Category: Investment - PFwise.com

The Tough Math of Market Losses - Part D

2/23/2020

What's the learning from our discussions in previous blogposts?

There are two key observations in this analysis from which your clients may benefit.

First, the S&P 500 is seldom the correct performance benchmark for most portfolios. If you’ve built a broadly diversified portfolio, it would be most appropriate to use a broadly diversified index.

Second, being invested in a broadly diversified portfolio is relatively boring, but boring doesn’t have to be a negative. Sure, years with performance of 30% or better will seldom, if ever, occur. But diversifying is a steadier approach without the dramatic ups and downs.

And the math of gains and losses will be on your side.

The Tough Math of Market Losses - Part C

2/22/2020

In our last blogpost, we showed you the various asset classes' performances in 2019. Now let's put everything into a 20-year perspective and see if there is any changes.

As shown in “20-year performance” the best-performing index over the past two decades (2000-2019) was real estate (specifically the S&P Global REIT). This REIT index produced an average annualized return of 10.68%, or 462 basis points higher than the S&P 500 return of 6.06%. Interestingly, a broadly diversified 12-index portfolio (equally weighted and annually rebalanced) also outperformed the one-dimensional S&P 500 by 76 basis points.
Not shown in the graph, but worthy of note, is that the 12-index portfolio bested the performance of the S&P 500, and did so with 32% less volatility (as measured by the standard deviation of annual returns).

What's the key learning out of all these discussions? Read 2 learnings here.

The Tough Math of Market Losses - Part B

2/21/2020

In our last blogpost, we showed you S&P 500's past 50 years' performances. Now let's see what if you have a portfolio that broadens diversification across multiple asset classes? It would create a pattern of performance that can minimize the magnitude and frequency of damaging negative returns.

In “2019 performance” you’ll see the performance of 12 key indexes (equity and fixed income) as well as the overall performance of the 12 indexes combined into a portfolio. The indexes are the following: S&P 500, S&P Midcap 400, S&P Small cap 600, MSCI EAFE Index NR, MSCI EM Index GR, S&P Global REIT, S&P North American Natural Resources, DBLQ Optimum Yield Diversified Commodity Index Excess Return, Barclays U.S. Aggregate Bond, Barclays US Treasury US TIPS, Barclays Global Treasury and the 90-day U.S. Treasury bill.

Not surprisingly, the best performing index in 2019 among these 12 was the S&P 500. The lowest return was achieved by the Treasury bills (or cash) at 2.06%. The equal-weighted combination of all 12 indexes produced a return of 16.57%, which was well below that of the S&P 500.

But what if you put this 12-index portfolio into a 20-year trend chart? You can see it in next blogpost.

The Tough Math of Market Losses - Part A

2/20/2020

2019 was a great run for the S&P 500. Its 12-month total return of 31.49% was over three times higher than its 50-year average annualized return of 10.60%.

So how about this year? There are interesting patterns to note.

Shown below is the graph “S&P 500: past 50 years” - it shows the annual returns of the S&P 500 from 1970 through 2019. Highlighted in purple are those years when the calendar-year return eclipsed 30% (shown by the horizontal black line). It’s worth noting that, since 1970, we don’t see two years in a row with a 30% or higher return. In fact, the average return in the year after a 30%-plus return was 13.4%, including two years in which the following year’s return was negative (1981 and 1990).

Performance adjusting to normal levels suggests smaller positive returns, as well as negative returns for an equity index such as the S&P 500. As we can see from the 50-year graph, there have been 10 years over the past 50 in which the S&P 500 produced a negative annual return (shown by red-colored bars in the graph). The average return in those 10 years was -14.08%.

What if you construct a 12-index portfolio, what will its performance be compared with S&P 500's performances? We will discuss this in next blogpost.

7 Best Salary Information Websites

2/11/2020

7 Best salary information websites

1. Salary.com
The most popular salary-specific job site, Salary.com lists every position in a field with free salary info. Their collection of data includes cost-of-living calculators, comparison tools, and lists of benefits, as well as negotiation tips.

Salary.com doubles as a career site, providing job listings and advice for those on the lookout. Overall, this is probably the best site for salary info.

2. Glassdoor
Glassdoor is known for its extensive company reviews and employee feedback. A salary search provides data for specific jobs at specific companies, rather than a general estimation.

Employees share info on salaries, benefits, interview questions, and more—a great insider resource if you’re starting out at a new company.

3. PayScale
A good resource for new grads, PayScale offers a free salary report based on experience, education, and other factors. Students should check out its College Salary Report for the lowdown on what various majors can expect to earn (and some negotiation tips). The career research section includes a Career Goal Tracker with salary data for the jobs you want.

4. Indeed
The well-known job site aggregator has a salary search tool. Indeed lets you use keywords to search, in addition to job titles. Since Indeed users can access over 50 million job postings from unique sources, there’s a ton of salary data here.

5. SalaryList
All the data on SalaryList comes from official reporting by companies or the United States Department of Labor, so you know you’re getting accurate information. The site provides salary data records for existing jobs by title, company, and state.

6. Salary Expert
With data updated daily, Salary Expert offers not only free salary reports but cost of living analysis and career salary potential. You can also search for jobs by salary, if you’re thinking about switching fields.

7. Bureau of Labor Statistics
The most recent Occupational Outlook handbook from the Bureau of Labor Statistics (available online or in print) provides salary data for thousands of jobs, searchable by field.

It’s also a good idea to investigate any sites specific to your field or career for salary data. These sites may have more info on industry norms, particularly if your field’s a rarer one.

What factors should you consider?

Sites will often allow you to search based on job title, education and experience level, and location. But how does each factor affect the compensation you should ask for?

1. Job title
Titles reflect responsibility and experience. While some companies allow you a little latitude in naming your job, others won’t be so flexible. Make sure you’re clear on the responsibilities of the title offered (or the title you want).

2. Career field
Depending on the profit ratio of your industry, the same title can come with a different salary. Sales representatives, for instance, can work in multiple fields. But sales reps in high-demand fields, like pharmaceuticals, may be able to ask for more than those in other industries.

3. Location
If you live in a location where housing, transit, food and other essentials cost more than the national average—like a large city, a coastal city, or a tourist destination—you should earn more. A Cost of Living Analysis (COLA) comparison, offered on many of the sites above, lets you know what to expect in your region.

4. Experience
Work experience in your field can increase your value and your salary. Internships may count in your favor, depending on your responsibilities there.

5. Education
Having a degree, period—an associate’s, a bachelor’s, or an advanced degree—should boost your salary expectations. Having a degree in your field is even better.

6. Where you went to college can sometimes make a difference, too.
PayScale has a College ROI (Return on Investment) report that analyzes how degrees from different colleges can affect your salary.

If you didn’t go to the Ivy League or a “top” school, don’t count yourself out! Education’s one of many factors that employers consider when setting compensation, and the more experience you get, the less it typically matters.

7. Special skills
Whether it’s a software program, a type of design, or a foreign language, special skills can be lucrative in the job market. Try doing a keyword search for a unique skill, and see which employers are willing to pay more for it.

The key is supply and demand. Workers in more in-demand fields, like nursing or computer science, tend to have more negotiating room. But, as you can see, there are plenty of factors that determine the “right” compensation for your job. And there are variables you can’t control. Racial and gender wage gaps, for instance, still persist. Industries in decline, or going through a temporary financial slump, may not have as much money to offer.

Tips for the salary negotiation

Have a range in mind, rather than a number. This gives you and the company more flexibility, and you’re likely to end up within the middle to high end of the range.
At the same time, know the lowest salary number you can live with. It’s better to have a floor than a ceiling.
Requesting benefit—such as employer-paid health insurance, retirement contributions, and achievement-based bonuses—if your company’s less willing to negotiate on salary. Benefits may end up saving you more in the long run.

Yield Curve 101

2/10/2020

Q. What is Yield Curve?

A. Basically, the yield curve is a visualization of the interest rates you get from bonds of different durations, from one month up to 30 years.

If everything always worked out logically, the longer-term bonds would yield way more than the shorter-term bonds. After all, you're tying up your money for longer, so you'd expect to earn a higher rate to help offset any risks that may develop while your money is in that bond.

Well, just like stocks, a bond's yield is a function of both the payout and the price -- which fluctuates in the open market. So, in a volatile market, weird things can happen to the yield curve.

Below you'll see a more normal Treasury yield curve from May 2018 (the gray line), in which yields gradually get larger for longer-term vs. shorter-term Treasury bonds.

However, in the current yield curve (red line), the short-term bonds actually yield MORE than some of the longer-term bonds, including the 10-year:

What's the implication of an inverted yield curve?
If short-term yields are higher, it's because bond investors fled from short-term to long-term Treasuries -- so they must not be feeling too confident near term.

Also, the banks don't love this scenario. Remember, a bank works by paying interest on your deposits and collecting interest on your loans. Those loans are based on bonds with longer durations -- so when the yield curve inverts, it hurts the big banks' profitability.

Add it all up and, economists say, it's a bad omen.

A Comparison of Robo Advisors

2/3/2020

The best robo-advisors offer an affordable alternative to picking stocks or mutual funds on your own or shelling over a lot of money to a wealth manager to invest your money for you. They’re a responsible way to take hold of your financial situation without needing to understand the ins and outs of stocks, bonds, ETFs, and more.

Here is a comparison of some of the most popular robo advisors and what they are best for:

Acorns: good for beginner savers and investors
Ally Invest: easy application process
Betterment: simple platform, competitive pricing
FutureAdvisor: free investing resources
M1 Finance: automated and/or hands-on investing
Personal Capital: good for high net-worth, access to human advisors
Vanguard: good for mutual fund investors
Wealthfront: strong financial planning component

5 Financial Things to Review Annually

1/31/2020

An annual financial checkup can take place at any time during the year and can help you better understand the "big picture" of your overall financial planning efforts. You can stop and think about your family's financial goals, such as saving for retirement, a house, or a child's education. You can consider reducing taxes on your investments, protecting your income, or building a financial cushion.

Here are 5 questions to ask when you do an annual financial review.

1. Is my investment strategy on track?
You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your situation has changed, make adjustments as necessary. At least once a year, check your target asset mix to ensure that it continues to meet your time frame, risk tolerance, needs, and preferences, and to perform any rebalancing that might be necessary in light of the past year's market performance.

2. Am I saving tax-efficiently?
Beyond applying diversification strategies broadly to your overall portfolio, what approaches are you exploring to help defer, reduce, or more efficiently manage taxes on your investments? Basic rule of thumb: Consider putting certain investments which generate taxable income—for example taxable bonds and real estate investment trusts—in tax-deferred accounts like 401(k)s and IRAs. For those investments which are more "tax-efficient"—like stocks and ETFs held for more than a year—place them in taxable accounts.

3. Am I protecting my income?
You've worked hard and want to protect your income. So it's wise to evaluate your family's total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan. Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones.

4. Am I preserving my assets?
Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.

5. How does my financial plan affect my family?
It's not just your retirement or financial future that you are planning for, especially as you age. You are likely researching and cultivating strategies to provide financial assistance to a number of people that you care deeply for, including parents, children, or even grandchildren. Beyond college, a lot of parents are helping to launch their millennial children into the world of fully independent living. Meanwhile, many have aging parents who can no longer live on their own or manage their own financial and personal affairs. Will caring for others affect your financial goals, priorities, and outcomes?

4 Areas To Look For Stock Ideas For 2020

1/30/2020

If you are looking for stock ideas for 2020, Fidelity has an article that shows you 4 areas you could look for them by utilizing Fidelity's stock screen:

Low PEG
High earnings growth
High stock analyst recommendation
Combination of the above

4 Ways to Hedge Your Investment In a Risky Market

1/26/2020

Q. I think the market is too high and I want to hedge my gains, what options should I consider?

A. You can consider 4 hedging strategies for your stock portfolios:

1. Hedge the Market
Buy ETFs that invests in derivatives and other financial instruments that have inverse returns of S&P 500 and Russell 2000. For example, Proshares Short S&P500 (SH) and Proshares Ultra-short Russell 2000 (TWM).

2. Buy Funds That Sell Short
Some funds invest in stocks that they believe will fall. For example, Grizzly Short (GRZZX).

3. Invest in Bonds
Bonds usually have very low or negative correlations with stocks, add bond funds to your investment portfolio. For example, Vanguard Core Bond (VCORX) and Fidelity Intermediate Bond (FTHRX).

4. Add Gold to Portfolio
Gold usually has no correlation with S&P 500. The easiest way is to buy Gold ETFs, for example IShares Gold Trust (IAU) and SPDR Gold Shares (GLD), or buy Gold Mining stocks, for example, Barrick Gold (GOLD).

One Retirement Risk Many People Have Overlooked - Part C

1/15/2020

In our last blogpost, we used two examples to illustrate the risk of sequence of returns. Now we will discuss two ways about how to protect yourself from the sequence of returns risk.

Use the right tools for the right job. For income, do not put money into a vehicle like the stock market where the sequence of returns plays a big part. Instead, put it into an investment that will guarantee you a payout for life, like an annuity. By guaranteeing your living and lifestyle expenses are covered, you can put your other assets into investments that you won’t be pulling money from on a consistent basis, such as ETFs and bonds.
Separate your assets into buckets that work for you differently. For example, secure liquid funds needed for large purchases in the beginning years of retirement in a stable vehicle in one bucket of assets, such as a bank account, money market account or CDs. In the next bucket, supplement your Social Security with other products that provide lifetime income, such as annuities. In a third bucket, determine your probable long term care costs and put money in a hybrid long term care product that does not have ongoing costs. That way you will have your long-term care needs covered down the road. All of your remaining assets should be put into an investment vehicle like ETFs, equities, bonds and mutual funds for future growth to keep up with inflation and taxes.

One Retirement Risk Many People Have Overlooked - Part B

1/14/2020

In our last blogpost, we introduced the sequence of returns risk for retirees. Now we will use two hypothetical examples to illustrate this risk.

The following two people having $100,000 in the market during a 10-year period and withdrawing 5% each year. You will see that the order of the returns of the market plays a big role in the final outcome.

Example 1.

Example 2.

If you look back, you will see both people started with $100,000, however, one ran out of money after 15 years, withdrawing a total of $77,593, while another has withdrawn $95,000 over the same amount of time and still has $58,043 left in her account.

In our next blogpost, we will discuss how to protect yourself from the sequence of returns risk.

One Retirement Risk Many People Have Overlooked - Part A

1/13/2020

You have been saving diligently for your retirement, but one retirement risk you may have not considered - the sequence of returns, or the order of the returns in your portfolio.

During your accumulation years (while you’re working), you are not subject to this risk because you are not withdrawing money. But when you retire (during your distribution phase) you will be.

Sequence of returns risk is a result of the timing of withdrawals from a retirement account that can have a negative impact on the overall rate of return on the investment. This may seriously hurt a retiree who depends on the income stream from a lifetime of investing.

In our next blogpost, we will use two examples to illustrate this risk.

What Are the 5 Factors Determine Your FICO Score?

1/12/2020

Q. What are the factors deciding my FICO score and what are their importance in deciding my FICO score?

A. At the high level, there are 5 factors deciding your FICO score, and their importances are shown in the chart below -

5 Ways Wealthy Families Could Potentially Pay Less For Colleges

1/11/2020

If you are a family with annual income more than $300,000, and with kids about to enter college, you should read this Financial-Planning article which describes 5 ways wealthy families could or should do in order to pay less for college.

What Types of Financial Advisors Are Out There and How Much to Pay For Them? - Part B

1/10/2020

In our last blogpost, we discussed the differences of 5 types of financial advisers. Now we will discuss how they are paid and how much you should expect to pay for their services.

There are three ways in which financial professionals are paid:

1. Fee-only
A fee-only financial professional is paid based on a fee that could be:

a percentage of your assets under management
a retainer/flat fee
an hourly rate

For example, a financial firm may charge .75 percent of assets under management as their annual fee. This means that regardless of your investment choices, you will pay the .75 percent fee every year. Usually, financial advisors who have a fiduciary duty to their clients are fee-only.

2. Fee-based
Fee-based financial professionals charge a fee for assets under management and a commission for the products they sell.

3. Commission-based
A commission-based financial professional is paid commissions for the financial products that he sells.

What Types of Financial Advisors Are Out There and How Much to Pay For Them? - Part A

1/9/2020

Q. How do I pick a financial advisor and how much should I expect to pay for their services?

A. At a high level, there are 5 types of financial advisors out there with various titles -

1. Financial Advisor
A financial advisor is sometimes used as a general term to mean someone who advises you on your finances. However, a true financial advisor is a Registered Financial Advisor (RIA) or Investment Advisor Representative (IAR). A financial advisor is held to the highest ethical standard. Additionally, a financial advisor may have other qualifications (like a CFP® or CFA designation).

2. Financial Planner
A financial planner is a type of financial advisor. However, there are no requirements to become a financial planner. A financial planner can help you with your overall wealth management. This includes financial planning and investment advice, tax planning, estate planning, insurance planning, and retirement planning. Usually, you have an ongoing relationship with your financial planner.

A financial planner may hold different designations including the Certified Financial Planner (CFP®), Certified Financial Analyst (CFA), Chartered Financial Consultant (ChFC), or Certified Investment Management Analyst (CIMA). For purposes of hiring a personal financial planner, the most important designation to discuss is CFP® – also known as certified financial planners.

3. Certified Financial Planner™ (CFP®)
A Certified Financial Planner™ is a type of financial planner who can help you with most of your financial planning. A CFP® designation means that the planner had specific training, passed an exam, met an experience requirement, and will continue to meet continuing education requirements. A CFP® has a fiduciary duty to act in the best interest of her client — a key distinction from other planners.

4. Registered Representative
A registered representative is a term used to describe financial professionals who are paid commissions for the financial products they sell. Think of a finance professional who holds his Series 6 or Series 7 under this category.

5. Investment Advisor or Wealth Manager
An investment advisor or wealth manager is someone who helps you primarily with your investments. This means that they manage your investments, but they may not advise you on tax, estate, insurance, or retirement planning. An investment advisor will help you determine your risk tolerance, asset allocation, and other investment advisory areas specific to your investments.

Think of an investment advisor as someone who does just one part of what a financial planner does, because the financial planner will also conduct investment advisory services (generally).

In our next blogpost, we will discuss how much you should expect to pay for a financial adviser's service.

2020 Sector Investment Outlook

12/30/2019

Fidelity's sector portfolio managers share some of their highest-conviction investing ideas for the coming year to uncover some of the best thematic opportunities within their sectors in 2020. Some themes, such as the arrival of 5G technology, will likely span across the equity market, while others are more specific to certain sectors or industries.

What Does "Life Expectancy" Actually Mean and What You Need to Do?

12/25/2019

Enjoy this article from UBS below ...

A Simple 5-point Investment Strategy Checklist

12/24/2019

Q. How to ensure an investment strategy is sound?

A. You can use the following 5-point checklist to make sure the investment strategy is a sound one.

Strategy Design - A strategy should be easy to describe to other people. The underlying assumptions should be clear. There should be a strong economic or structural rationale for why the strategy should be successful. Some strategies will only be effective for a limited time, so the conditions when the strategy will fail should be explained clearly.
Expected returns - Defining the expected return goes without saying; however, expected returns should always be tempered by volatility. The Sharpe ratio should be strongly positive but also stable and consistent and reasonable. High risk adjusted returns will not last forever.
Reliability – All strategies are time varying. The reliability issue is whether it is clear when this variability will occur. What are the conditions for when an investment will do well or poorly? Back-tests are always good, but do they make sense relative to different market conditions.
Convexity – Every investor wants convexity. It is always an issue of what is the price to be paid for this convexity. In a very broad sense, convexity relative to the market means that when the market is going up, the strategy will also go up and when the market goes down, the strategy will not lose as much as the market. Once that minimum achieved, a great convexity instrument will go up when the market goes down and will have positive correlation when the market is up. This is hard to achieve in reality, but the question has to be asked.
Costs – There is the cost with implementing a strategy and there is the cost of downside risk. Both of these have to be reviewed and discussed. There is also a cost with liquidity if you are not allowed to exit a strategy or the price of exit is high.

How to Evaluate If You Should Prepay Mortgage Or Not

12/22/2019

Q. What factors should I consider if I should prepay mortgage or not?

A. You need to consider your portfolio mix when you consider whether to prepay mortgage or not. Below is a guideline from Fidelity -

Case studies:
Let's take a look at a hypothetical example. Say Joan is 10 years into a 30-year mortgage with an interest rate of 4%, an outstanding balance close to $275,000, and a monthly payment of about $1,300. She is approaching retirement and trying to decide if she should use her savings to pay off the mortgage before she stops working.

Let's say Joan is a conservative investor—she holds about 20% of her portfolio in stocks, about 50% in bonds, and 30% in cash. If she prepays her mortgage, our estimate indicates she will end up improving her financial condition by reducing the risk of running out of money in retirement by about 10%, and improving her final balance by about 3% on average.

But what if she was a more aggressive investor and held 70% of her portfolio in stocks and 25% in bonds and 5% in cash. According to our estimates, if Joan decides to prepay, she would still reduce her risk of running out of money. But in terms of wealth, the outcome would likely change: Instead of increasing her final balance, prepaying the mortgage would actually hurt her wealth. Because her investments would have grown more than savings from repayment, Joan would see her final balance decrease by about 10% on average.

What is Affinity Fraud and How Not to Fall For It?

12/21/2019

Q. What is affinity fraud and how to avoid becoming a victim of it?

A. Affinity fraud is a type of scam that preys upon members of close-knit groups, such as church or social club members, those who are part of ethnic communities or racial minorities, coworkers, and the elderly. Even members of the military have been targets.

Many affinity frauds are Ponzi or pyramid schemes, in which money from new investors is paid to earlier ones to give the impression the investment is successful.

To help avoid becoming an affinity fraud victim, follow these tips:

If you know the person making the offer — no matter how trustworthy — act as though you don’t. Research the person’s background and the investment offer. Sometimes those making pitches are victims themselves without realizing it.
Never invest solely on the recommendation of a member of a group to which you belong. Be especially wary of pitches made through online groups, chat rooms or bulletin boards catering to an interest you have.
Don’t fall for promises of spectacular, “once in a lifetime” profits or “guaranteed” returns with little or no risk. These are classic signs of fraud.
Reject the opportunity if you can’t get the promoter to put everything in writing.
Be suspicious if you’re told to keep the opportunity confidential.
Don’t be pressured into something before you have time to research it.
Just because someone you know claims to have made money doesn’t mean that’s true or that you will also make money.

Stock Market Correction Is Coming, Are You Ready For It?

12/18/2019

Successful individual investors tend to be optimistic ones because, over the long term, the market rewards optimists far more frequently than pessimists.

The flip side is that as time passes, our memories color the past corrections with a brighter, lighter brush. This makes it important to revisit history and revisit your exit strategies well before the next correction.

Here are a few observations about market corrections in the past 12 years -

Observations

The past 12 years have seen four corrections, reactions, pullbacks, or whatever you'd like to call them (2008, 2011, 2016 and 2018). As we all know, the most painful was 2008, so let's zero in on this correction.
In 2008, Amazon pulled back 64%. This is the question you should ask yourself: if I owned it at $87, could I hold it through this 64% reaction all the way down to $34? Note: In 2008, it was $34.68. Today it’s at $1,773.94.
The market indexes pulled back less than Amazon, Apple and the Consumer Discretionary Sector (XLY). The S&P 500 was down 56%, and VTI was down 57%. Note: Vanguard Total Market (VTI) has since risen from $27.05 to $159.64. That’s nearly +600% in under 11 years.
Even five-star, gold-rated diversified mutual funds — such as Primecap (POAGX) pulled back 56%. On recovery, however, it’s up nearly 900% since the 2008 correction.
Although five-star balanced funds which hold both stocks and bonds (such as PRWCX) are expected to be less volatile, they nevertheless lost 42% in the 2008 correction. Once again, the good news is that it’s up nearly 500% since that downdraft.
Finally, it’s interesting that Healthcare funds (PRHSX and VGHAX) are up 900% and 550% respectively from the 2008 correction where they lost 38% and 37% respectively — much less than the market.

Conclusion
It is important to review all your positions and revisit the four corrections mentioned and shown in the chart below. Ask yourself what percentage pullback you could tolerate for each and every type of equity you own. A correction is inevitable. Are you emotionally prepared for it? Panic is not a profitable investment methodology.

4 Money Saving Tips When Leasing a Car

12/15/2019

Q. Is there any trick I need to know when leasing a car?

A. Yes, please keep these three money-saving tips in mind when leasing a car:

1. Make Sure You Have Gap Insurance
This is perhaps the single most important — and most overlooked — element of leasing.

Say your contract says the car’s residual value at the end of the lease will be $15,200, but the car’s actual value will be only $10,000. If you wreck the car three months before your lease expires, guess how much your insurance company will pay in settlement?

The insurer will pay the dealer (who owns the car) the actual market value, which is $10,000. But your contract says the residual value is $15,200. That means you are responsible for the other $5,200.
This “gap” between the lease contract’s stated residual value and the car’s actual value has caused many lessees to incur huge losses due to accidents.

The solution: Make sure your lease contract includes “gap insurance” — even if you have to pay extra for it, for being without it is like driving without insurance.

2. Avoid the Cap Cost Reduction
When someone buys a car, the more money he puts down, the less his monthly payments. Similarly, to lower your lease payments, you can make a cap cost reduction, which is a large, one-time payment made at the start of the lease. And as with a down payment, the more you pay in cap (short for capitalized) cost reductions, the lower your monthly payments. However, this is where the similarity ends.

Remember that when leasing, you do not own the car. Thus, if you make a cap cost reduction, you are making a down payment on property that is not yours. Never do that — no matter how much the dealer wants you to, and no matter how much it reduces your monthly payments — for in the long run, you are throwing your money away.

And the run might not be so long, either: Steve leased a $25,000 car and paid $3,000 in cap costs. Two months later, he totaled the car. Since he didn’t own the car, his insurer repaid the dealer $22,000; Steve lost his $3,000.

Paying cap costs is a waste even if you don’t wreck the car. Why? Because the only reason dealers want you to pay it is so they can offer you a monthly payment that sounds really low.

Would you visit a dealer who advertised a $20,000 car for just $199 a month? You bet! But would you get excited about having to pay $263 per month for the same car? Not likely. And that’s why dealers want you to pay a cap cost reduction.

You see, in one recent ad, a car dealer offered a $20,000 car for $199 per month for 24 months with a cap cost reduction of $1,525. But paying $199 per month with $1,525 down is the same as paying $263 per month with no cap cost reduction. If $263 doesn’t sound so hot (and it’s not), then the other deal isn’t so hot, either.

Instead of paying a cap cost reduction to lower your payments, ask the dealer to let you make additional security deposits. This will have the same effect as a cap cost reduction, except you’ll get the deposit back when you return the car.

3. Never Buy Optional Equipment in a Car You’re Not Buying
When leasing, you must keep in mind that you don’t own the car. That means you must be careful when agreeing to options that the dealer offers you. Take Carmen for example. She worked out a fine deal on a car — $250 per month for 36 months, with no cap cost reduction.

But then she decided to have the dealer install mats, fancier rims, a iPod adapter, and a navigation system. The cost of all these items came to $1,800, so the dealer added $50 to the monthly payment.

This not only made sense to Carmen, since $50 per month for 36 months is $1,800, she thought it was a heck of a deal — because although she would be paying for the options over three years, the dealer did not add in any interest.

It was a deal all right — but for the dealer, not Carmen. When the lease expired three years later, Carmen returned the car — and with it, the mats, rims, iPod adapter, and navigation system. Carmen paid the full cost of owning those items, but she only rented them. Dumb move, Carmen.

What she should have done is incorporated the cost of the options into the overall price of the car, and then negotiated the lease price. That way, she’d be renting the options along with the rest of the car.

Remember: When you lease, you are renting the car and everything in it. Don’t pay the costs of ownership when you lease.

4. Never Lease Beyond the Car's Warranty
If you choose to lease, don’t lease for a term beyond the car’s warranty. If the car comes with a two-year bumper-to-bumper warranty, for example, get a two-year lease. By opting for a three-year lease, you could be stuck with huge repair bills in year three — on a car you don’t own!

8 Smart Year-end Financial Planning Actions to Take

12/10/2019

Take these eight steps now:

Contribute to your retirement accounts.
If you work for a company that matches your 401(k) contribution, try to contribute at least up to the percentage they match. Otherwise, you’re leaving money on the table.
Make your required minimum withdrawal from your IRA.
Do you have a traditional IRA? Starting at 70 ½, the IRS requires you to withdraw a certain amount each year, known as a required minimum distribution (RMD).
Use up your flexible spending account (FSA).
Find out the deadline for using this money if you have an FSA, since you will lose it if you don’t use it by the deadline.
Think through your holiday spending.
Now is the time to also think about paying down any debt or padding your emergency fund.
Check your credit reports.
If you haven’t checked your credit reports in the last 12 months, the end of the year is a great time to do so.
Consider year‑end charitable giving.
In addition to using your dollars to support a cause you are passionate about; many charitable contributions of money or property are also tax deductible.
Assess the last 12 months.
Reflect on how you did this year from a financial standpoint. Think about what went right and what would you like to adjust.
Plan for the next 12 months.
If your assessment of the past year calls for some changes, use that information to start planning for the new year.

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