Some Words on Income

Ever wondered why real estate investing is so popular? Or do you know why income tax reform is such a contentious issue? Or why you hardly ever hear anyone in their 20s talk about retiring with a “pension” one day? Our economy is changing rapidly, and we have to learn to adapt with it, especially if you want to live a comfortable life. Remember the words of Darwin: It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

Let’s start with those pesky “wealthy” people. Often the rich are portrayed as negatively in the media as the poor who take advantage of the System. You see them in the large houses, flaunting their opulence, appearing on Robin Leach documentaries. However, the vast majority of the rich do very little of these things. Most drive regular cars, live in regular homes, and all don’t work at Goldman Sachs type jobs. Many own their own businesses and are just the proverbial Average Joes.

But the one thing that these guys do different than others is their money management skill. Consider the following income tax rate structure:

Income Tax Rates for Select Income Types

A. Salary/Income	25%
B. Capital Gains Income	15%*

* These rates apply only if these investments are held at least one year.

Now, let’s say that you could control the money you had flowing into your possession. Which tax rate would you prefer? If you’re sane, you’d probably choose (B). Capital gains taxes are taxes levied on income gained through investments—the sale of securities (like stocks or mutual funds) and/or real estate. So those who pursue wealth try to maximize B while (legally) minimizing A when reporting income to the government. You can reduce (A) through tax deductions, and maximize (B) by working to increase your holdings in interest-gaining investments. So if for some reason you are in a rush to retire for some reason it is generally easier for most people to get there using the Real Estate option than investments. However do keep in mind that real estate does pose greater risks than investing in stocks/bonds/mutual funds.

So, keep in mind that the more income type (A) increases, the higher your tax rate can go (up to about 35%). However, as your Type B income increases, the tax rate generally stays the same. If you reach a point where your investment income is high enough to equal or exceed the amount of Type (A) income you receive, the lower your tax rate will be (generally). And if this amount is high enough to cover your expenses every month without dipping too heavily into your Type (A) income (your salary) it will place you in a powerful position of financial independence. This is yet another reason to consider socking away income for your later years as you move up in income.

J. Hogans: Mutual Funds

A proven track record, a fund you know, and the ability to take risks are just a few things you should know about Mutual Funds. Special Contributor Joseph Hogans returns to cover the basics.

My previous article focused on ways to build wealth through income-generating investments such as bonds, mortgage-backed securities (MBSs), and real estate investment trusts (REITs). While it is possible to put money directly into these investment vehicles, there are often high minimum investment amounts associated with these choices. Most mortgage-backed securities for example, require a minimum investment of $25,000. If you have that kind of money to put into one investment, consider yourself blessed. For the rest of us however, there is a way to get around these high investment minimums and increase the diversification of our portfolio at the same time. The solution lies in mutual funds.

A mutual fund is a pool of money from multiple investors that is used to invest in specific stocks, bonds, and other money-making securities. Instead of you needing $25,000 for a MBS, you and other investors can invest $1,000 each in a mutual fund that invests in MBSs. In this way, you can reap the benefits of a MBS investment without needing the large amount of money required to buy one directly.

The Basics

Mutual funds are denoted with a 5-letter ticker symbol (eg. ARGFX) and are run by a person, or group of people, known as a fund manager(s). The investments that these fund managers make will be guided by the fund objective, which is a statement defining the goal and types of investments that can be made. For example, a fund whose objective is “long-term capital appreciation” will only invest in securities that are expected to increase in value over the span of many years, as opposed to investing in securities to make a quick short-term buck. Therefore, it is important to review the fund objective and the history of the fund managers before you choose to invest in a mutual fund. Since the fund manager is the one who actually chooses how to invest your money, you need to make sure this person has a good history of choosing wise investments and sticking to the statements given in the fund objective.

Fees

After you have reviewed various fund objectives and managers and compiled a list of funds in which you may be interested in investing, it is time to look at the fees. Of course, the fund manager is not going to invest your money out of the kindness of his/her heart. They expect to be paid and also need some money to cover other necessary expenses (operating and administrative costs, private jet excursions to the Bahamas, Little Johny’s golf lessons, etc.). These costs are given by the fund’s expense ratio which represents the percentage of the fund’s net assets that are used to cover annual expenses. Though all funds have expenses, it is important to only invest in those whose expense ratios are low (~1.1% or less). However because you’re pretty smart, you know that with anything involving the movement of large sums of money, there are ways that people will try to hustle you. In the world of mutual funds, these hustles are known as “loads.”

No Load- A no load mutual fund is a fund that you can purchase without the fund manager charging a commission. If you invest $1,000 into the fund, $1,000 will added to the net assets of the fund.

Front-End Load- A front-end load mutual fund is a fund in which the manager takes a portion of your money before you even have a chance to invest it (he/she takes your money on the “front end”). Let’s examine the effect of a 5.0% front-end load fund. If you choose to invest $1,000, instead of the fund manager putting the entire $1,000 into the net assets of the fund, he/she will put $50 (5%) in their pocket and only put $950 into the net assets of the fund. This means that your investment has to have at least a 5% return for you to even break even. You’ve already lost money the moment you decided to invest in the fund.

Back-End Load- A back-end load, also known as a deferred load, fund is similar to a front-end load except your money is taken when you sell your shares (on the “back-end”). With a 5% back-end load, you will receive $950 when you sell $1,000 worth of shares. Once again, you’ve been hustled.

The Bottom Line

Mutual funds are a great way for the average person to become involved in the stock market. You are basically handing your money to someone who will invest it with specific goals and objectives in mind. Accordingly, it is important that you trust this someone (the fund manager) and you feel comfortable investing in the types of securities that your money will be used to buy (i.e comfortable with the fund objective). Once you have decided what your investment objectives are, do some research to find funds that match your objective. Analyze these funds to determine their previous returns over the long-term and decide what particular funds will be successful in the future given the objective, management, and fees. Most importantly, DO NOT invest in a mutual fund that charges a load. You are shooting yourself in the foot and making someone else rich when you do so.

If you have any questions feel free to e-mail me jwhogans[at]gatech[dot]edu.

CheckING: Wait Till’ I Tell You This….

ING Rolls Out “Electric Orange” Checking Accounts; Others Sure to Follow

I guess that tagline would just about sum it up. ING, one of the leaders in the online high-yield savings account market, is preparing to roll out its move into the checking account business, and it’s making a strong first impression. ING plans to nationally market their program starting February 1, but many of their current customers have received access to open Electric Orange (EO) Accounts already. This is perhaps a move to re-assert ING as the market leader in online banking, and its major competitors Emigrant Direct and HSBC Direct will most likely offer a similar service.

What’s Included?

- High Interest. ING is offering the following interest rate for the checking accounts.

Electric Orange Balance	Interest Rate	APY	Effective Date
$0-$49,999.99	2.96%	3.00%	11/29/2006
$50,000.00-$99,999.99	4.94%	5.05%	11/29/2006
$100,000.00 or more	5.18%	5.30%	11/29/2006

Source: INGDirect.com

Of course, we at Wealth Weekly are not big supporters of keeping very large amounts of money in a simple checking account (including this one) especially since you won’t need all that money at once. So even though you see a decent interest rate of 5.3% for $100,000 dollar balances, it would probably be best to have half of that money in (at least) a high-yield savings or some type of mutual fund. Besides, the FDIC only insures up to $100,000 anyway.

- MasterCard Debit Card and All Point ATM Access. After opening an electric orange checking account you will receive a debit card from MasterCard to use at All Point ATMs (there are about 32,000 of them located all over) free of charge. ING charges no fees for using other ATMs, but the ATM owner may do so. However, in most metropolitan areas you can find an ATM on the All Point Network.

- Line of Credit on Overdrafts. Perhaps one of the most innovative (but not really new) features is an automatic line of credit on overdrafts. Most banks make you separately apply for such a system. How does it work? If for some reason your balance on your checking account were to fall below zero, instead of being charged an $25 “Not Enough Money” fee that most banks charge, the EO account simply extends to you up to a $1000 line of credit, and you can pay it back at a about a 12.25% interest rate. (So if you fall $30 under, you pay back about $33.68, not $55+).

- Sending Check Payments. You can also wire money to individuals and companies electronically using E-Check payments (a system similar to PayPal). You will need to get the account number and bank routing number of the person you’re sending money to (at least for the first time).

So Should I Close and Switch?

Slow down. To be fair I should let you know some of the downsides. For example:

• Despite all the technological advances we’ve made in this country, there are still some areas that still only take paper checks. ING acts as a third-party in handling paper checks. Instead of you writing a paper check and mailing it yourself, you would make the request online at ING, and they would then send a paper check to the recipient of your choice (at no charge to you) as First-Class Mail. If you need overnight service, they charge a $15 fee. You would also need the bank account number and bank routing number of the person to whom you are sending the money. (If the person is an ING account holder, however, transfers of money are far easier).

• Teller services are still needed in sometimes. Sometimes you need $20 in quarters. Sometimes you need a cashier’s check. These services would cost money if you don’t have an account with a particular bank.

• In addition, other companies are most likely to follow behind ING with their own set of services and perhaps better rates. Presidential Bank has had online checking for some time (since 1995), and its website looks like that was the last time it was updated. It has a higher rate (4.5%), but the features are not as extensive.

So I suggest that you retain your checking account at your current bank and pare it down to the necessary minimum to take advantage of the branch services. Then open and use an ING (or similar) account for the majority of your purchases. I think once you get comfortable with online checking, you will find it a very rewarding change.

I will be traveling for the next two weeks so I'm not sure about the internet access I will have. Next week, Special Contributor J. Hogans returns with a new post. See you soon.

5 Tips to Start the Year Right

HAPPY NEW YEAR! NOW LET'S GET TO WORK.

Welcome to a new year at Wealth Weekly! Before I begin, please take a look over at my friends over at Brilliant Brown, who have some new articles up on New Year's Resolutions and Relationships. I always like to start off the New Year with some optimism towards how the year will play out—no negativity today, we instead will focus on things you can do to quickly get a good start on this year.

1. Tax Time is almost here! Yes, with the New Year, you can now determine the amount of money you paid in taxes last year. Keep in mind that if you get a refund later this year, it does not mean that you didn't have to pay taxes this year. It means you paid too much in taxes, and hence you're getting a refund. This year, make sure that one of your financial resolutions is to make sure you keep more of your money.

2. Contribute to you. If you haven't done so, this would be an excellent time to kick off your switch to a high-yield savings account for your long-term savings. ING Direct, Emigrant Direct, HSBC are the popular ones, but there are many others—you can find more info here. Make sure you set a goal for the amount of money you seek to save this year, and then set monthly installments to meet that goal. Also, you should track your progress by month throughout the year, "on paper, on purpose" to borrow a phrase from financial guru Dave Ramsey.

3. Contribute to Your Community. This should be something you do financially and physically. Financially, your can contribute a reasonable amount to your favorite charity, your church (through tithes and offerings), or both. Financially, if you give enough, you can make a nice deduction from your tax bill. Physically, by showing up you can put a face to the money and get involved in your community by meeting and networking with others.

4. Actively Save. Many sites are very good at telling you to forgo some spending. For instance, once you get into your work routine of (roughly) $3 coffee breakfasts and $7 lunches, you will probably dedicate about $2000 of your earnings to at-work food alone. Brown-bagging once a week can trim about $400 in annual savings. Instead of just "knowing" that, it's only beneficial if you actually take that money and literally transfer it over to your savings account.

5. Obtain Your Credit Report. If you haven't done this within the past three months, perhaps it's time to take a look. You usually are allowed to get one free copy per year from each credit bureau, and it will also help you keep up with your credit history (if you have one) and will also let you know if your identity is being maliciously used by someone else.

I hope things go well for you this year, and let's make this year the year you get on the path to better financial security. Peace and blessings.