about 9% of sales as profits, which seems like a lot, until you start to compare with other industries. Also, much of their profit is reinvested in exploration and R&D activities. You may also be surprised to know that the oil companies give more money to the government in taxes than they keep as profits.

Why are we in this mess, anyway? What do we do about this? Who can fix this?

Well, worldwide consumption has increased, and continues to increase. You can blame China and India for this. Global oil demand is about 87 million barrels per day. At $100 per barrel, about $9 billion worth of crude is sold worldwide daily for an annual figure that staggers the mind at about $3.175 trillion!

We all know that OPEC in the Middle East controls the worldwide supply of oil, because they pull more of it out of the ground than anyone else. Good ol' Hugo Chavez in Venezuela makes a bunch of the stuff, and we have some here, but we can't drill for it. I'm sure it will surprise you to know that the Middle East only supplies 14% of the crude oil consumed in the USA. In fact, 55% of the crude oil we use comes from within our own borders. 12% of our oil comes from South America, and 15% of our oil comes from Africa. Africa could be the answer to a very interesting trivia question! Who knew we bought more oil from them than from the Middle East?

The falling US Dollar is another factor affecting oil prices, because oil prices are always set in Greenbacks. Some have called for the Euro to become the standard, although I don't think the argument has much traction. Regardless of the currency used, the effect is the same. A falling dollar increases our cost of imports. This is a basic Macro-Economic principle.

Crude oil prices are set based on Supply and Demand. OPEC has the capacity to produce a lot more oil, but they have no economic incentive to do so. Even as prices rise, our demand has not diminished greatly, yet. If OPEC made more oil, they would lower the price and their own profits, because a lower price would not increase demand to a point that would increase their overall profits. We need to find a way to increase the supply of oil, without counting on them to do it.

We have enough oil in the USA to serve our nation's needs for the next 100 years or more. Why don't we increase drilling here? Short Answer: The Environmentalists won't let us. Even if we opened Anwar (Alaska), allowed drilling off the coasts of Florida and California, and increased drilling in South Dakota and other oil-rich areas, it would probably take ten years for us to be producing enough oil each day to really make a dent in the world market.

We are going to have to find a way to decrease our demand, if we want to see any lowering of prices. Keep in mind that crude oil doesn't just affect the price of gasoline. Crude oil also affects the cost of heating your home. The high price of gasoline affects the price of every product you consume and most services that you use. Trucks need fuel to operate, and these increased costs are added to the price of the products you buy. Airlines use a lot of fuel, and they are already losing billions of dollars due to the rising cost of fuel. Airlines are instituting new fees to offset these costs, because they can't charge more for the tickets; we simply won't pay higher fares.

The best recommendation at this point is to limit your driving, if possible. Join a carpool. Use public transportation (buses and trains). Ride a bike. Consider buying a vehicle with better fuel economy, but be careful about hybrids. The higher price of a hybrid can take from one year to sixty years (no fooling!) to recover through gas savings, even at $4.00 per gallon.

As we are about to enter the general election cycle for President, it may become harder for me to avoid political issues, but I will do my best to discuss some of the topics, so that you can make an informed choice. I won't tell you how to vote or for whom to vote, unless you ask for my opinion.

See you next week.

Mortgage Modifications

After last week's post, many of you have sent emails asking about Mortgage Modifications, which I promised to discuss this week. Sorry for making you wait, but I was out-of-town most of this week. (Actually, I traveled back to California, arriving on Monday, El Cinco de Mayo). I then spent some time in Bakersfield and Fresno, and just got back to the LA area yesterday.

A Mortgage Modification is a renegotiation of the terms of your existing mortgage. This is another tool that we use to help people to avoid foreclosure. For the most part, you will have the best results renegotiating for your personal residence. If you have investment property, you may face more resistance from the lender, but approval is not an impossibility.

Mortgage Modification makes sense if any of the following apply to your situation or your loan:

• Your property value has declined to the point that you owe more than its market value
• Your loan interest rate has increase or adjusted (ARM loans) to a point that you cannot afford
• Your job situation has changed or your income has been reduced for any reason beyond your control
• You are now behind in your mortgage payments due to a temporary situation that has now passed, but you are unable to raise the money to bring your mortgage current

If your mortgage is current, you may have a tougher time trying to get a modification on your loan, but if you just explain to your lender that your income situation has just changed, they may be willing to work with you, before your credit score goes into the toilet.

If you have one of these situations, you may be able to get a modification of terms from your lender. A modification may include changing your ARM to a fixed-rate mortgage, an increase in the number of years of your mortgage, which would lower your payments (i.e. 30-year to 40-year), a permanent lowering of your interest rate, and forebearance, which capitalizes your late payments, and adds them to the principal balance on your loan.

Every modification plan is different, so the only hard-and-fast rules here are those that the lenders place upon their loan negotiators. Generally, if you are three months behind in your payment, you are in a position to renegotiate your terms.

Now, you may be asking, "Should I contact my lender and negotiate this myself, or should I pay for help?"

You could try to do this yourself, but this is about as effective as trying to beat the dealer when buying a car. They play this game all day, every day, and you are (hopefully) only going to attempt this once. My recommendation is to get help. A third-party, who is not emotionally involved in your situation, and has the experience and relationships with the lenders from having done this many times, will negotiate a much better deal on your behalf, than you would ever be able to negotiate on your own.

As part of the negotiation, your loan will be brought current, and you generally will get to skip one month's payment, while the lender goes through the paperwork process of modifying the terms of your loan.

You will want to stress to your negotiator what is important to you with regard to the mortgage, so that s/he may best represent you. You should determine how much payment you can afford, how long you plan to keep your home, and convey any other information that may be helpful, such as any knowledge of recent sales prices for similar homes in your area.

We offer mortgage modification services, which are provided by a legal team that we have under retainer. Generally, we charge the greater of $1,995 or one month's mortgage payment (after modification) as a fee. Our negotiators will save you much more than the fee by getting you a much better deal than the lender would likely offer, if you were to negotiate a plan yourself. We also have a 72-hour turnaround on most files.

You will need to provide information on your income and debts, including credit cards, student loans, and support payments. If you have additional regular expenses, such as children's or your own current educational costs or ongoing medical expenses, be sure to include these as well. We will determine what payment you can afford, based on your financial situation.

If a workable agreement cannot be reached with the lender, then go back to last week's article, and read up on short sales. If this is the route for you, let me know, as we can refer you to a short-sale experienced Realtor who can assist you.

As always, I hope this information proves helpful. Your comments and subscription to this blog are always welcome. See you next week!

*** Just a reminder: All reader comments to this blog are moderated and approved before they show up on the website. You may contact me via email at randall_parker@yahoo.com or by posting a comment to this article, and I will contact you, but remove your comments, so that your personal information does not appear in the blog. ***

What is a Short Sale?

We will be discussing Short Sales this week. A number of other planners' clients have come to me recently wanting to know about these, so I thought it would be a good idea to touch upon short sales in this week's post. We are talking about Short Sales with respect to real estate, and not the White Sales that you might see at Sear's, Target, or Wal-Mart. Of course, if you find a good deal on Havana's or Dolphin shorts, go for it. Speedo's, not so much!

The reason a short sale helps you is that your lender does not want your home to go to foreclosure any more than you want that to happen. If property values have dropped, and you can no longer afford to make your payments, then a short sale is one way to avoid foreclosure. Another viable method is a loan modification, but we will talk about this next week.

Short sales basically help you to avoid foreclosure. If you are going to lose your home anyway, a short sale can help you retain some of your dignity in the process, and may even help you to save your credit. Basically, a short sale allows you to sell your home for less than you owe against it, with the lender accepting the sales proceeds as full satisfaction of your loan. If you never paid your loan late, your credit report should show a paid-in-full mortgage with no hits after close of escrow. In short (pun not intended), it will appear as though you simply paid-off your mortgage. If you already are late on your payments, you will still have the mortgage lates, but you will avoid the damage that a foreclosure would cause.

Many people who are in financial trouble would like to sell their homes, but the market values have dropped to the point that they are underwater. This means that the potential sales price is not enough to cover the costs of sale and the liens (mortgages) that exist against the property. By agreeing to a short sale, the lender is allowing you to sell the house at market value without you having to come out-of-pocket to pay-off the balance of the loan.

A short sale does require pre-approval from your lender. You will have to explain to them that you cannot continue making your payments, and that your only solution is to sell your home. The lender will order a Broker's Price Opinion (BPO) to get an idea of the value of your home. From this price, they will deduct their estimated costs of foreclosing and reselling your property. Generally, if you can get an offer that exceeds this amount, they will accept the offer, and let you sell the property.

If you have two loans on your property with two different lenders, you will have to work-out arrangements with both of them. If the same lender holds both loans, this may work to your advantage. In any event, it is illegal for you to profit from the sale of the home, so don't expect this option to put any money into your pocket.

Short sales aren't for everyone, and not everyone will get approved for a short sale. Many lenders will reject offers that seem valid, so you want to ensure that you are working with real estate professionals who have experience in this arena.

If you have run into financial difficulty, and you would like to explore the benefits of a short sale, feel free to contact me, or contact a Realtor in your area.

Special Edition: Philippine Peso vs. Dollar Valuation

I posted this information in response to a question posted in Yahoo!Groups, "LivingInThePhilippines3." I thought that it would be appropriate to share here. Enjoy!

The peso and dollar should fluctuate within a narrow range for the rest of this year, at least through the time of the American election. The worst of the sub-prime mess is over now, but corrections continue in the real estate sector. Housing prices bottomed-out in many traditional markets in November, but other areas are still seeing fallout. The main reasons that real estate is still falling in certain areas, and will have a long climb back in others, is due to the high vacancy rates of homes (bank owned), tightly enforced requirements on borrowing (which are starting to ease), and a general credit crunch that is now shifting towards consumer borrowing. Average credit scores of Americans are dropping due to foreclosures, short sales, and Deeds in Lieu thereof, as well as people renegotiating their upside-down mortgages.

Higher interest rates, higher fuel prices, and an increase in unemployment are causing more credit card defaults as well, while banks are trying to raise interest rates into the stratosphere on credit cards (up to 30% or more)! Bankruptcies are also on the rise, and this trend will continue into the foreseeable future. Some banks will still incur multi-million or multi-billion dollar write downs (B of A/Countrywide $2B for renegotiations), and a couple of major bank mergers are on the horizon yet. All of this will eventually settle down, and we will have an American real estate economy again. This total recovery will take at least two years to get back to the price levels of 2006, but five to seven years to get back on track to long-term average year-on-year returns. Real estate is still a great investment if you are a buy-and-hold investor with enough liquidity and good enough credit to qualify for a mortgage.

The rental market prices are increasing, due to high numbers of recently-displaced families, so CAP rates in the multi-family housing sector remain low (gradual increases in CAP rate, but good increases in cash flow), in spite of the recent fall-out in values. Commercial credit is still surprisingly easy to attain for real estate or unsecured obligations.

In addition to the sub-prime mess, the peso has enjoyed certain benefits over the past couple of years. First, the economy has improved, so rather than the cheese heads in government taking all the money for themselves, they have chosen to try to balance the budget. This still doesn't help that poor family of 16 on the corner who can't afford rice, but the country looks better (on paper) to the rest of the world.

The improved credit rates achieved by the Philippine government have allowed fewer pesos to go farther with regard to reducing debt. The BSP's (Bankgo Sentral Philippines - Central Bank of the Philippines) policy of hoarding dollars has created an effective, although limited, hedge against fluctuations, but has put the country in the position of having to reverse itself in order to reduce inflation. In other words, they over-bought dollars, and inflation is already starting to affect the average Filipino. Over the past two years, only we (who get paid in dollars) have noticed the double-digit inflation rate, as peso-denominated prices didn't change, but our purchasing power dropped like a rock!

The Federal Reserve Boards' actions in keeping interest rates low (2.00% as of today - Don't expect it to fall any farther), as a hedge against both inflation and a total meltdown in financial markets, has fueled an exodus from investments in the dollar, as higher interest rates are to be found elsewhere. Just look in the newspaper at the difference in interest rates offered by banks for the dollar vs. the peso. European banks give higher rates for Euros as well. If the demand for dollars was higher (usually meaning a lower trade deficit and/or more foreign investment streaming into the country), interest rates would have to rise, and the currency would do the same. (Side Note: Local banks have now adjusted CD rates on peso and dollar accounts to about the same rate, whereas the peso paid much more for the past few years This is an indication that the dollar and peso are expected to hold steady for the next year.)

If not for the sub-prime mess, we probably would have seen the dollar recover to at least 45:1 by now, with a target of 50:1 possible within the next 12-18 months. As it stands, 42:1 or 43:1 is the best it is likely to get by the year-end, unless some major breakthrough happens in the world. Unfortunately, big news is usually negative, so don't hold your breath for this one. The good news is that the dollar is unlikely to fall any lower against the peso, as Malacanang is not going to be able to balance the budget this year. Rising gas prices, a worldwide food shortage, and tightening of financial markets have served to rein in the currency exchange markets, and reduce volatility. In English, this means the exchange markets should be pretty stable the rest of the year, and trade in a narrow range.

Barring any terrorist attacks on US soil, the nuking of any rogue state, global warming putting us under water, or the Lord returning to take over, the exchange rate should be within 41:1 to 43:1 the rest of the year. In sum, a peso:dollar rate of worse than 40:1 is highly unlikely, as is 45:1, in the next six months. We could get to 45:1 by this time next year, if the world economy improves and fuel prices drop (they actually should), but don't expect to see a ratio of 50:1 or better anytime soon (perhaps never).

If you are looking for ways to increase the total return to your portfolio without taking on aggressive risk, please contact me regarding solid investment opportunities in the Philippines.

Received this the other day from a client. (Thank you, Samantha!) I think you might enjoy it:

I had a bunch of Canadian dollars I needed to exchange, so I went to the currency exchange window at the local bank. Just one lady in front of me, an Asian lady who was trying to exchange yen for dollars and she was a little irritated.

She asked the teller, "Why it change? Yesterday, I get two hunat dolla fo yen. Today I get hunat eighty? Why it change?"

The teller shrugged his shoulders and said, "Fluctuations". The Asian lady said, "Fluc you white people, too"

Insurance: How to Protect Yourself

Insurance baffles many people. Some insurance you are "forced" to carry, such as basic coverage for auto liability and homeowner's insurance, and other coverage you want, but may not be able to afford, such as health and disability insurance, and of course, coverage you hope never to have to use, such as life insurance. Today, we will discuss the risk transfer aspects of insurance, so we will be dealing with those areas of protection that can keep you and your family out of harm's way financially, through the proper use of liability insurance protection.

We will speak today on personal liability, and save other types of liability protection (i.e. E&O, D&O, Business Insurance, etc.) for another day. The three most common insurance policies that provide personal liability protection to your family are Home, Auto, and Umbrella insurance coverage. We will deal with these coverages individually at first, and then tie them together at the end of this post.

Auto Insurance

In California (as well as most, if not all other states), the government forces you to carry at least a basic level of liability insurance. Commonly, this shows up as 15/30/5. What that means is that you must have at least enough insurance to cover:

1. Any harmed individual for $15,000 of personal injury damages
2. All persons injured in a common accident to a total of $30,000 for personal injuries
3. Property damage coverage of at least $5,000 per accident.

As you can imagine, it does not take a very severe accident incur liability in excess of these required amounts. While auto insurance is compulsory, at least 25% of our fellow drivers still have no coverage. The state is cracking down on this by requiring all insurance companies in the state to be linked electronically to the DMV for up-to-the-minute policy status information. If your coverage lapses, is cancelled, or goes out-of-force for any reason, DMV can immediately cancel the registration on your vehicle. It is getting harder to not have coverage, but not impossible.

My recommendation, unless you really have no assets or income to protect, is to always get the maximum amount of coverage that you can afford. As you will find, once you have the basic coverage, it can cost very little to increase your liability amounts, as compared to the amount of coverage that you would receive.

A search at 21st.com provides the following pricing data for a sample policy (42 y.o. male, single, LA County, clean DMV):

Coverage-------------------------------Limit--------------------Premium 
Bodily Injury Liability-----------------$15,000/30,000------$130.00 
Property Damage Liability-----------$5,000-------------------78.00

Bodily Injury Liability-----------------$250,000/500,000---$169.00 
Property Damage Liability-----------$100,000---------------$98.00

As you can see, the difference between the minimum and the maximum coverage for this good driver is only $59 per six months. Less than $10 per month provides over $550,000 in additional protection. Maximizing coverage is a very small investment with a very big upside in protection.

Some other questions for auto insurance concern other coverages, and which coverages might be necessary. Well, if you owe money on your car, your lender will require that you carry Comprehensive (other than collision) and Collision coverage on your vehicle. Collision is the category that pays to fix your car if you are found to be at-fault in an accident in which your car is damaged. Comprehensive covers for theft, vandalism, natural disasters, and any other harm that comes to your vehicle other than an accident. Your lender will tell you the maximum deductible amounts that they will allow.

You also have the option of purchasing Medical Payments Coverage, Uninsured Motorists' Coverage, and optional coverages including coverage for Accessories, Towing & Disablement, and others that vary from company-to-company. My quick recommendations for these are as follow:

Uninsured Motorists' Coverage: Get an amount that matches your liability coverage

Medical Payments Coverage: $5,000 if you don't have health insurance or if you have a high deductible Health Insurance Policy (HSA or MSA Plans)

Accessories: If you have over $1,000 in electronics or a special paint job, you need this coverage

Towing & Disablement: Unless this came with your car, buy it with your insurance. It is probably cheaper than AAA or other independently-purchased coverage, and may be less restrictive.

Homeowner's/Renter's Insurance

Your mortgage company will require you to have replacement coverage for your home. Renters are four times more likely to suffer a break-in, so renter's coverage is highly recommended. Both policies also include liability protection for injuries sustained by visitors or guests to your property, as well as fire legal liability should your property burn and cause harm to the property of others (e.g. The neighboring apartment).

Again, max-out your liability coverage, because it does not cost much to do so. Also, be sure that you get "replacement coverage" for all of your personal property. You don't want to have to accept ACV (Actual Cash Value) or depreciated valuations, plus your deductible, if you should have a theft, fire or other property loss.

Discounts are available if you have a home alarm system with monitoring, sprinklers, smoke detectors, fire extinguishers, and/or other safety-related items. Check with your agent for these discounts, and take the appropriate steps to maximize your protection and savings.

Umbrella Policies

A personal umbrella policy does not protect you just in the rain. An umbrella policy protects you from all insured losses, over and above the amount of your other coverage. For example, if you purchase $1 million of umbrella protection, you have just increased all of your liability protections by $1 million. This means your auto is now $1.25 million instead of $250K, and your home is now $1.50 million instead of $500K.

Umbrella policies can be issued in amounts up to $5 million, but any amount over $2 million will probably require additional underwriting. Ask your agent how much coverage is appropriate for your situation.

It is unlikely, although possible, that you could have an exposure that will exceed these coverage amounts. If you do find yourself involved in a lawsuit that could exceed these amounts, have an attorney send a letter to the insurance company advising them to settle within policy limits if they should have the opportunity. This will further protect you, but see an attorney for legal advice if this happens to you.

Summary

Your auto, homeowners'/renters', and umbrella policies exist to shift the responsibility for losses from your family to the insurance company. Hopefully, you will never need to file a claim against any of these coverages. However, if you ever need to file a claim, you will be glad that you protected yourself as fully as possible.

Be sure to review all of your coverages with your agent at each renewal opportunity, in order to ensure that your coverages are appropriate and that you are receiving all savings to which you are entitled. We will discuss other types of insurance in future articles, but if you have any questions, be sure to post them here.

Until next time, be careful out there!

Business: How to Incorporate/Form LLC

This week, we will follow-up my previous post regarding business structure. As you can imagine, my advice regarding business structure is almost always a recommendation to incorporate or form an LLC. While neither of these is all that difficult to complete, you must follow certain rules and procedures in order to do it properly. In addition, each state has its own rules, so I can only provide generic assistance in this forum. I highly suggest that you work with your accountant and attorney to decide which type of entity to form, and get their help with the formation, documentary requirements, and on-going administrative assistance.

Today's Issue of "Personal Finance for Real People," sponsored by:

With any luck, this will be a painless process, and you can have your company formed in just a few days. If you want to perform this process yourself, please visit our sponsor above to secure the necessary forms. The incorporation kit includes instructions for each state in which you may want to set-up your entity.

The first step is to decide which state you want for your corporate home. Nevada and Delaware are two of the friendliest states in which to incorporate. One big advantage of a Nevada corporation is that you don't have to issue your shares or reveal the names of your stockholders. If privacy is an issue, this is a good place to call your corporate home. Your CPA and attorney can help you make this decision.

You must also file as a foreign corporation in each state in which you have a physical presence. For example, if your corporate home is in Nevada, but you really do business in California, then you will need to also register your corporation with the Secretary of State of California, and pay the requisite fees.

Filing instructions for a corporation or an LLC are quite similar. Where they differ is in the amount of administration that is required. Many people who form LLCs are under the incorrect assumption that they don't need to be as careful about keeping the business separate from their personal lives. It is possible to lose the protection of an LLC, much the way one would "pierce the corporate veil." You must maintain the LLC as a separate entity from your person, in order to keep your liability protection in place. Also, you may have to pay the same franchise fee every year, whether you form an LLC or corporation. Each state may have requirements that you update your registration on a regular basis. This could be an annual or biannual requirement. Again, have your CPA or attorney do the research for each state in which you will register.

I highly recommend that you have a complete library of commonly-used business forms available on your computer at all times. Having these forms handy can save you a ton of time and thousands of dollars in attorneys' fees. The forms available from our sponsor have all been reviewed by attorneys, and are probably valid in all states. Double-check with your own attorney prior to using these forms, but you should be able to save a ton of money (not to mention time) by not having to ask your attorney to create these forms for you.

Also Available from Today's Sponsor:

While this article can only provide a limited amount of information with regard to the process, I hope that it has provided enough to get you started. In short, see your CPA or attorney in order to form an LLC or corporation. If you feel confident enough that you can perform the process yourself, then visit our sponsor above, and use the incorporation/LLC kit to get started.

I wish you luck in your new venture! Be sure to let me know if I can help you with your financial planning needs, whether they be personal or corporate. See you next week!

Happy Tax Day!

Celebrate Good Times, Come On!

Well, maybe not quite, for most of us. CPAs are working feverishly to complete those last tax returns and extensions, and looking forward to the company parties this weekend. For the rest of us, we may be relieved, broke and/or worried now!

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Probably the most oft-heard question for me on April 15 of each year is, "What if I'm not done with my taxes? What do I do?" Well, PANIC!!! No, not really.

Usually, people are late for one of three reasons:

1) They are waiting for that last W-2 or 1099 to show up.

2) They are trying to decide on those final expense item amounts.

3) They just procrastinated too long, and there is no hope of filing on time.

If you are waiting for a form, but you know what data should be on it, there is no need for concern. If you need a W-2, but have your final paycheck of the year from the provider, then just copy the information from that last pay-stub as if it came from a W-2. If you file electronically, there is no need to attach forms anyway, so you should be fine.

If you are waiting for a 1099, stop waiting. Just be sure to include the amounts from any unreceived 1099 forms in "Other Income" on your Schedule C or Schedule K, and be done with it. The form may never come, but it doesn't matter, as long as you counted the income in your calculations.

If you are unsure of an expense amount, it is OK to guesstimate. Unless you are way off, it should not throw up any red flags. If you missed by a lot, you can always file a 1040X later to correct your return.

It is important to file by today if you want to get your stimulus check in May. If you file an extension, or if you file late, you might not get your stimulus check until October.

If you procrastinated, here is what you should do. First, calculate all of your income amounts. Second, estimate your deductions. Third, determine what your tax is based on these rough figures. Fourth, complete Form 4868 and request a six-month extension to file, and include any estimated tax due, and mail the form by midnight tonight.

If you know that you will have a refund coming, you don't really even have to file Form 4868. Just be sure to file when you have your numbers together.

Some people are confused about the stimulus check. Let me try to clear it up for you.

Basically, every person who has at least $3,000 of earned income (including SS, disability, and retirement income), and files a return showing this income, will receive at least $300 from the stimulus package. If you paid income tax, you will receive up to $300 of that tax back in addition to the first $300, which means you could receive up to $600. For a joint return, this is $600 - $1,200. If you have children, who qualify as dependents, you will receive $300 per. If they file their own tax returns, they will receive their own refund, but you won't get $300 for them. Those are the breaks!

Anyway, this is a special edition, so I made it short-and-sweet. See you on Saturday!

Credit: What is a FICO Score?

I didn't plan on bringing you another credit-related post so soon. In fact, I expected that I would probably be giving you a post on tax issues about now, but maybe I'll do another post on tax day for that one. Anyway, today we will talk about one of the greatest mysteries in the world of credit: The (dreaded) FICO Score!

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The reason that the FICO score is such a mystery, is that Fair, Isaac, and Company (the developers of the FICO score) won't release the formula that they use to compute it. Over time, we have figured some things out about what drives the score, and I will share with you some of what we have learned to this point.

I'm sure that by now, everyone has heard of the FICO score, as it has become a topic of major discussion, and is one of the major components in the process of applying for any loan, but especially with regard to mortgage loans. With all of the news about the housing crisis and the tightening of mortgage lending, the FICO score has become a point of contention.

The basic breakdown of your FICO score is as follows:

• Payment History - 35%
• Outstanding Balances - 30%
• Length of Credit History - 15%
• Amount of New Credit - 10%
• Types of Credit Used - 10%

Payment History

If you pay your bills on time, this helps a lot. If you have late payments, collections, back child support, and/or judgments appearing on your credit report, this hurts a lot. The amount past due, length of delinquencies, time since you last paid late, number of past due items, and number of accounts "paid as agreed" all play a role in determining the "Payment History" portion of your score. Obviously, if you pay all of your accounts on time, this is a huge help to your score!

Amounts Owed

Obviously, the amount of money that you owe is a factor here, but what is less obvious is that the amount you owe for certain types of debt can work against you. If you have amounts owing to Finance Companies (i.e. Wells Fargo Finance, Finance & Thrift, etc.), this will lower your score, even if the payments are always on time, because these are considered "lenders of last resort." If you could have been granted credit at better rates, the assumption is that you would have used another credit card or finance method. The unfortunate part of this is that these institutions often finance autos and furniture at stores you frequent, so you might have a balance with them, even if you have stellar credit otherwise.

American Express can also lower your credit score, because they don't show a credit limit. This means that the FICO system assumes that you are using 100% of your available credit on the card. Also, if you have an account where the limit has been lowered, this can hurt you as well. You don't want to be over your credit limit on any account, because you will take a severe hit to your score. The outstanding balance as a proportion of the credit limit is also a factor, with any balance in excess of 20% of the credit limit working against you, albeit on a sliding scale. For best results, stay under 20%. To avoid any dings, stay under 45%.

Length of Credit History

This is how long you have had a credit record, as well as how long your existing accounts have been open. If you have accounts with histories over two years, DO NOT CLOSE THEM! You can stop using them, but it is better in most cases to keep the accounts open with a zero balance.

New Credit

This runs in concert with Length of Credit History, but takes a special look at recently opened accounts and the number of recent credit inquiries. This factor also looks at your attempts to re-establish good payment patterns after a series of past payment problems.

Types of Credit Used

This looks at what proportion of your credit usage is comprised of mortgages, installment (auto or other purchase-money) loans, credit cards, finance company accounts, etc. If you have 100% credit cards, this can count against you, while a mortgage will generally help your score.

Summary

Keep in mind that your FICO score takes into account ALL of the above issues. Yes, some of these issues seem to overlap, but the overall weighting of each issue is as stated above. Your FICO score only takes into account information on your credit report, so your job, income, and education level do not play a part in your score, but they may affect a lender's desire to offer you credit. Also, the Credit Reporting Agency does not determine whether you get credit; only your lender makes that decision, but your credit score will be an important factor in that decision.

Clarification

You may hear some things in the news about FICO '08. This is a change to the scoring system that eliminates the advantage of riding on someone else's credit history by becoming an authorized user on their established cards. At this point, only Experian plans to use it, as both TransUnion and Equifax are in litigation opposing its implementation. If you plan to use this 'credit riding' technique, you can probably continue to do so for the foreseeable future. With most lenders looking at your mid-score, and TU and EQ still using the old formula, your EX score will matter less.

In a later posting, I will provide tips on how to Keep and Maintain a High FICO. Stay tuned!

Business Start-Up: Choosing the Right Structure

One of the first questions that I pose to anyone who wants to start a new business is "What will be the structure of your company? Will you incorporate, set-up an LLC/LLP, or operate as a partnership or proprietorship?" The answer to this question will provide the basis for setting the company's legal status as an entity. Today, we will review the most common types of business structure, and we will explore the advantages and disadvantages of each.

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The most common types of business ownership are Sole Proprietorship (also includes Husband/Wife ownership), Partnership (various forms), and Corporation. LLC and LLP are other options, and include some of the benefits of a Corporation with some of the benefits of non-corporate structures. We will explore each of these in this issue.

Sole Proprietorships and Partnerships

By far, the easiest form of company set-up is the sole proprietorship. All you have to do is decide that you want to go into business, and then go through some basic set-up steps to legitimize it. If this will be a home-based business, you will file a name registration with your county (commonly referred to a DBA or "Doing Business As..."), publish it in a local paper, open a bank account in the business name, secure any licenses required (Home Occupation Permit, Business License, Resale Permit, etc.), and you are good to go! You will typically file your business income and expenses on IRS Schedule C and attach it to your Form 1040 at the end of the year.

While a sole proprietorship is easy to form, I generally don't recommend it as a business structure unless the business is never expected to ever grow larger than being home based, and it has minimal to no legal liability exposure. A partnership follows the same series of events as listed above, with the addition of the need for a partnership agreement. Partnerships can be either General Partnerships or Limited Partnerships.

A General Partnership has one or more General Partners, each of whom assumes full personal legal liability for the partnership. A Limited Partnership has one or more General Partners, along with one or more Limited Partners who may invest money, but who are not allowed to participate in the daily activities of the partnership in any capacity. A Limited Partner's liability for the partnership's actions is limited to the amount of money s/he has invested in the partnership.

Perhaps the single biggest disadvantage of a Sole Proprietorship or Partnership is the unlimited personal liability that attaches to the owners of either entity. If the business should go bankrupt, whether through mismanagement, a lawsuit, or other business reasons, the owner(s) must take personal responsibility for payment of the business' debts. Often, this causes the owner(s) to file for bankruptcy protection themselves. Another issue that can handicap either of these entities is the acquisition of credit. Since the business is not a separate legal entity from the owners, the owners usually wind up using their personal credit capacity to fund the business. This can make deduction calculations difficult, in addition to making credit acquisition difficult for the business.

A partnership will file an information report to the IRS every year on Form 1065. This form includes Schedule K, which details how the income and expenses of the partnership are to be allocated amongst the partners. Since a partnership is not a legal entity, it will not pay taxes directly to the IRS, but each member of the partnership will.

Each partner will receive a Schedule K-1 from the business, and will use this form to complete their income tax return. Note that the due date for Form 1065 is one month prior to the due date for the personal income tax returns of the partners. This is to allow the partners time to complete their returns by the standard tax filing day. The information from Schedule K-1 is reported by each partner on Schedule E, which is then attached to their Form 1040 and filed with the IRS.

Corporations and Incorporation

Incorporating can be a simple process, but the decision to set-up a corporation, as well as the continuing administrative requirements to keep a corporation legal, can be daunting. Setting-up the corporation does not take a lot of work, but you must follow some key steps in order to do it properly. A corporation may be set-up as a C-corp or an S-corp. S-corps are more common if you have a smaller company and/or a limited number of investors. An S-corp cannot sell shares to the public.

The first decision is to determine which of the fifty United States is most beneficial to the business as a home state. This does not have to be the same state in which the business operates, nor does the business have to have a physical presence in that state, other than a person who will agree to receive any court or legal documents on behalf of the corporation in that state. This is usually an attorney or accountant, but can be any person of legal age whom you authorize. They must have a physical presence (residence or office) in the state of incorporation, and they must be available to receive personal service of documents on behalf of the corporation.

When filing, you should have Articles of Incorporation and Bylaws to file with the Secretary of State of the state in which you will incorporate. You will also be required (in most states) to name the directors and officers of the corporation. In most states, these can all be the same individual. You will be required to keep corporate books and records. These records include Corporate Minutes, key decisions, Stock/Share records, and more. Today's sponsor has more information and guides available which can help you with this. Be sure to visit their site for more information.

You must also register your corporation in the states in which you will have a physical presence and conduct business. For example, you may decide to register your corporation in Nevada or Delaware, but actually operate your business in California. While your initial registration will be in Nevada or Delaware, you will also have to be a registered corporation in California. You do not have to register in every state in which you have customers (i.e. mail order), but you must register in any state in which you will have an office. There are exceptions to this, based on your line of business, so check with your attorney or CPA for additional requirements.

A corporation helps you to avoid the unlimited liability provisions of proprietorships and partnerships, but you must be careful to run your corporation as a completely separate entity from your person or your household. DO NOT pay any personal bills from the corporation. DO pay yourself a salary from the company, and use this money to pay your personal bills. If you don't truly run your corporation as a separate entity, then you run the risk of having your corporate status invalidated in court, and you could find that you are now subject to unlimited personal liability for the actions of the corporation.

Having a corporation also simplifies the process of procuring credit and trade lines in the business name. If done properly, you can avoid having these items appear on your personal credit report, and you can also avoid having to sign personal guarantees for these credit lines. If you would like more information on Business Credit, see future articles, or contact me by commenting on this blog. Since all comments are moderated by me, you don't have to worry about your personal contact information showing up on this site.

A corporation will file taxes on Form 1120 (c-corp) or Form 1120S (s-corp). A c-corp may issue dividends, and these dividends will be reported on a Form 1099-DIV issued to each shareholder. An s-corp will issue a Schedule K-1, just like a partnership, and the owners will transfer this information to Schedule E.

Limited Liability Companies (LLC/LLP)

An LLC/LLP works very similar to a corporation, but the recordkeeping requirements are less stringent, as you don't need to keep corporate books and records, but you must still ensure that you are running the business as an independent entity. An LLC/LLP has a manager and members. The manager is selected as the company's representative and the rest of the owners are the members.

An LLC/LLP can also get business credit, just like a corporation, and liability for the actions of the company is limited to the amount invested by the owners. Also, limited liability owners of an LLC/LLP ARE allowed to participate in the daily activities of the business (unlike a Limited Partnership), while maintaining their limited liability status.

An LLC/LLP is appropriate for many small businesses, and I highly recommend this business structure to most of my clients. As the business grows, you may eventually convert to a full corporation, but in most cases an LLC provides liability protection, access to business credit, and simpler administration.

Tax filing for an LLC is simple. If the LLC has only one owner, the owner can report all LLC income and expense data on a Schedule C, just as if the entity were a sole proprietorship. If structured as an LLP, or if an LLC with partners, then Form 1065 would be filed, and each manager and member would receive a Schedule K-1 and report on Schedule E. An LLC has the option to be treated as a corporation, in which case it would file Form 1120 instead.

Speak to an Attorney or CPA or Both!

Prior to setting-up your business, I recommend that you retain counsel and a CPA who will work with you and your business. The attorney can ensure that you are following the proper legal proceedures with respect to your business structure and set-up, as well as the ongoing administration of your status. The CPA will help you set-up your company books and records, and s/he will also be in charge of your annual audit and financial reporting.

We have not talked in detail about business credit here, but we will be speaking to these issues in future posts. Your CPA and attorney may play a pivotal role in assisting you with regard to business credit. In any event, you will (or should) find their guidance and counsel of help and comfort while operating your new venture. Your CPA will also help you with tax issues, if necessary. We will discuss some of the tax issues of each type of business structure in future posts as well.

Regardless of whether you set-up your new company as a proprietorship, partnership, corporation, or limited liability entity, you should be sure that you understand the pros and cons of each structure, and decide which provides the best combination of benefits for your type and scale of business. Working with your financial planner, an attorney, and an accountant will enable you to ensure that you are getting the most from your chosen business structure.

As with any of my posts, I urge you to speak to a licensed, qualified attorney or CPA in your area before acting on anything contained herein that speaks to legal or accounting issues, as I am not licensed to work in these areas. Any information contained herein is for informative purposes only, and should be verified prior to being acted upon.